AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1997.
FILE NO. 33-8982
ICA NO. 811-4852
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. _____ [ ]
POST-EFFECTIVE AMENDMENT NO. 31 [X]
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 32
VICTORY PORTFOLIOS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN TRUST INSTRUMENT)
3435 STELZER ROAD
COLUMBUS, OHIO 43219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(800) 362-5365
(AREA CODE AND TELEPHONE NUMBER)
COPY TO:
GEORGE O. MARTINEZ, ESQ. CARL FRISCHLING, ESQ.
BISYS FUND SERVICES KRAMER, LEVIN, NAFTALIS & FRANKEL
3435 STELZER ROAD 919 THIRD AVENUE
COLUMBUS, OHIO 43219 NEW YORK,NEW YORK 10022
(NAME AND ADDRESS OF AGENT FOR SERVICE)
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
[ ] IMMEDIATELY UPON FILING PURSUANT TO [ ] ON ( ) PURSUANT TO
PARAGRAPH (B) PARAGRAPH (B)
[ ] 60 DAYS AFTER FILING PURSUANT TO [ ] ( ) PURSUANT TO
PARAGRAPH (A)(1) PARAGRAPH (A)(1)
|X| 75 DAYS AFTER FILING PURSUANT TO [ ] ON ( ) PURSUANT TO
PARAGRAPH (A)(2) PARAGRAPH (A)(2) OF RULE 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST- EFFECTIVE AMENDMENT.
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES PURSUANT TO RULE 24F-2
AND ITS RULE 24F-2 NOTICE FOR ITS OCTOBER 31, 1996 FISCAL YEAR WAS FILED ON
DECEMBER 23, 1996, IN ACCORDANCE WITH RULE 24F-2.
<PAGE>
THE VICTORY PORTFOLIOS
CROSS-REFERENCE SHEET
THE VICTORY PORTFOLIOS
BALANCED FUND, DIVERSIFIED STOCK FUND, FINANCIAL RESERVES FUND, FUND FOR INCOME,
GOVERNMENT BOND FUND, GOVERNMENT MORTGAGE FUND, GROWTH FUND,
INSTITUTIONAL MONEY MARKET FUND, INTERMEDIATE INCOME FUND,
INTERNATIONAL GROWTH FUND, INVESTMENT QUALITY BOND FUND,
LIMITED TERM INCOME FUND, NATIONAL MUNICIPAL BOND FUND,
OHIO MUNICIPAL BOND FUND, OHIO REGIONAL STOCK FUND,
PRIME OBLIGATIONS FUND, SPECIAL GROWTH FUND,
SPECIAL VALUE FUND, STOCK INDEX FUND,
TAX-FREE MONEY MARKET FUND, VALUE FUND,
LAKEFRONT FUND, REAL ESTATE INVESTMENT FUND
<TABLE>
<CAPTION>
Item Number
Form N-1A Part A Prospectus Caption
------ -------------------
<S> <C> <C>
i. Cover Page Cover Page; Introduction; An
Overview of the Fund
ii. Synopsis Fund Expenses
iii. Condensed Financial Information Financial Highlights
iv. General Description of Registrant Introduction; An Overview of the Fund;
Investment Policies and Strategies; Risk
Factors; Investment Limitations ; Fund
Organization and Fees; Additional Information
v. Management of the Fund Organization and Management of the
Fund
v.A. Management's Discussion of Fund Investment Performance
Performance
vi. Capital Stock and Other Securities INVESTING WITH VICTORY; How to
Purchase Shares; How to Exchange Shares;
How to Redeem Shares; Dividends,
Distributions and Taxes; Fund Organization
and Fees; Additional Information
vii. Purchase of Securities Being Offered How to Purchase Shares; How to Exchange
Shares
viii. Redemption or Repurchase How to Exchange Shares; How to
Redeem Shares
ix. Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE>
THE VICTORY PORTFOLIOS
CROSS REFERENCE SHEET
THE VICTORY PORTFOLIOS
BALANCED FUND, DIVERSIFIED STOCK FUND, FINANCIAL RESERVES FUND, FUND FOR INCOME,
GOVERNMENT BOND FUND, GOVERNMENT MORTGAGE FUND, GROWTH FUND,
INSTITUTIONAL MONEY MARKET FUND, INTERMEDIATE INCOME FUND,
INTERNATIONAL GROWTH FUND, INVESTMENT QUALITY BOND FUND,
LIMITED TERM INCOME FUND, NATIONAL MUNICIPAL BOND FUND,
OHIO MUNICIPAL BOND FUND, OHIO REGIONAL STOCK FUND,
PRIME OBLIGATIONS FUND, SPECIAL GROWTH FUND,
SPECIAL VALUE FUND, STOCK INDEX FUND,
TAX-FREE MONEY MARKET FUND, VALUE FUND,
LAKEFRONT FUND, REAL ESTATE INVESTMENT FUND
<TABLE>
<CAPTION>
Item Number
Form N-1A Statement of Additional
Part B Information Caption
- ------------- ------------------------
<S> <C> <C>
x. Cover Page Cover Page
xi. Table of Contents Table of Contents
xii. General Information and History Additional Information
xiii. Investment Objectives and Policies Investment Objective and Policies; Investment
Limitations and Restrictions
xiv. Management of the Fund Trustees and Officers
xv. Control Persons and Principal Additional Information
Holders of Securities
xvi. Investment Advisory and Other Advisory and Other Contracts
Services
xvii. Brokerage Allocation and Other Practices Advisory and Other Contracts
xviii. Capital Stock and Other Securities Valuation of Portfolio Securities; Additional
Purchase, Exchange and Redemption
Information; Additional Information
xix. Purchase, Redemption and Pricing Valuation of Portfolio Securities; Additional
of Securities Being Offered Purchase, Exchange and Redemption
Information; Performance; Additional
Information
</TABLE>
<PAGE>
THE VICTORY PORTFOLIOS
<TABLE>
<CAPTION>
Item Number
Form N-1A Statement of Additional
Part B Information Caption
- ------------- ------------------------
<S> <C> <C>
xx. Tax Status Dividends and Distributions
xxi. Underwriters Advisory and Other Contracts
xxii. Calculation of Performance Data Performance; Additional Information
xxiii. Financial Statements
</TABLE>
<PAGE>
THE VICTORY PORTFOLIOS
CROSS-REFERENCE SHEET
THE VICTORY PORTFOLIOS
U.S. GOVERNMENT OBLIGATIONS FUND
<TABLE>
<CAPTION>
Item Number
Form N-1A
Part A Prospectus Caption
- ------------ -------------------
<S> <C> <C>
i. Cover Page Cover Page
ii. Synopsis Fund Expenses
iii. Condensed Financial Information Financial Highlights
iv. General Description of Registrant Investment Objective; Investment Policies and
Risk Factors; Limiting Investment Risks;
Fund Organization and Fees; Additional
Information
v. Management of the Fund Fund Organization and Fees
v.A. Management's Discussion of Fund Inapplicable
Performance
vi. Capital Stock and Other Securities How to Invest, Exchange and Redeem;
Dividends, Distributions and Taxes; Fund
Organization and Fees; Additional Information
vii. Purchase of Securities Being Offered How to Invest, Exchange and Redeem
viii. Redemption or Repurchase How to Invest, Exchange and Redeem
ix. Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE>
THE VICTORY PORTFOLIOS
CROSS REFERENCE SHEET
THE VICTORY PORTFOLIOS
U.S. GOVERNMENT OBLIGATIONS FUND
<TABLE>
<CAPTION>
Item Number
Form N-1A Statement of Additional
Part B Information Caption
- ------------ ------------------------
<S> <C> <C>
x. Cover Page Cover Page
xi. Table of Contents Table of Contents
xii. General Information and History Additional Information
xiii. Investment Objectives and Policies Investment Objective and Policies; Investment
Limitations and Restrictions
xiv. Management of the Fund Trustees and Officers
xv. Control Persons and Principal Additional Information
Holders of Securities
xvi. Investment Advisory and Other Advisory and Other Contracts
Services
xvii. Brokerage Allocation and Other Practices Advisory and Other Contracts
xviii. Capital Stock and Other Securities Valuation of Portfolio Securities; Additional
Purchase, Exchange and Redemption
Information; Additional Information
xix. Purchase, Redemption and Pricing Valuation of Portfolio Securities; Additional
of Securities Being Offered Purchase, Exchange and Redemption
Information; Performance; Additional
Information
xx. Tax Status Dividends and Distributions
xxi. Underwriters Advisory and Other Contracts
xxii. Calculation of Performance Data Performance; Additional Information
xxiii. Financial Statements
</TABLE>
<PAGE>
THE VICTORY PORTFOLIOS
PART A
THE VICTORY FUNDS
800-KEY-FUND(R)
OR
800-539-3863
THE VICTORY
BALANCED FUND
DIVERSIFIED STOCK FUND
VALUE FUND
STOCK INDEX FUND
OHIO REGIONAL STOCK FUND
GROWTH FUND
SPECIAL VALUE FUND
SPECIAL GROWTH FUND
INTERNATIONAL GROWTH FUND
PROSPECTUS
MARCH 1, 1997
<PAGE>
TABLE OF CONTENTS PAGE
Introduction 2
AN OVERVIEW OF EACH OF THE FUNDS 3
A fund-by-fund analysis which includes objectives, policies,
expenses, and financial highlights
Balanced Fund 6
Diversified Stock Fund 10
Value Fund 14
Stock Index Fund 17
Ohio Regional Stock Fund 20
Growth Fund 24
Special Value Fund 28
Special Growth Fund 32
International Growth Fund 36
Risk Factors 40
Investment Limitations 41
Investment Performance 41
Share Price 42
Dividends, Distributions, and Taxes 42
INVESTING WITH VICTORY 44
Choosing a Share Class 44
How to Purchase Shares 46
How to Exchange Shares 49
How to Redeem Shares 49
Organization and Management of the Funds 50
Additional Information 55
Other Securities and Investment Practices 56
Key to Fund Information:
(1) Objective and Strategy: The goals and the strategy that a Fund plans to use
in pursuing its investment objective.
(2) Risk Factors: The risks that you may assume as an investor in a Fund.
(3) Expenses: The costs that you will pay as an investor in a Fund, including
sales charges and ongoing expenses.
(4) Financial Highlights: A table which shows a Fund's historical performance by
share class. This table also summarizes previous operating expenses.
SHARES OF THE FUNDS ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYBANK, ANY OF
ITS AFFILIATES, OR ANY OTHER BANK;
o SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
2
<PAGE>
THE VICTORY PORTFOLIOS
BALANCED FUND
DIVERSIFIED STOCK FUND
VALUE FUND
STOCK INDEX FUND
OHIO REGIONAL STOCK FUND
GROWTH FUND
SPECIAL VALUE FUND
SPECIAL GROWTH FUND
INTERNATIONAL GROWTH FUND
800-KEY-FUND OR 800-539-3863
INTRODUCTION
This prospectus describes the following funds:
Balanced Fund
Diversified Stock Fund
Value Fund
Stock Index Fund
Ohio Regional Stock Fund
Growth Fund
Special Value Fund
Special Growth Fund
International Growth Fund
The nine Victory Funds (the Funds) discussed in this prospectus are diversified
mutual funds and are a part of The Victory Portfolios (Victory), an open-end
investment management company. This prospectus explains the objectives,
policies, risks, and strategies of the Funds. You should read this prospectus
before investing in one of these Funds and keep it for future reference. A
detailed Statement of Additional Information (the SAI) describing each of the
Funds is also available for your review. The SAI has been filed with the
Securities and Exchange Commission (the SEC), and is incorporated into this
prospectus by reference. If you would like a free copy of the SAI, please
request one by calling us at 800-KEY-FUND.
(1)INVESTMENT OBJECTIVE:
The BALANCED FUND seeks to provide income and long-term growth of capital.
The DIVERSIFIED STOCK FUND seeks to provide long-term growth of capital.
The VALUE FUND seeks to provide long-term growth of capital and dividend income.
The STOCK INDEX FUND seeks to provide long-term capital appreciation by
attempting to match the investment performance of the Standard & Poor's 500
Composite Stock Index.
The OHIO REGIONAL STOCK FUND seeks to provide capital appreciation.
The GROWTH FUND seeks to provide long-term growth of capital.
The SPECIAL VALUE FUND seeks to provide long-term growth of capital and dividend
income.
The SPECIAL GROWTH FUND seeks capital appreciation.
The INTERNATIONAL GROWTH FUND seeks to provide capital growth consistent with
reasonable investment risk.
3
<PAGE>
(1)INVESTMENT STRATEGY:
Each of the Funds pursues its investment objective by investing primarily in
equity securities. However, each of the Funds has unique investment strategies
and its own risk/reward profile. Please review the section about the Fund in
which you are interested in investing and "Other Securities and Investment
Practices" for an overview of the Funds.
(2)RISK FACTORS:
The Funds are not insured by the FDIC. Since equity securities fluctuate in
value, the Funds' shares also will fluctuate in value.
The Value Fund and the Special Value Fund invest in securities which the
Adviser believes are undervalued. Therefore, investments in the Value Fund and
the Special Value Fund may involve additional risks that the securities in which
they invest are not undervalued.
The Growth Fund, the International Growth Fund, and the Special Growth Fund
invest primarily in equity securities of companies that do not pay out a
significant portion of their earnings as dividends. Therefore, the Growth Fund,
the International Growth Fund, and the Special Growth Fund will not generate
significant dividend income to their investors.
The International Growth Fund invests primarily in foreign equity securities.
Therefore, an investment in the International Growth Fund may involve additional
risks including economic, currency, or political risks specific to the foreign
countries in which it invests.
The Ohio Regional Stock Fund invests primarily in the securities of companies
whose headquarters are located in the State of Ohio. Therefore, an investment in
the Ohio Regional Stock Fund may involve additional risks including economic or
political risks specific to the State of Ohio.
The Special Growth Fund and the Special Value Fund invest primarily in
securities of small and mid-capitalization companies. The smaller, less seasoned
companies in which the Special Value Fund may invest may be subject to greater
business risks than larger, established companies. They may be at greater risk
to changes in economic conditions and factors affecting the profits of
corporations.
In addition, there are other potential risks, which are discussed in the section
"Risk Factors."
WHO SHOULD INVEST:
o Investors willing to accept higher short-term risk along with higher
potential long-term returns
o Investors seeking capital appreciation over the long term
o Investors seeking funds for the growth portion of a diversified portfolio
o Investors who are investing for goals that are many years in the future
(3)FEES AND EXPENSES:
The Value Fund, the Stock Index Fund, the Growth Fund, and the Special Growth
Fund offer only Class A Shares, while the Balanced Fund, the Diversified Stock
Fund, the Ohio Regional Stock Fund, the Special Value Fund, and the
International Growth Fund offer both Class A and Class B Shares. (See "Choosing
a Share Class.") If you purchase Class A Shares of a Fund, you may pay a sales
charge of up to 4.75% of the offering price, depending on the Fund in which you
invest and the amount you invest. If you purchase Class B Shares of a Fund, you
will not pay an initial sales charge; however, you may pay a deferred sales
charge if you sell ("redeem") your shares within six years of purchase, and you
will pay additional distribution expenses. In either case, you also will incur
expenses for investment advisory, management, administrative, and shareholder
services, all of which are included in a Fund's expense ratio. See "Choosing a
Share Class." PURCHASES: The minimum initial investment is $500 for most
accounts $250 for Individual Retirement Accounts and $25 thereafter. An initial
investment must be accompanied by a Fund's Account Application. Fund shares may
be purchased by check, Automated Clearing House, or wire. See "How to Purchase
Shares."
4
<PAGE>
REDEMPTIONS:
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, a Fund will redeem the
shares and credit your bank account or send the proceeds to the address
designated on your account application. See "How to Redeem Shares."
DIVIDENDS/DISTRIBUTIONS:
Ordinarily, the Balanced Fund declares and pays dividends from its net
investment income monthly. All other Funds in this prospectus declare and pay
dividends from their net investment income quarterly. Any net capital gains
realized by a Fund are paid as dividends annually. A Fund can send your
dividends directly to you by mail, credit them to your bank account, reinvest
them in the Fund, or invest them in another fund of the Victory Group. The
"Victory Group" includes other funds of The Victory Portfolios and Key Mutual
Funds. You can make this choice when you fill out an account application. See
"Dividends, Distributions, and Taxes."
OTHER SERVICES:
Victory offers a number of other services to better serve shareholders including
exchange privileges and automated investment and withdrawal plans. See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.
AN OVERVIEW OF EACH OF THE FUNDS:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ESTIMATED ANNUAL
EXPENSES AFTER
INCEPTION (AS A % OF MAXIMIUM NEWSPAPER
VICTORY FUND DATE NET ASSETS) SALES CHARGE ABBREVIATION*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund Class A 12/10/93 1.25% 4.75% Victory BalncdA
Balanced Fund Class B 2/1/96 2.20% 5.00% Victory BalncdB
- -----------------------------------------------------------------------------------------------------
Diversified Stock Fund Class A 10/20/89 1.05% 4.75% Victory DvsStkA
Diversified Stock Fund Class B 02/01/96 1.95% 5.00% Victory DvsStkB
- -----------------------------------------------------------------------------------------------------
Value Fund Class A 12/3/93 1.40% 4.75% Victory Value
- -----------------------------------------------------------------------------------------------------
Stock Index Fund Class A 12/3/93 0.56% 4.75% Victory StkIdx
- -----------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund Class A 10/20/89 1.45% 4.75% Victory OH RegA
Ohio Regional Stock Fund Class B 2/1/96 2.50% 5.00% Victory OH RegB
- -----------------------------------------------------------------------------------------------------
Growth Fund Class A 12/3/93 1.40% 4.75% Victory Growth
- -----------------------------------------------------------------------------------------------------
Special Value Fund Class A 12/3/93 1.45% 4.75% Victory SplValA
Special Value Fund Class B 2/1/96 2.35% 5.00% Victory SplValB
- -----------------------------------------------------------------------------------------------------
Special Growth Fund Class A 12/3/93 1.53% 4.75% Victory SplGwth
- ------------------------------------------------------------------------------------------------------
International Growth Fund Class A 12/10/93 1.70% 4.75% Victory IntlGrA
International Growth Fund Class B 2/1/96 3.10% 5.00% Victory IntlGrA
- ------------------------------------------------------------------------------------------------------
</TABLE>
*All newspapers do not use the same abbreviation.
5
<PAGE>
The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, policies, risks, expenses, and
financial history to determine which Fund will best suit your risk tolerance and
investment needs. You also should review "Other Securities and Investment
Practices" for additional information about the individual securities in which
the Funds can invest and the risks related to these investments.
6
<PAGE>
BALANCED FUND
(1)INVESTMENT OBJECTIVE: The Balanced Fund seeks to provide income and long-term
growth of capital.
(1)INVESTMENT POLICIES AND STRATEGY: The Balanced Fund pursues its investment
objective by investing in equity securities and fixed income securities. The
Balanced Fund may invest in any type or class of security.
Important Characteristics of the Balanced Fund's Investments:
In making investment decisions involving EQUITY SECURITIES, the Adviser
considers:
o The growth and profitability prospects for the economic sector and
markets in which the company operates and for the products or
services it provides
o The financial condition of the company
o The price of the security and how that price compares to historical
price levels, to current price levels in the general market, and to
prices of competing companies; projected earnings estimates; and
earnings growth rate for the company
In making investment decisions involving DEBT SECURITIES, the Adviser
considers:
o Quality: The Balanced Fund primarily purchases investment-grade
corporate debt securities.
o Maturity: The average weighted maturity of the Balanced Fund's fixed
income securities will range from 5 to 15 years. This range may be
changed in response to changes in market conditions.
In making investment decisions involving PREFERRED STOCK, the Adviser
considers:
o The issuer's financial strength, including its historic and current
financial condition
o The issuer's projected earnings, cash flow, and borrowing
requirements
o The issuer's continuing ability to meet its obligations
Under normal market conditions, the Balanced Fund will:
o Invest 40% to 70% of its total assets in equity securities and securities
convertible into common stock
o Invest at least 25% of its total assets in fixed income securities
(2) RISK: The Balanced Fund is designed for long-term investors. The Balanced
Fund is subject to the risks common to all mutual funds and the risks common to
mutual funds that invest in equity securities and debt securities. By itself,
the Balanced Fund does not constitute a complete investment plan and should be
considered a long-term investment for investors who can afford to weather
changes in the value of their investment and in the level of income they receive
from their investment. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Denise Coyne and Richard T. Heine are the Portfolio
Managers of the Balanced Fund. Richard Heine has been the Portfolio Manager of
the Balanced Fund since its inception in December 1993. Richard Heine is a
Senior Portfolio Manager and Director of Key Asset Management Inc., and has been
in the investment business since 1976. Denise Coyne has been a Portfolio Manager
of the Balanced Fund since January 1995. She is a Senior Portfolio Manager and
Director for Key Asset Management Inc., and has been in the investment advisory
business since ___________.
7
<PAGE>
BALANCED FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Balanced Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES CLASS B SHARES
-------------- --------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75% None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None 5.00%**
Redemption Fees None None
Exchange Fees None None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
**5% in the first year, declining to 1% in the sixth year, with no charge after
the sixth year.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Balanced Fund.
THESE EXPENSES ARE CHARGED DIRECTLY TO THE BALANCED FUND. Expenses include
management fees, as well as the costs of maintaining accounts, administering the
Balanced Fund, providing shareholder services, and other activities. The
expenses shown are estimated based on historical or projected expenses of the
Balanced Fund.
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES CLASS B SHARES
-------------- --------------
(AFTER EXPENSE WAIVERS AND REIMBURSEMENTS)
(as a percentage of average daily net assets)
Management Fee(1) .85% .85%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses(2) .40% .60%
----- -----
Total Fund Operating Expenses(1) 1.25% 2.20%
===== =====
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be 1.00%, and the Total Fund Operating Expenses would
be 1.40% for Class A Shares and 2.35% for Class B Shares.
(2) Other Expenses includes an estimate of shareholder servicing fees the
Balanced Fund expects to pay. See "Organization and Management of the
Funds-Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Balanced Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
Balanced Fund, assuming: (1) a 5% annual return, and (2) redemption at the end
of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $60 $85 $113 $191
CLASS B SHARES $72 $99 $138 $229
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
8
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Balanced Fund's returns and operating
expenses over time. This table shows the results of an investment in one share
of the Balanced Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Balanced Fund's most recent
Annual Report to shareholders, which is incorporated by reference into the SAI.
If you would like a copy of the Annual Report, write or call the Balanced Fund
at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing Total
Return)
BALANCED FUND
<TABLE>
<CAPTION>
CLASS B SHARES CLASS A SHARES
MARCH 1, 1996 ---------------------------------------------
THROUGH YEAR ENDED YEAR ENDED DECEMBER 10,
OCTOBER 31, OCTOBER 31, OCTOBER 31, 1993 TO OCTOBER
1996(d) 1996(d) 1995 31, 1994(a)
------- ------- ---- - -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.51 $11.01 $9.62 $10.00
- ---------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.14 0.36 0.41 0.33
Net realized and unrealized gains
(losses) from investments and 0.85 1.39 1.40 (0.39)
foreign currencies
- ---------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.99 1.75 1.81 (0.06)
- ---------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.14) (0.36) (0.41) (0.32)
In excess of net investment income (0.02) ----- (0.01) -----
Net realized gains ----- (0.07) ----- -----
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.16) (0.43) (0.42) (0.32)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.34 $12.33 $11.01 $9.62
=========================================================================================================
Total Return (excludes sales charge) 15.73%(e) 16.27% 19.24% (0.57%)(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $1,432 $273,553 $201,073 $127,285
Ratio of expenses to average net assets 2.46%(c) 1.27% 0.98% 0.87%(c)
Ratio of net investment income to
average net assets 1.78%(c) 3.14% 4.05% 3.97%(c)
Ratio of expenses to average net assets(h) 2.67%(c) 1.43% 1.36% 1.49%(c)
Ratio of net investment income to
to average net assets(h) 1.57 2.98% 3.67% 3.35%
Portfolio turnover(f) 80% 80% 69% 118%
Average commission rate paid (g) $0.0084 $0.0084 ---- ----
</TABLE>
During the period certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective March 1, 1996, the Balanced Fund designated the existing shares as
Class A Shares and began offering Class B Shares.
(e) Represents total return for the Balanced Fund for the period November 1,
1995 through February 29, 1996 plus total return for Class B Shares for the
period March 1, 1996 through October 31, 1996.
(f) Portfolio turnover is calculated on the basis of the Balanced Fund as a
whole without distinguishing between the classes of shares issued.
(g) Represents the total dollar amount of commissions paid on portfolio security
transactions divided by total number of shares purchased and sold by the
Balanced Fund for which commissions were charged.
9
<PAGE>
DIVERSIFIED STOCK FUND
(1)INVESTMENT OBJECTIVE: The Diversified Stock Fund seeks to provide long-term
growth of capital.
(1)INVESTMENT POLICIES AND STRATEGIES: The Diversified Stock Fund pursues its
investment objective by investing primarily in common stocks and securities
convertible into common stocks issued by established domestic and foreign
companies.
The Adviser seeks to invest in securities that they consider undervalued in
relation to historical earnings and the value of the issuer's underlying assets.
In making investment decisions, the Adviser may consider cash flow, book value,
dividend yield and growth potential, quality of management, adequacy of
revenues, earnings, capitalization, and future relative earnings growth. The
Adviser will pursue investments that provide above average dividend yield or
potential for appreciation.
Under normal market conditions, the Diversified Stock Fund:
o Will invest at least 80% of its total assets in equity securities and
securities convertible into common stock
o May invest up to 20% of its total assets in:
o Equity securities of foreign issuers
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
(2) RISK: The Diversified Stock Fund is designed for long-term investors. The
Diversified Stock Fund is subject to the risks common to all mutual funds and
the risks common to mutual funds that invest in equity securities. By itself,
the Diversified Stock Fund does not constitute a complete investment plan and
should be considered a long-term investment for investors who can afford to
weather changes in the value of their investment. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Lawrence G. Babin is the Portfolio Manager of the
Diversified Stock Fund, a position he has held since its inception in October
1989. He is a Senior Portfolio Manager and Managing Director of Key Asset
Management Inc., and has been in the investment business since 1982.
DIVERSIFIED STOCK FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Diversified Stock Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES CLASS B SHARES
-------------- --------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75% None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None 5.00%**
Redemption Fees None None
Exchange Fee None None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent. **5% in the first year, declining to 1% in the sixth
year, with no charge after the sixth year.
10
<PAGE>
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Diversified Stock
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE DIVERSIFIED STOCK FUND.
Expenses include management fees as well as the costs of maintaining accounts,
administering the Diversified Stock Fund, providing shareholder services, and
other activities. The expenses shown are estimated based on historical or
projected expenses of the Diversified Stock Fund.
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES CLASS B SHARES
-------------- --------------
(as a percentage of average daily net assets)
Management Fees .65% .65%
Rule 12b-1 Distribution Fees None .75%
Other Expenses(1) .40% .65%
----- -----
Total Fund Operating Expenses 1.05% 1.95%
===== =====
(1) Other Expenses include an estimate of shareholder servicing fees the
Diversified Stock Fund expects to pay. See "Organization and Management of
the Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Diversified Stock Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, in the
Diversified Stock Fund assuming: (1) a 5% annual return , and (2) redemption at
the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $58 $79 $103 $170
CLASS B SHARES $70 $91 $125 $204
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSE AND RETURNS WILL VARY.
11
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Diversified Stock Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Diversified Stock Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Diversified Stock Fund's most
recent Annual Report to shareholders, which is incorporated by reference into
the SAI. If you would like a copy of the Annual Report, write or call the
Diversified Stock Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return : (Insert chart showing Total
Return)
DIVERSIFIED STOCK FUND
<TABLE>
<CAPTION>
Class B Shares Class A Shares
---------------------------------------------------------------------------------------------
March 1, October 20,
1996 through Year Ended Year Ended October 31, 1989 to
October 31, October 31, ------------------------------------------------------- October 31,
1996(a) 1996(a) 1995 1994 1993 1992 1991 1990(c) 1989(a)(c)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.18 $13.62 $12.68 $13.39 $12.16 $11.44 $9.25 $9.90 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.07 0.20 0.27 0.25 0.18 0.19 0.23 0.26
Net realized and unrealized gains
(losses) from investments 1.57 3.21 2.33 0.64 1.50 1.11 2.20 (0.67) (0.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.64 3.41 2.60 0.89 1.68 1.30 2.43 (0.41) (0.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.07) (0.19) (0.27) (0.23) (0.21) (0.19) (0.24) (0.24)
In excess of net investment income (0.04) ----- (0.01) ----- ----- ----- ----- ----- -----
Net realized gains ----- (1.09) (1.38) (1.37) (0.24) (0.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.11) (1.28) (1.66) (1.60) (0.45) (0.58) (0.24) (0.24)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.71 $15.75 $13.62 $12.68 $13.39 $12.16 $11.44 $9.25 $9.90
====================================================================================================================================
Total Return (excludes sales charge) 26.61%(c) 27.16% 23.54% 7.39% 14.04% 11.57% 27.50% (4.29%) (1.00%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $8,228 $571,153 $409,549 $263,227 $257,405 $227,839 $177,472 $121,754 $80,046
Ratio of expenses to average net assets 2.07%(b) 1.05% 0.92% 0.89% 0.89% 0.91% 0.91% 0.91% 0.75%(d)
Ratio of net investment income to 0.11%(b) 1.40% 2.11% 2.06% 1.45% 1.63% 2.06% 2.75% 1.39%(d)
average net assets
Ratio of expenses to average net 2.08%(b) 1.08% 0.95% 1.10% 0.90%
assets(b)
Ratio of net investment income to 0.10%(b) 1.37% 2.07% 1.86% 1.43%
average net assets(b)
Portfolio turnover(d) 94% 94% 75% 104% 86% 75% 51% 63% 3%
Average commission rate paid(e) $0.0504 $0.0504
</TABLE>
During the period certain fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
(a) Effective March 1, 1996, the Diversified Stock Fund designated the existing
shares as Class A Shares and began offering Class B Shares.
(b) Annualized.
(c) Represents total return for the Diversified Stock Fund for the period
November 1, 1995 through February 29, 1996 plus total return for Class B
Shares for the period March, 1996 through October 31, 1996
(d) Portfolio turnover is calculated on the basis of the Diversified Stock Fund
as a whole without distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on portfolio security
transactions divided by total number of shares purchased and sold by the
Diversified Stock Fund for which commissions were charged.
12
<PAGE>
VALUE FUND
(1)INVESTMENT OBJECTIVE: The Value Fund seeks to provide long-term growth of
capital and dividend income.
(1)INVESTMENT POLICIES AND STRATEGY: The Value Fund pursues its investment
objective by investing primarily in a diversified group of equity securities
with an emphasis on companies with above average total return potential. The
securities in the Value Fund usually are listed on a nationally recognized
exchange.
The Adviser seeks equity securities of under-valued companies.
Under normal market conditions, the Value Fund:
o Will invest at least 80% of its total assets in equity securities and
securities convertible into common stock
o May invest up to 20% of its total assets in:
o Preferred stocks
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
(2)RISK: The Value Fund is designed for long-term investors. The Value Fund is
subject to the risks common to all mutual funds and the risks common to mutual
funds that invest in equity securities. By itself, the Value Fund does not
constitute a complete investment plan and should be considered a long-term
investment for investors who can afford to weather changes in the value of their
investment. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Judith A. Jones is the Portfolio Manager of the Value
Fund, a position she has held since its inception in December 1993. She is a
Senior Portfolio Manager and Managing Director of Key Asset Management, Inc.,
and has been in the investment business since 1967.
VALUE FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Value Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES
--------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75%
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table, below, illustrates illustrate the
estimated operating expenses that you will incur as a shareholder of the Value
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE VALUE FUND. Expenses include
management fees as well as the costs of maintaining accounts, administering the
Value Fund, providing shareholder services, and other activities. The expenses
shown are estimated based on historical or projected expenses of the Value Fund.
13
<PAGE>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES
(as a percentage of average daily net assets) --------------
Management Fee 1.00%
Other Expenses(1) .40%
-----
Total Fund Operating Expenses 1.40%
=====
(1) Other Expenses includes an estimate of shareholder servicing fees the Value
Fund expects to pay. See "Organization and Management of the Funds --
Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Value Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
Value Fund, assuming: (1) a 5% annual return, and (2) redemption at the end of
each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $61 $90 $120 $207
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
14
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Value Fund's returns and operating
expenses over time. This table shows the results of an investment in one share
of the Value Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Value Fund's most recent
Annual Report to shareholders, which is incorporated by reference into the SAI.
If you would like a copy of the Annual Report, write or call the Value Fund at
800-KEY-FUND).
Variability, as shown by year-to-year total return : (Insert chart showing Total
Return)
VALUE FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED DECEMBER 3, 1993
OCTOBER 31, OCTOBER 31, TO OCTOBER 31,
1996 1995(d) 1994(a)
---- ------- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.87 $10.13 $10.00
- --------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.20 0.27 0.21
Net realized and unrealized gains from investments 2.65 1.92 0.11
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 2.85 2.19 0.32
- --------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.20) (0.27) (0.19)
In excess of net investment income ---- (0.01) -----
Net realized gains (0.34) (0.17) -----
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.54) (0.45) (0.19)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.18 $11.87 $10.13
==========================================================================================================================
Total Return (excludes sales charge) 24.66% 22.28% 3.27%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $382,083 $295,871 $188,184
Ratio of expenses to average net assets 1.33% 0.99% 0.92%(c)
Ratio of net investment income to average net assets 1.56% 2.55% 2.32%(c)
Ratio of expenses to average net assets(f) 1.35% 1.30% 1.48%(c)
Ratio of net investment income to average net assets(f) 1.54% 2.24% 1.76%(c)
Portfolio turnover 28% 23% 39%
Average commission rate paid(e) $0.0524
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Equity Income Portfolio merged into the
Value Fund. Financial highlights for the periods prior to June 5, 1995
represent the Value Fund.
(e) Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Value Fund for which commissions were charged.
(f) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
15
<PAGE>
(1)INVESTMENT OBJECTIVE: The Stock Index Fund seeks to provide capital
appreciation by attempting to match the investment performance of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
(1)INVESTMENT POLICIES AND STRATEGY: The Stock Index Fund pursues its investment
objective by attempting to duplicate the capital performance and dividend income
of the S&P 500 Index. The Stock Index Fund invests primarily in many of the
equity securities that are in the S&P 500 Index, including American Depository
Receipts (ADRs), and secondarily in realted futures and options contracts.
The S&P 500 Index is composed of 500 common stocks. To minimize small positions
and transactions expenses, the Stock Index Fund need not invest in every stock
included in the S&P 500 Index. The Stock Index Fund may purchase stocks that are
not included in the S&P 500 Index if the Adviser believes that those purchases
will reduce "tracking error" (the difference between the Stock Index Fund's
investment results, before expenses, and that of the S&P 500 Index).
The Stock Index Fund is not managed in the traditional sense using economic,
financial, and market analysis. Therefore, the Stock Index Fund will not
necessarily sell a stock that is underperforming. Brokerage costs, fees,
operating expenses, and tracking errors may cause the Stock Index Fund's total
return to be lower than that of the S&P 500 Index.
In connection with its futures and options transactions, the Stock Index Fund
may invest in:
o Preferred stocks
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations.
(2)RISK: The Stock Index Fund is designed for long-term investors. The Stock
Index Fund is subject to the risks common to all mutual funds and the risks
common to mutual funds that invest in equity securities. The Stock Index Fund
may purchase, retain, and sell securities when such transactions would not be
consistent with traditional investment criteria. The Stock Index Fund generally
will remain fully invested in common stocks even when stock prices generally are
falling. Accordingly, an investor is exposed to a greater risk of loss (and a
corresponding greater prospect of gain) from fluctuations in the value of such
securities than would be the case if the Stock Index Fund was not so invested in
such securities. By itself, the Stock Index Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather sudden and sometimes substantial changes in the value
of their investment.
PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Malini S. Menon is the Portfolio Manager of the Stock
Index Fund, a position she has held since April, 1996. She is a Vice President
and Portfolio Manager of Key Asset Management Inc., and has been in the
investment business since 1990.
16
<PAGE>
STOCK INDEX FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Stock Index Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES
--------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75%
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Stock Index Fund.
THESE EXPENSES ARE CHARGED DIRECTLY TO THE STOCK INDEX FUND. Expenses include
management fees, as well as the costs of maintaining accounts, administering the
Stock Index Fund, providing shareholder services, and other activities. The
expenses shown are estimated based on historical or projected expenses of the
Stock Index Fund.
ANNUAL FUND OPERATING EXPENSES (AFTER EXPENSE, WAIVERS AND CLASS A SHARES
REIMBURSMENTS) (as a percentage of average daily net assets) --------------
Management Fee (1) .45%
Other Expenses (2) .11%
----
Total Fund Operating Expenses(1)(2) .56%
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .60% and the Administration Fee would be .15%. If
the waivers were not in place, the Total Fund Operating Expenses would be
.86%.
(2) Other Expenses includes an estimate of the shareholder servicing fees the
Stock Index Fund expects to pay. See "Organization and Management of the
Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Stock Index Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, in the
Stock Index Fund assuming (1) a 5% annual return, and (2) redemption at the end
of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $53 $65 $77 $114
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
17
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Stock Index Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Stock Index Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Stock Index Fund's most
recent Annual Report to shareholders, which is incorporated by reference into
the SAI. If you would like a copy of the Annual Report, write or call the Stock
Index Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing Total
Return)
STOCK INDEX FUND
CLASS A SHARES
<TABLE>
<CAPTION>
DECEMBER 3,
YEAR ENDED YEAR ENDED 1993 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1994(a)
----- ---- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.50 $10.18 $10.00
- --------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.28 0.27 0.20
Net realized and unrealized gains on investments 2.58 2.31 0.16
- --------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 2.86 2.58 0.36
- --------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.28) (0.26) (0.18)
In excess of net investment income ----- ----- -----
Net realized gains (0.23) ----- -----
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.26) (0.18)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.85 $12.50 $10.18
- --------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 23.38% 25.72% 3.66%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $277,124 $160,822 $89,686
Ratio of expenses to average net assets 0.57% 0.55% 0.58%(c)
Ratio of net investment income to average net assets 2.14% 2.53% 2.35%(c)
Ratio of expenses to average net assets(g) 0.89% 0.87% 1.10%(c)
Ratio of net investment income to average net assets(g) 1.82% 2.21% 1.82%(c)
Portfolio Turnover(e) 4% 12% 1%
Average commission rate paid(f) $0.0186
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective March 1, 1996, the Stock Index Fund designated the existing
shares as Class A Shares and began offering Class B Shares.
(e) Portfolio turnover is calculated on the basis of the Stock Index Fund as a
whole without distinguishing between the classes of shares.
(f) Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Stock Index Fund for which commissions were charged.
(g) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
18
<PAGE>
OHIO REGIONAL STOCK FUND
(1)INVESTMENT OBJECTIVE: The Ohio Regional Stock Fund seeks to provide capital
appreciation.
(1)INVESTMENT POLICIES AND STRATEGY: The Ohio Regional Stock Fund pursues its
investment objective by investing primarily in equity securities issued by
companies headquartered in the State of Ohio.
In making investment decisions, the Adviser analyzes cash flow, book value,
dividend growth potential, quality of management, earnings, and capitalization.
The Ohio Regional Stock Fund looks at any information that reflects the
potential for future earnings growth. The Ohio Regional Stock Fund invests in
nationally recognized companies and lesser-known companies that may have smaller
capitalization, but also the potential for growth.
Under normal market conditions, the Ohio Regional Stock Fund:
o Will invest at least 80% of its total assets in common stocks and
securities convertible into common stocks.
o May invest up to 20% of its total assets in:
o Short-term debt obligations
o Investment-grade corporate debt securities
o Investment company securities
(2)RISK: The Ohio Regional Stock Fund is designed for long-term investors. The
Ohio Regional Stock Fund is subject to the risks common to all mutual funds and
the risks common to mutual funds that invest in equity securities. The Ohio
Regional Stock Fund may be appropriate for investors who are comfortable with
assuming the added risks associated with an investment in a fund that
concentrates its investments in a single state. By itself, the Ohio Regional
Stock Fund does not constitute a complete investment plan and should be
considered a long-term investment for investors who can afford to weather
changes in the value of their investment. Since the Ohio Regional Stock Fund
concentrates its investments in the State of Ohio, its assets may be at greater
risk because of economic, political, or regulatory risks associated with the
state. The Ohio Regional Stock Fund is subject to additional risks because it
concentrates its investments in a single geographic area and it may invest more
than 5% of its assets in the securities of a single issuer. PLEASE READ "RISK
FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Lynn S. Hamilton is the Portfolio Manager of the Ohio
Regional Stock Fund, a position he has held since September, 1991. He is a
Senior Portfolio Manager of Key Asset Management Inc., and has been in the
investment business since 1977.
OHIO REGIONAL STOCK FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Ohio Regional Stock Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES CLASS B SHARES
-------------- --------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75% None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None 5.00%**
Redemption Fees None None
Exchange Fees None None
19
<PAGE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent. **5% in the first year, declining to 1% in the sixth
year, with no charge after the sixth year.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Ohio Regional
Stock Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE OHIO REGIONAL STOCK FUND.
Expenses include management fees as well as the costs of maintaining accounts,
administering the Ohio Regional Stock Fund, providing shareholder services, and
other activities. The expenses shown are estimated based on historical or
projected expenses of the Ohio Regional Stock Fund.
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES CLASS B SHARES
(as a percentage of average daily net assets) -------------- --------------
Management Fee .75% .75%
Rule 12b-1 Distribution Fees None .75%
Other Expenses(1) .70% 1.00%
----- -----
Total Fund Operating Expenses(1) 1.45% 2.50
===== =====
(1) Other Expenses includes an estimate of shareholder servicing fees the Ohio
Regional Stock Fund expects to pay. See "Organization and Management of the
Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Ohio Regional Stock
Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the Ohio
Regional Stock Fund, assuming: (1) a 5% annual return, and (2) redemption at the
end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $62 $91 $123 $213
CLASS B SHARES $75 $108 $153 $258
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
20
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Ohio Regional Stock Fund's return and
operating expenses over time. This table shows the results of an investment in
one share of the Ohio Regional Stock Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996 periods, and by other auditors for all for earlier periods. This
information should be read in conjunction with the Ohio Regional Stock Fund's
most recent Annual Report to shareholders, which is incorporated by reference
into the SAI. If you would like a copy of the Annual Report, write or call the
Ohio Regional Stock Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing Total
Return)
<TABLE>
<CAPTION>
OHIO REGIONAL STOCK FUND
CLASS B SHARES CLASS A SHARES
---------------------- ---------------------------------------------------------------------
Class B Shares Class A Shares
------------------------------------------------------------------------------------------------
March 1, March 1, October 20,
1996 through 1996 through Year Ended October 31, 1989 to
October 31, October 31, ------------------------------------------------------- October 31,
1996(e) 1996(e) 1995 1994 1993 1992 1991 1990(a)(c) 1989(a)(c)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $16.43 $15.94 $14.56 $14.69 $12.12 $11.15 $6.75 $9.72 $10.00
Investment Activities
Net investment income (loss) (0.03) 0.14 0.17 0.18 0.16 0.20 0.21 0.24
Net realized and unrealized gains
(losses) on investments 1.51 2.62 2.13 0.39 2.63 1.07 4.39 (2.98) (0.28)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.48 2.76 2.30 0.57 2.79 1.27 4.60 (2.74) (0.28)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income ----- (0.14) (0.17) (0.17) (0.18) (0.21) (0.20) (0.23) -----
In excess of net investment income (0.04) ----- (0.01) ----- ----- ----- ----- ----- -----
Net realized gains ----- (0.36) (0.65) (0.53) (0.04) (0.09) ----- ----- -----
In excess of net realized gains ----- (0.25) (0.09) ----- ----- ----- ----- ----- -----
Total Distributions (0.04) (0.75) (0.92) (0.70) (0.22) (0.30) (0.20) (0.23)
NET ASSET VALUE, END OF PERIOD $17.87 $17.95 $15.94 $14.56 $14.69 $12.12 $11.15 $6.75 $9.72
Total Return (excludes sales charge) 16.95%(g) 17.79% 16.93% 3.96% 23.16% 11.50% 68.68% -28.63% -2.80%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $326 $45,294 $39,048 $33,965 $34,926 $36,115 $27,092 $13,039 $20,277
Ratio of expenses to average
net assets 2.61%(c) 1.39% 1.20% 1.04% 1.04% 1.04% 1.08% 1.11% 0.88%(b)
Ratio of net investment income
(loss) to (0.60%)(c) 0.79% 1.13% 1.27% 1.17% 1.73% 2.16% 2.66% 0.47%(b)
average net assets
Ratio of expenses to average
net assets(d) 3.50%(c) 1.40% 1.24% 1.27% 1.06% ----- ----- ----- ----
Ratio of net investment income
to average (1.49%)(c) 0.78% 1.09% 1.04% 1.15% ----- ----- ----- -----
net assets(d)
Portfolio turnover(h) 6% 6% 11% 14% 7% 8% 15% 11% -----
Average commissions paid(i) $0.0513 $0.0513
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(e) Effective March 1, 1996, the Ohio Regional Stock Fund designated the
existing shares as Class A Shares and began offering Class B Shares.
(f) This information is not included in the financial statements audited by
Coopers & Lybrand L.L.P.
(g) Represents total return for the Ohio Regional Stock Fund for the period
November 1, 1995 through February 29, 1996 plus total return for Class B
Shares for the period March 1, 1996 through October 31, 1996.
(h) Portfolio turnover is calculated on the basis of the Ohio Regional Stock
Fund as a whole without distinguishing between the classes of shares
issued.
(i) Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Ohio Regional Stock Fund for which commissions were charged.
21
<PAGE>
GROWTH FUND
(1)INVESTMENT OBJECTIVE: The Growth Fund seeks to provide long-term growth of
capital.
(1)INVESTMENT POLICIES AND STRATEGY: The Growth Fund pursues its investment
objective by investing primarily in equity securities of companies with superior
prospects for long-term earnings growth and price appreciation. The issuers
usually are listed on a nationally recognized exchange.
In making investment decisions, the Adviser will look for above average growth
rates, high return on equity, issuers that reinvest their earnings in their
business, and strong balance sheets.
Under normal market conditions, the Growth Fund:
o Will invest at least 80% of its total assets in common stocks and
securities convertible into common stocks
o May invest up to 20% of its total assets in:
o Preferred stocks
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
(2) RISK: The Growth Fund is designed for long-term investors. The Growth Fund
is subject to the risks common to all mutual funds and the risks common to
mutual funds that invest in equity securities. The Growth Fund may be
appropriate for investors who are comfortable with assuming the added risks
associated with stocks that do not pay out significant portions of their
earnings as dividends. By itself, the Growth Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment and do not
require significant current income from their investments. PLEASE READ "RISK
FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: William F. Ruple is the Portfolio Manager of the Growth
Fund, a position he has held since June, 1995. He is a Senior Portfolio Manager
and Director of Key Asset Management, Inc., and has been in the investment
advisory business since 1970.
GROWTH FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Growth Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES
--------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75%
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Growth Fund.
THESE EXPENSES ARE CHARGED DIRECTLY TO THE GROWTH FUND'S INCOME BEFORE IT IS
PAID TO YOU. Expenses include management fees as well as the costs of
maintaining accounts, administering the Growth Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical or projected expenses of the Growth Fund.
22
<PAGE>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES
(as a percentage of average daily net assets)
Management Fee 1.00
Other Expenses(1) .40
Total Fund Operating Expenses 1.40%
(1) Other Expenses includes an estimate of shareholder servicing fees the
Growth Fund expects to pay see "Organization and Management of the Fund --
Shareholder Servicing Plan".
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Growth Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, in the
Growth Fund assuming: (1) a 5% annual return, and (2) redemption at the end of
each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $61 $90 $120 $207
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
23
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Growth Fund's returns and operating
expenses over time. This following table shows the results of an investment in
one share of the Growth Fund for each of the period indicated****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Growth Fund's most recent
Annual Report to shareholders, which is incorporated by reference into the SAI.
If you would like a copy of the Annual Report, write or call the Growth Fund at
800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing Total
Return in table.
GROWTH FUND
CLASS A SHARES
<TABLE>
<CAPTION>
DECEMBER 3,
YEAR ENDED YEAR ENDED 1993 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995(d) 1994(a)(f)
---- ------- ----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.15 $10.23 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income (loss) 0.08 0.11 0.10
Net realized and unrealized gains (losses) on investments 2.93 1.97 0.22
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 3.01 2.08 0.32
Distributions
Net investment income (0.08) (0.11) (0.09)
In excess of net investment income ---- ---- ----
Net realized gains (0.51) (0.05) ----
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.59) (0.16) (0.09)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.57 $12.15 $10.23
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 25.66% 20.54% 3.22%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $147,753 $108,253 $66,921
Ratio of expenses to average net assets 1.33% 1.07% 0.94%(c)
Ratio of net investment income to average net assets 0.64% 1.00% 1.10%(c)
Ratio of expenses to average net assets(e) 1.39% 1.42% 1.51%(c)
Ratio of net investment income to average net assets(e) 0.58% 0.65% 0.53%(c)
Portfolio Turnover(g) 27% 107% 28%
Ratio of net investment income to average net assets(e) 0.58% 0.65% 0.52%(c)
Portfolio Turnover(g) 27% 107.13% 28.09%
Average commission rate paid(h) $0.0618
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Equity Portfolio merged into the Growth
Fund. Financial highlights for the period prior to June 5, 1995 represent
the Growth Fund.
(e) During the period, certain fees were voluntarily waived or expenses
reimbursed. If such voluntary fee reductions had not occurred, the ratios
would have been as indicated.
24
<PAGE>
(f) Effective March 17, 1996, the Society Earnings Momentum Fund merged into
the Growth Fund. Financial highlights for the period prior to March 17,
1994 represent the Growth Fund.
(g) Portfolio turnover is calculated on the basis of the Growth Fund as a whole
without distinguishing between the classes of shares issued.
(h) Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Growth Fund for which commissions were charged.
25
<PAGE>
SPECIAL VALUE FUND
(1)INVESTMENT OBJECTIVE: The Special Value Fund seeks to provide long-term
growth of capital and dividend income.
(1)INVESTMENT POLICIES AND STRATEGY: The Special Value Fund pursues its
investment objective by investing primarily in equity securities of small-and
medium-sized companies listed on a nationally recognized exchange. Small-sized
companies are defined as those having market capitalization of less than $1
billion and medium-sized companies are defined as those having a market
capitalization of between $1 billion and $5 billion.
The Adviser looks for companies with above average total return potential whose
equity securities are under-valued and considered statistically cheap.
Under normal market conditions the Special Value Fund will invest at least 65%
of its total assets in:
o Common and preferred stocks
o Securities convertible into common stock of small- and medium-sized
companies Debt securities
(2)RISK: The Special Value Fund is designed for long-term investors. The Special
Value Fund is subject to the risks common to all mutual funds and the risks
common to mutual funds that invest in equity securities. The Special Value Fund
may be appropriate for investors who are comfortable with assuming the added
risks associated with small capitalization stocks in return for the possibility
of long-term rewards. The smaller, less seasoned companies in which the Special
Value Fund may invest may be subject to greater business risks than larger,
established companies. They may be at greater risk to changes in economic
conditions and factors affecting the profits of corporations. By itself, the
Special Value Fund does not constitute a complete investment plan and should be
considered a long-term investment for investors who can afford to weather
changes in the value of their investment. PLEASE READ "RISK FACTORS" CAREFULLY
BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Anthony Aveni, Barbara Myers, and Paul Danes are the
Portfolio Managers of the Special Value Fund. Anthony Aveni has been a Portfolio
Manager of the Special Value Fund since its inception in December 1993. He is a
Senior Managing Director with Key Asset Management, Inc., he has been in the
investment business since 1981. Barbara Myers has been a Portfolio Manager of
the Special Value Fund since June, 1985. She is a Senior Portfolio Manager and
Director with Key Asset Management, Inc. and has been in the investment business
since 1987. Paul Danes has been a Portfolio Manager of the Special Value since
October, 1995. He is a Senior Portfolio Manager and Director with Society Asset
Management, Inc. since 1987, and has been in the investment business since 1987.
SPECIAL VALUE FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Special Value Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A CLASS B
SHARES SHARES
------ ------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75% None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None 5.00%
Redemption Fees None None
Exchange Fees None None
26
<PAGE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
**5% in the first year, declining to 1% in the sixth year, with no charge after
the sixth year.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Special Value
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE SPECIAL VALUE FUND. Expenses
include management fees, as well as the costs of maintaining accounts,
administering the Special Value Fund, providing shareholder services, and other
activities. The expenses shown are estimated based on historical or projected
expenses of the Special Value Fund.
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
SHARES SHARES
(a percentage of average daily net assets)
Management Fee 1.00% 1.00%
Rule 12b-1 Distribution Fees None .75%
Other Expenses(1) .45% .60%
--- ---
Total Fund Operating Expenses 1.45% 2.35%
==== ====
(1) Other Expenses includes an estimate of shareholder servicing fees the
Special Value Fund expects to pay. See "Organization and Management of the
Fund -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Special Value Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, in the
Special Value Fund assuming: (1) a 5% annual return, and (2) redemption at the
end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $62 $91 $123 $213
CLASS B SHARES $74 $103 $146 $246
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
27
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Special Value Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Special Value Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Special Value Fund's most
recent Annual Report to shareholders, which is incorporated by reference into
the SAI. If you would like a copy of the Annual Report, write or call the
Special Value Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return (Insert chart showing Total
Return
SPECIAL VALUE FUND
<TABLE>
<CAPTION>
CLASS B SHARES CLASS A SHARES
------------------- -------------------------------------------------
MARCH 1, 1996 DECEMBER 3,
THROUGH YEAR ENDED YEAR ENDED 1993 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996(e) 1996(e) 1995 1994(a)
------- ------- ---- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.89 $12.15 $10.49 $10.00
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net Investment income 0.01 0.12 0.15 0.11
Net realized and unrealized gains
on investments 1.23 2.33 1.71 0.48
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.24 2.45 1.86 0.59
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions
Net Investment Income (0.01) (0.11) (0.15) (0.10)
In excess of net investment income (0.03) -- -- --
Net realized gains -- (0.34) (0.05)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.04) (0.45) (0.20) (0.10)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.09 $14.15 $12.15 $10.49
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 19.80%(f) 20.60% 18.01% 5.92%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $386 $289,460 $194,700 $118,600
Ratio of expenses to average net assets 2.51%(c) 1.37% 1.04% 1.00%(c)
Ratio of net investment income to average
net assets (0.31)%(c) 0.88% 1.35% 1.23%(c)
Ratio of expenses to average net assets(d) 3.75%(c) 1.40% 1.30% 1.49%(c)
Ratio of net investment income to average
net assets(d) (1.55)%(c) 0.85% 1.09% 0.74%(c)
Portfolio turnover(g) 55% 55% 38.57% 17.90%
Average commission rate paid(h) $0.0501 $0.0501
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) During the period, certain fees were voluntarily reduced. If such voluntary
waivers or fee reductions had not occurred, the ratios would have been as
indicated.
28
<PAGE>
(e) Effective March 1, 1996, the Special Value Fund designated the existing
shares as Class A Shares and began offering Class B Shares.
(f) Represents total return for the Special Value Fund for the period November
1, 1995 through February 29, 1996 plus total return for Class B Shares for
the period March 1, 1996 through October 31, 1996.
(g) Portfolio turnover is calculated on the basis of the Special Value Fund as
a whole without distinguishing between the classes of shares issued.
(h) Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Special Value Fund for which commissions were charged.
29
<PAGE>
SPECIAL GROWTH FUND
(1)INVESTMENT OBJECTIVE: The Special Growth Fund seeks to provide capital
appreciation.
(1)INVESTMENT POLICIES AND STRATEGY: The Special Growth Fund pursues its
investment objective by investing in equity securities of companies with market
capitalization of $750 million or less.
In making investment decisions, the Advisers will look for above average growth
rates, high return on equity, issuers that reinvest their earnings in their
business, and strong balance sheets.
Under normal market conditions, the Special Growth Fund:
o Will invest at least 65% of its total assets in equity securities of
companies with market capitalization of $750 Million or less. These equity
investments include:
o Common stock
o Preferred stock
o Convertible preferred stock
o Debt convertible into equity securities
o Securities convertible into common stock
o May invest up to 35% of its total assets in:
o Equity securities of companies with market capitalizations of up to
approximately $1 billion
o Investment-grade debt securities
o May invest up to 5% of its total assets in lower-rated debt
securities, commonly referred to as "junk bonds."
(2)RISK: The Special Growth Fund is designed for long-term equity investors. The
Special Growth Fund may be appropriate for investors who are comfortable with
assuming the added risks associated with small capitalization stocks in return
for the possibility of long-term rewards. Smaller capitalization companies may
have limited product lines, markets, or financial resources, which may make them
more susceptible to setbacks and reversals. These securities may be subject to
more abrupt or erratic price fluctuations than securities of larger companies.
Small capitalization stocks as a group may not respond to general market rallies
or downturns as much as other types of equity securities. The Special Growth
Fund may be appropriate for investors who are comfortable with assuming the
added risks associated with stocks that do not pay out significant portions of
their earnings as dividends. By itself, the Special Growth Fund does not
constitute a complete investment plan and should be considered a long-term
investment for investors who can afford to weather changes in the value of their
investment and do not require significant current income from their investments.
PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Annette Geddes is the Portfolio Manager of the Special
Growth Fund, a position she has held since June, 1996. She is a Managing
Director and Portfolio Manager of Key Asset Management, Inc., and has been in
the investment business since 1967.
30
<PAGE>
SPECIAL GROWTH FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Special Growth Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES
--------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75%
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating table, below, illustrates the estimated operating
expenses that you will incur as a shareholder of the Special Growth Fund. THESE
EXPENSES ARE CHARGED DIRECTLY TO THE SPECIAL GROWTH FUND. Expenses include
management fees as well as costs of maintaining accounts, administering the
Special Growth Fund, providing shareholder services, and other activities. The
expenses shown are estimated based on historical or projected expenses of the
Special Growth Fund.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
CLASS A SHARES
--------------
Management Fee 1.00%
Other Expenses(1) .53%
---
Total Fund Operating Expenses 1.53%
====
(1) Other Expenses includes an estimate of shareholder servicing fees the
Special Growth Fund expects to pay. See "Organization and Management of the
Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Special Growth Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
Special Growth Fund, assuming: (1) a 5% annual return, and (2) redemption at the
end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $ 62 $94 $127 $221
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
31
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Special Growth Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Special Growth Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Special Growth Fund's most
recent Annual Report to shareholders, which is incorporated by reference into
the SAI. If you would like a copy of the Annual Report, write or call the
Special Growth Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart sharing total
return)
SPECIAL GROWTH FUND
CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS JANUARY 11,
YEAR ENDED ENDED YEAR ENDED 1994 THROUGH
OCTOBER 31, OCTOBER 31, APRIL 30, APRIL 30,
1996 1995 1995(d) 1994(a)
---- ---- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.81 $10.54 $9.82 $10.00
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income (loss) (0.07) 0.00 0.02 (0.01)
Net realized and unrealized gains
(losses) on investments 2.40 1.27 0.72 (0.17)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 2.33 1.27 0.74 (0.18)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income -- -- (0.02)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.02)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.14 $11.81 $10.54 $9.82
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 19.73% 12.05%(b) 7.51% (1.80%)(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $87,837 $54,335 $20,796 $30,867
Ratio of expenses to average net assets 1.47% 0.65%(c) 1.04% 0.82%(c)
Ratio of net investment income loss to
average net assets (0.62%) (0.13%)(c) 0.17% (0.27%)(c)
Ratio of expenses to average net assets(f) 1.51% 1.40%(c) 1.35% 1.47%(c)
Ratio of net investment income (loss)
to average net assets(f) (0.66%) (0.88%)(c) (0.14)% (0.92%)(c)
Portfolio turnover 152% 54% 102% 61%
Average commission rate paid (e) $0.0468
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Aggressive Growth Portfolio merged into
the Special Growth Fund. Financial highlights for the periods prior to June
5, 1995 represent the Aggressive Growth Portfolio.
(e) Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Special Growth Fund for which commissions were charged.
(f) During the period, certain fees were waived voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
32
<PAGE>
INTERNATIONAL GROWTH FUND
(1)INVESTMENT OBJECTIVE: The International Growth Fund seeks to provide
capital growth consistent with reasonable investment risk.
(1) INVESTMENT POLICIES AND STRATEGY: The International Growth Fund pursues
its investment objective by investing primarily in equity securities of foreign
corporations, most of which are denominated in foreign currencies.
The International Growth Fund will invest most of its assets in securities of
companies located either in developed countries in Western Europe or in Japan,
although it may purchase securities of companies located in developing countries
and other developed countries. In making investment decisions, the Advisers may
analyze the economies of foreign countries and the growth potential for
individual sectors and securities.
Under normal market conditions, the International Growth Fund:
o Will invest at least 65% of its total assets in securities (including
American Depository Receipts) of companies that derive more than 50% of
their gross revenues from, or have more than 50% of their assets, outside
the United States.
o Will invest at least 65% of its total assets in securities for which the
principal trading markets are located in at least three different countries
(excluding the United States).
o May invest up to 35% of its total assets in:
o Domestic money market securities
o Securities convertible into common stock
o "Sponsored" and "unsponsored" American Depository Receipts and similar
securities
(2)RISK: The International Growth Fund is designed for long-term investors. The
International Growth Fund is subject to the risks common to all mutual funds and
to the risks common to mutual funds that invest in equity securities and foreign
securities. The International Growth Fund may be appropriate for investors who
are comfortable with assuming the added risks associated with stocks that do not
pay out significant portions of their earnings as dividends. The International
Growth Fund may be appropriate for investors who are comfortable with assuming
the added risks associated with investments in foreign countries and investments
denominated in foreign currencies. By itself, the International Growth Fund does
not constitute a complete investment plan and should be considered a long-term
investment for investors who can afford to weather changes in the value of their
investment and do not require significant current income from their investments.
PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Conrad R. Metz is the Portfolio Manager of the
International Growth Fund, a position he has held since October, 1995. From
1993-1995 he was Senior Vice President, International Equities, at Bailard Biehl
& Kaiser and has held other responsible positions managing or researching
international investments since 1983. He is a Senior Portfolio Manager and
Managing Director of Key Asset Management, Inc., and has been in the investment
business since 1978.
INTERNATIONAL GROWTH FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the International Growth Fund.
33
<PAGE>
SHAREHOLDER TRANSACTION EXPENSES* CLASS A CLASS B
SHARES SHARES
------ ------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75% None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None 5.00%**
Redemption Fees None None
Exchange Fees None None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent. **5% in the first year, declining to 1% in the sixth
year with no charge after the sixth year.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the International
Growth Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE INTERNATIONAL GROWTH
FUND. Expenses include management fees as well as the costs of maintaining
accounts, administering the International Growth Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical or projected expenses of the International Growth Fund.
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B
SHARES SHARES
------ ------
(as a percentage of average daily net assets)
Management Fee 1.10% 1.10%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses(1) .60% 1.25%
--- -----
Total Fund Operating Expenses(1) 1.70% 3.10%
==== =====
(1) Other Expenses includes an estimate of shareholder servicing fees the
International Growth Fund expects to pay. See "Organization and Management
of the Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the International Growth
Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, in the
International Growth Fund assuming: (1) a 5% annual return, and (2) redemption
at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $64 $99 $135 $239
CLASS B SHARES $81 $126 $183 $308
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
34
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the International Growth Fund's returns
and operating expenses over time. This table shows the results of an investment
in one share of the International Growth Fund for each of the periods
indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996 periods, and by other auditors for all earlier periods. This
information should be read in conjunction with the International Growth Fund's
most recent Annual Report to shareholders, which is incorporated by reference
into the SAI. If you would like a copy of the Annual Report, write or call the
International Growth Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing Total
Return in table below.)
<TABLE>
<CAPTION>
THE VICTORY INTERNATIONAL GROWTH FUND
CLASS B SHARES CLASS A SHARES
----------------- --------------------------------------------------------
MARCH 1, 1996
THROUGH
OCTOBER 31, YEAR ENDED OCTOBER 31,
1996(a) 1996(a) 1995(b) 1994 1993
------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.79 $ $12.33 $13.32 $11.93 $8.93
- --------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income (loss) -- 0.08 (0.05) (0.01) (0.03)
Net realized and unrealized gains --
(losses) from investments and foreign
currencies 0.14 0.62 (0.42) 1.40 3.03
- --------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.14 0.70 (0.37) 1.39 3.00
- --------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income -- (0.02)
Net realized gains -- -- (0.55)
Tax return of capital -- -- (0.07)
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.02) (0.62)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.93 $13.01 $12.33 $13.32 $11.93
- --------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 4.89%(c) 5.65% (2.50%) 11.65% 33.59%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $118 $121,517 $106,477 $81,307 $30,629
Ratio of expenses to average net assets 2.91%(d) 1.73% 1.53% 1.48% 1.46%
Ratio of net investment income
(loss) to average net assets (0.10%)(d) 0.64% 0.75% (0.51%) (0.74%)
Ratio of expenses to average net assets(g) 6.46%(d) 1.75% 1.65% 1.83% 1.63%
Ratio of net investment loss to average
net assets(g) (3.65%)(d) 0.62% 0.63% (0.86%) (0.91%)
Portfolio turnover(e) 178% 178% 68% 51% 45%
Average commission rate paid(f) $0.0242 $0.0242
CLASS A SHARES
----------------------------------------
MAY 18, 1990
THROUGH
OCTOBER 31,
1992 1991(d) 1990(a)(d)
---- ------- ----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.20 $9.46 $10.00
- ---------------------------------------------------------------------------------------------
Investment Activities
Net investment income (loss) (0.02) 0.51 0.09
Net realized and unrealized gains
(losses) from investments and foreign
currencies (0.17) (0.25) (0.55)
- ---------------------------------------------------------------------------------------------
Total from Investment Activities (0.19) 0.26 (0.46)
- ---------------------------------------------------------------------------------------------
Distributions
Net investment income (0.01) (0.52) (0.08)
Net realized gains (0.07)
Tax return of capital
- ---------------------------------------------------------------------------------------------
Total Distributions (0.08) (0.52) (0.08)
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.93 $9.20 $9.46
- ---------------------------------------------------------------------------------------------
Total Return (excludes sales charge) (2.08%) 2.93% (4.54%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $11,091 $5,682 $9,878
Ratio of expenses to average net assets 1.56% 1.72% 1.70%(b)
Ratio of net investment income
(loss) to average net assets (0.20%) 5.97% 2.51%(b)
Ratio of expenses to average net assets(g) 1.72%
Ratio of net investment loss to average
net assets(g) (0.35%)
Portfolio turnover(e) 96% 103% 12%
Average commission rate paid(f)
</TABLE>
(a) Effective March 1, 1996, the International Growth Fund designated the
existing shares of Class A Shares and began offering Class B Shares.
(b) Effective June 5, 1995, the Victory Foreign Markets Portfolio merged into
the International Growth Fund. Financial highlights for the periods prior
to June 5, 1995 represent the International Growth Fund.
(c) Represents total return for the International Growth Fund for the period
November 1, 1995 through February 29, 1995 plus total return for Class B
Shares for the Period March 1, 1995 through October 31, 1996.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the International Growth
Fund as a whole without distinguishing between the classes of shares
issued.
(f) Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the International Growth Fund for which commissions were charged.
(g) During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(h) Period from commencement of operations.
(i) This information is not included in the financial statements audited by
Coopers & Lybrand L.L.P.
35
<PAGE>
RISK FACTORS
This prospectus describes some of the risks that you may assume as an investor
in the Funds. By matching your investment objective with a comfortable level of
risk, you can create your own customized investment plan. Some limitations on
the Funds' investments are described in the section that follows. "Other
Securities and Investment Practices" at the end of this prospectus provides
additional information on the securities mentioned in the overview of each of
the Funds. As with any mutual fund, there is no guarantee that a Fund will earn
income or show a positive total return over time. A Fund's price, yield, and
total return will fluctuate. You may lose money if a Fund's investments do not
perform well. ****It is important to keep in mind one basic principle of
investing: the greater the risk, the greater the potential reward. The reverse
is also generally true: the lower the risk, the lower the potential reward.****
The following risks are common to ALL MUTUAL FUNDS:
o MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price a
Fund originally paid for it, or less than the security was worth at an
earlier time. Market risk may affect a single issuer, an industry, a sector
of the economy, or the entire market, and is common to all investments.
o MANAGER RISK is the risk that a Fund's Portfolio Manager may use a strategy
that does not produce the intended result.
The following risks are common to mutual funds that invest in EQUITY
SECURITIES:
EQUITY RISK is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
earnings and cash flow, equity securities are entitled to the residual
value after the company meets its other obligations. For example, holders
of debt securities have priority over holders of equity securities to a
company's assets in the event of bankruptcy.
The following risks are common to mutual funds that invest in FOREIGN
SECURITIES:
o CURRENCY RISK is the risk that fluctuations in the exchange rates between
the U.S. dollar and foreign currencies may negatively affect an investment.
Adverse changes in exchange rates may erode or reverse any gains produced
by foreign currency denominated investments and may widen any losses.
o FOREIGN ISSUER RISK. Compared to U.S. and Canadian companies, there
generally is less publicly available information about foreign companies
and there may be less governmental regulation and supervision of foreign
stock exchanges, brokers, and listed companies. Foreign issuers may not be
subject to the uniform accounting, auditing, and financial reporting
standards and practices used by domestic issuers.
The following risks are common to mutual funds that invest in DEBT SECURITIES:
o INTEREST RATE RISK. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a fixed-rate security typically goes down. When interest
rates go down, the value of these securities typically goes up. Generally,
the market values of securities with longer maturities are more sensitive
to changes in interest rates.
o INFLATION RISK is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities.
o REINVESTMENT RISK is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested at a
lower interest rate. Generally, interest rate risk and reinvestment risk
have offsetting effects.
o CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although
the Funds generally invest in only high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities.
36
<PAGE>
The following risk is common to mutual funds that invest in the SECURITIES OF A
SINGLE STATE:
o CONCENTRATION AND DIVERSIFICATION RISK is the risk that only a limited
number of high-quality securities of a particular type may be available.
Concentration and diversification risk is greater for Funds that primarily
invest in the securities of a single state.
INVESTMENT LIMITATIONS
****The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.****
To help reduce risk, the Funds have adopted limitations on some investment
policies. These limits involve a Fund's ability to borrow money and the amount
it can invest in various types of securities. Certain limitations can be changed
only with the approval of shareholders. Victory's Board of Trustees can change
other investment limitations without shareholder approval. See "Other Securities
and Investment Practices" and the SAI for more information.
Each Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations). Each Fund limits its
borrowing to 33-1/3% of its total assets (a Fund would borrow by selling a
security that it owns and then repurchasing that security later at a higher
price). The Funds do not intend to borrow for leveraging purposes
Each Fund is "diversified" according to certain federal securities provisions
regarding the diversification of its assets. Generally, under those provisions,
at least 75% of a Fund's total assets must be invested so that no more than 5%
of the Fund's total assets are invested in the securities of any one issuer.
Each Fund also intends to comply with certain federal tax requirements regarding
the diversification of its assets, which generally are less restrictive than the
securities provisions. These diversification provisions and requirements are
discussed in the SAI.
INVESTMENT PERFORMANCE
****Past performance does not guarantee future results. You may obtain the
current 30-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 7:00 p.m. Eastern Time Monday
through Friday.****
Victory may advertise the performance of a Fund by comparing it to other mutual
funds with similar objectives and policies. Performance information may also
appear in various publications. Any fees charged by Investment Professionals may
not be reflected in these performance calculations. Performance information is
contained in the annual and semi-annual reports, you may obtain a copy of the
annual and semi-annual reports free of charge, which include performance
information.
The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to have the same yield
throughout that year. To calculate 30-day yield, a Fund's net investment income
per share for the most recent 30 days is divided by the maximum offering price
per share for Class A Shares. This number is divided by the NAV for Class B
Shares.
To calculate "total return," a Fund starts with the total number of shares that
you can buy for $1,000 at the beginning of the period, then adds the additional
shares that you would have purchased if you reinvested all of the dividends and
distributions paid within the period (this takes into account the Fund's income,
if any). The number
37
<PAGE>
of these shares is multiplied by the net asset value on the last day of the
period and the result is divided by the initial $1,000 investment to determine
the percentage gain or loss. For periods of more than one year, the cumulative
total return is adjusted to get an average annual total return.
o YIELD is a measure of dividend income.
o AVERAGE ANNUAL TOTAL RETURN (OR "ANNUALIZED TOTAL RETURN") is a measure of
past dividend income plus capital appreciation. It is the sum of all of the
parts of your investment return.
Whenever you see information on a Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in a Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.
SHARE PRICE
Each Fund's share price, called its net asset value (the NAV), is calculated
each business day (normally at 4:00 p.m. Eastern time). Shares are purchased at
the next share price calculated after your investment is received and accepted.
A business day is a day on which the New York Stock Exchange is open for trading
or any day in which enough trading has occurred in the securities held by a Fund
to materially affect the NAV. If your account is established with an Investment
Professional or a bank, you may not be able to purchase or sell shares on other
holidays when the Federal Reserve Bank of Cleveland is closed and the New York
Stock Exchange is closed.
The NAV is calculated by adding up the total value of a Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund:
Total Assets - Liabilities
NAV = -------------------------------------
Number of Shares Outstanding
****The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own, gives you the dollar amount and value of
your investment.****
Each Fund's net asset value can be found daily in The Wall Street Journal and
other newspapers.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of distributions. Dividend distributions are the net dividends or interest
earned on investments. If a Fund makes a capital gain distribution, it usually
occurs in December. As with any investment, you should consider the tax
consequences of an investment in a Fund.
Ordinarily, the Balanced Fund declares and pays dividends from its net
investment income monthly. All other Funds in this prospectus declare and pay
dividends from their net investment income quarterly. Any net capital gains
realized by the Funds are paid as dividends at least annually. The Funds declare
and pay dividends separately for Class A and Class B Shares of the Funds that
have both classes of shares. Shareholders who receive a dividend check for less
than $10.00 will have future dividends reinvested automatically into their
accounts. Distributions can be received in one of the following ways:
o REINVESTMENT OPTION: You can have distributions automatically reinvested in
additional shares of a Fund. If you do not indicate another choice on your
Account Application, this option will be assigned to you automatically.
o CASH OPTION: A check will be mailed to you no later than 7 days after the
pay date.
38
<PAGE>
o INCOME EARNED OPTION: Dividends can be reinvested automatically in a Fund
in which you have invested and your capital gains can be paid in cash, or
capital gains can be reinvested and dividends paid in cash.
o DIRECTED DIVIDENDS OPTION: You can have distributions automatically
reinvested in shares of another fund of the Victory Group. The "Victory
Group" includes other funds of the Victory Portfolios and Key Mutual Funds
If distributions from Class A Shares are reinvested in Class A Shares of
another fund, you will not pay a sales charge on the reinvested
distributions.
o DIRECTED BANK ACCOUNT OPTION: In most cases, you can have distributions
transferred automatically to your bank checking or savings account. Under
normal circumstances, a divdend will transferred within 7 days of the
dividend payment date. The bank account must have a registration identical
to that of your Fund account.
****Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you presently use, please
call the Transfer Agent at 800-KEY-FUND.****
BUYING A DIVIDEND: You should check a Fund's distribution schedule before you
invest. If you buy shares of a Fund shortly before it makes a distribution, some
of your investment may come back to you as a taxable distribution.
IMPORTANT INFORMATION ABOUT TAXES: Each Fund intends to qualify as a regulated
investment company, in which case it pays no federal income tax on the earnings
or capital gains it distributes to its shareholders.
o Ordinary dividends from a Fund are taxable as ordinary income; dividends
from a Fund's long-term capital gains are taxable as capital gain.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
o Dividends from the Funds that are attributable to interest on certain U.S.
Government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to U.S.
Government obligations will be shown on the tax statements you receive from
a Fund.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
o You will receive tax statements from a Fund every January showing the
amounts and tax status of distributions made to you.
o Under certain circumstances, a Fund may be in a position to (in which case
it would) elect to "pass-through" to you the right to a credit or deduction
for income or other creditable taxes paid by the Fund to foreign
governments.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
****THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION.
YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN A FUND.****
39
<PAGE>
INVESTING WITH VICTORY
****All you need to do to get started is to fill out an application.****
If you are looking for a convenient way to open an account for yourself or a
minor child, or to add money to an existing account, Victory can help. The
section on "Choosing a Share Class" will help you decide whether it would be
more to your advantage to purchase Class A or Class B Shares of a Fund. The
following sections will describe how to access information on your account, how
to open an account, and how to purchase, exchange, and redeem shares of a Fund.
We want to make it simple for you to do business with us. The sections that
follow will serve as a guide to your investments with Victory. If you have
questions about any of this information, please call one of our customer service
representatives at 800-KEY-FUND. They will be happy to assist you.
CHOOSING A SHARE CLASS
Some of the funds described in this prospectus offer only Class A Shares, while
others offer both Class A and B shares of the funds. The following chart shows
which funds offer one or both classes of shares:
ONLY CLASS A SHARES BOTH CLASS A AND CLASS B SHARES
------------------- -------------------------------
Growth Fund Balanced Fund
Special Growth Fund Diversified Fund
Index Fund International Growth Fund
Value Fund Ohio Fund
Special Value Fund
Each class has its own cost structure, allowing you to choose the one that best
meets your requirements. Your Investment Professional can also help you decide.
CLASS A
o Front-end sales charges, as described below. There are several ways
to reduce these charges.
o Lower annual expenses than Class B Shares.
CLASS B
o No front-end sales charge. All your money goes to work for you right away.
o Higher annual expenses than Class A Shares.
o A deferred sales charge on shares you sell within
o 6 years of purchase, as described below. Automatic conversion to Class A
Shares after 8 years, thus reducing future annual expenses.
****For historical expense information on Class A and B shares, see the
financial highlights in the Fund overviews earlier in this prospectus.****
40
<PAGE>
CALCULATION OF SALES CHARGES -- CLASS A: Class A Shares are sold at their public
offering price, which includes the initial sales charge. The sales charge as a
percentage of your investment decreases as your investment amount increases. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
SALES CHARGE SALES CHARGE DEALER REALLOWANCE
YOUR INVESTMENT AS A % OF OFFERING AS A % OF YOUR AS A % OF THE
PRICE INVESTMENT OFFERING PRICE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 4.75% 4.99% 4.00%
- ------------------------------------------------------------------------------------------
$50,000 up to $100,000 4.59% 4.71% 4.00%
- ------------------------------------------------------------------------------------------
$100,000 up to $250,000 3.50% 3.63% 3.00%
- ------------------------------------------------------------------------------------------
$250,000 up to $500,000 2.25% 2.30% 2.00%
- ------------------------------------------------------------------------------------------
$500,000 up to $1,000,000 1.75% 1.78% 1.50%
- ------------------------------------------------------------------------------------------
$1,000,000 and above 0.00% 0.00% *
- ------------------------------------------------------------------------------------------
</TABLE>
*There is no initial sales charge on purchases of $1 million or more.
However, a CDSC of up to 1.00% of the purchase price will be charged
if shares are redeemed in the first year after purchase, or at .50%
within two years of the purchase. This charge will be based on either
the cost of the shares or current net asset value, whichever is lower.
There will be no CDSC on reinvested dividends. Investment
Professionals may be paid at a rate of up to 1.00% of the purchase
price.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under federal
securities laws.
****There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.****
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES: You may qualify for
reduced sales charges in the following cases:
1. A Letter of Intent lets you purchase Class A Shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at one time. You must start with a minimum initial investment of
5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds, excluding Money
Market Funds for purposes of calculating the sales charge. The combination
privilege also allows you to combine the total investments from the
accounts of members of your immediate family for a reduced sales charge at
the time of purchase.
4. Waivers for certain investors:
a) Current and retired Fund Trustees, employees, directors, trustees and
family members of KeyCorp or "Affiliated Providers"* and dealers who
have an agreement with the Distributor and any trade organization to
which the Adviser or the Administrator belong.
b) Investors who purchase shares for non-discretionary trust or other
advisory accounts established with KeyCorp or its affiliates.
c) Investors who reinvest a distribution from a deferred compensation
plan, agency, trust, or custody account that was maintained by the
Victory Group or invested in a fund of the Victory Group.
d) Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales
charge for those shares.
e) Investment Professionals utilizing fund shares in fee-based investment
products under agreement with the Victory Group, and selling brokers
and their sales representatives.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organizations that provide services to Victory and Key Mutual Funds (the
"Victory Group").
41
<PAGE>
DEFERRED SALES CHARGES - CLASS B: Shares are offered at their NAV per share,
without an initial sales charge. When you sell the shares within six years of
buying them, there is a contingent deferred sales charge ("CDSC"). The CDSC is
based on the original purchase cost of your investment. ****There is no CDSC on
reinvested dividends.**** The longer the time between the purchase and sale of
shares, the lower the rate of the CDSC.
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
-------------------- -------------------------
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
After 6 Years None
Eight years after Class B Shares are purchased, they automatically will convert
to Class A Shares. These shareholders are not subject to the asset-based sales
charge that normally would apply, as described in "Distribution Plan for Class B
Shares." Also see the SAI for additional details.
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS B SHARES: The CDSC will be waived
for the following redemptions:
1. Distributions from retirement plans if the distributions are made:
a) under the Systematic Withdrawal Plan after age 59-1/2 for up to 12% of
the account value annually; or
b) following the death or disability of the participant or beneficial
owner;
2. Redemptions from accounts other than retirement accounts following the
death or disability of the shareholder;
3. Returns of excess contributions to retirement plans;
4. Distributions of less than 12% of the annual account value under a
Systematic Withdrawal Plan;
5. Shares sold to the Adviser or its affiliates; and
6. Shares issued in a plan of reorganization sponsored by Victory, or shares
redeemed involuntarily in a similar situation.
HOW TO PURCHASE SHARES
Class A and Class B Shares can be purchased in a number of different ways.
****All you need to do to get started is to fill out an application.**** You can
send in your payment by check, wire transfer, exchange from another Victory
Fund, or through arrangements with your Investment Professional. An Investment
Professional is a salesperson, financial planner, investment adviser, or trust
officer who provides you with investment information. Sometimes they will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by a Fund.
MAKE YOUR CHECK PAYABLE TO:
The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
REGULAR U.S. MAIL ADDRESS:
Send completed Account Applications with your check, bank draft, or money order
to:
The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
42
<PAGE>
OVERNIGHT MAIL ADDRESS:
Use the following address ONLY for overnight packages:
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
WIRE ADDRESS:
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring funds
to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert account number, name, and
control number assigned by the Transfer Agent)
TELEPHONE NUMBER:
800-KEY-FUND
800-539-3863
ACH. After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. The Funds do is not currently charge a
fee for ACH transfers; however, the Funds may charge a fee at some future date.
Notification would be sent out prior to implementing a fee.
STATEMENTS AND REPORTS. You will receive a periodic statement reflecting any
transactions that affect the balance or registration of your account. You will
receive a confirmation after any purchase, exchange, or redemption. If your
account has been set up by an Investment Professional, account activity will be
detailed in their statements to you. Share certificates are not issued. Twice a
year, you will receive the financial reports of the Funds. By January 31 of each
year, you will receive an IRS Form 1099-DIV, which also will be filed with the
IRS. Form 1099-DIV reports activity from the previous year.
SYSTEMATIC INVESTMENT PLAN. To enroll in the Systematic Investment Plan, you
should check this box on the Account Application. We will need your bank
information and the amount and frequency of your investment. You can select
monthly, quarterly, semi-annual, or annual investments. You should attach a
voided personal check so the proper information can be obtained. You must first
meet the minimum investment requirement of $500, then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it into shares of a Fund.
RETIREMENT PLANS. You can use the Funds as part of your retirement portfolio.
Your Investment Professional can set up your new account under one of several
tax sheltered plans. Please contact your Investment Professional for details
regarding an IRA or other retirement plan that works best for your financial
situation.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. ****If you
would like to make additional investments after your account is already
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.**** The Transfer Agent may
reject any purchase order, in its sole discretion. If your check is returned for
any reason, you will be charged for any resulting fees and/or losses. Third
party checks will not be accepted. You may only invest or exchange into fund
shares legally
43
<PAGE>
available in your state. If your account falls below $500, we may ask you to
re-establish the minimum investment. If you do not do so within 60 days, we may
close your account and send you the value of your account.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges. The "Victory Group" includes funds offered as a part of the
Victory Funds and Key Mutual Funds complex. Key Mutual Funds is affiliated with
KeyCorp.
You can exchange shares of the Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Fund, you should keep the
following in mind:
o Shares of the fund selected for exchange must be available for sale in your
state of residence.
o The Fund whose shares you would like to exchange and the Fund whose shares
you want to buy must offer the exchange privilege.
o Shares of a Fund may be exchanged at relative net asset value. Class A
Shares can be exchanged only for Class A Shares of another fund. This means
that if you own Class A Shares of the Fund, you can only exchange them for
Class A Shares of another fund. The same rules apply to Class B Shares.
o You must meet the minimum purchase requirements for the fund you purchase
by exchange. The registration and tax identification numbers of the two
accounts must be identical.
o You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any business day. Before exchanging, read
the prospectus of the fund you wish to purchase by exchange.
****You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-FUND.****
HOW TO REDEEM SHARES
****There are a number of convenient ways to redeem shares of a Fund. You can
use the same mailing and wiring addresses listed for purchases. You will earn
dividends up to and including the date your redemption request is processed.****
BY TELEPHONE. The easiest way to redeem shares is by calling 800-KEY-FUND. When
you fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when your are ready to redeem, call us and tell
us which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via the Automated Clearing House (ACH).
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory nor its servicing agents, the Advisers, nor the Transfer Agent
will be responsible for any losses. If these procedures are not followed, the
Transfer Agent may be liable to you for losses resulting from unauthorized
instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
BY MAIL. Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
44
<PAGE>
BY WIRE. If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 4:00 p.m. Eastern time,
your funds will be wired on the next business day.
BY ACH. Normally, your redemption will be processed on the same day or the next
day if received after 4:00 p.m. Eastern Time. It will be transferred by ACH as
long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividends accrued will be included with the redemption proceeds.
SYSTEMATIC WITHDRAWAL PLAN. If you check this box on the Account Application, we
will send monthly, quarterly, semi-annual, or annual payments to the person you
designate. The minimum withdrawal is $25, and you must have a balance of $5,000
or more. Once again, we will need a voided personal check to activate this
feature. You should be aware that your account eventually may be depleted.
However, you cannot automatically close your account using the Systematic
Withdrawal Plan. If your balance falls below $500, we may ask you to bring the
account back to the minimum balance. If you decide not to increase your account
to the minimum balance, your account may be closed and the proceeds mailed to
you.
ORGANIZATION AND MANAGEMENT OF THE FUNDS
****We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
service their shareholders. They are paid a fee for their services.****
ABOUT VICTORY:
Each Fund is a member of the Victory Funds, a family of 26 distinct investment
portfolios. Victory has been operating continuously since 1983, and was
organized as a Delaware business trust on February 29, 1996.
The Board of Trustees of Victory has the overall responsibility for the
management of the Funds.
THE INVESTMENT ADVISERS: One of a Fund's most important contracts is its
Advisory Agreement with Key Asset Management Inc. (KAM or the Adviser), a New
York Corporation registered as an investment adviser with the SEC. KAM is a
subsidiary of KeyBank National Association, a wholly-owned subsidiary of
KeyCorp. Effective February 28, 1997, KAM became the surviving corporation after
the reorganization of four indirect investment adviser subsidiaries of KeyCorp.
Affiliates manage approximately $50 billion for a limited number of
institutional clients.
The Advisory Agreement authorizes the Adviser to hire employers of its
affiliates as sub-advisers to the Funds. It also allows KAM to choose brokers or
dealers to handle the purchases and sales of a Fund's securities. Prior to
February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was the adviser and
Society Asset Management, Inc. was the sub-adviser to each of the Funds. During
the fiscal year ended October 31, 1996, KeyCorp Mutual Fund Advisers, Inc.
(formerly the adviser) was paid an annual rate based on a percentage of the
average daily net assets of each Fund in advisory fees as follows:
<TABLE>
<CAPTION>
Balanced Diversified Growth International Ohio Special Special Stock Value
Fund Stock Fund Growth Regional Growth Fund Value Index Fund
Fund Fund Stock Fund Fund Fund
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory Fees 1.00% .65% 1.00% 1.10% .75% 1.00% 1.00% .60% 1.00%
</TABLE>
45
<PAGE>
MANAGEMENT OF THE FUNDS
--------------------------------------------------
| |
| TRUSTEES |
| |
| Supervise each Fund's activities. |
| |
--------------------------------------------------
|
|
--------------------------------------------------
| INVESTMENT ADVISER |
| Key Asset Management Inc. |
| 127 Public Square |
| Cleveland, OH 44114 |
| |
| Manages each Fund's business |
| and investment activities. |
---------------------------------------------------
THE ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT:
BISYS Fund Services is the Administrator and Distributor. BISYS is paid a fee of
.15% of the Fund's average daily net assets on a monthly basis as the
Administrator, but does not charge a fee for its services as Distributor. BISYS
Fund Services Ohio, Inc. receives a fee as the Fund Accountant.
The Distributor may provide cash or other compensation to dealers for selling
shares of a Fund. Payments may be in the form of trips, tickets, and/or
merchandise offered through sales contests. It does this at its own expense and
not at the expense of a Fund or its shareholders.
SHAREHOLDER SERVICING PLAN:
Victory has a Shareholder Servicing Plan for each class of shares of the Funds.
The shareholder servicing agent performs a number of services for their
customers who are shareholders of the Fund. It establishes and maintains
accounts and records, processes dividend and distribution payments, arranges for
bank wires, assists in transactions, and changes account information. For these
services a Fund pays up to .25% of the average daily net assets of the shares of
the class. The Funds have agreements with various shareholder servicing agents,
including the Distributor, the Custodian and its affiliates, other financial
institutions, and securities brokers. Shareholder servicing agents may waive all
or a portion of their fee periodically.
DISTRIBUTION PLAN:
Victory has adopted a Distribution and Service Plan for Class B Shares of the
five funds that sell Class B Shares. Victory pays the Distributor an annual
asset-based sales charge of 0.75%. The fee is computed on the average daily net
assets of those Funds and paid monthly. The Distributor pays sales commissions
of 4.00% of the purchase price to dealers at the time of sale. The Distributor
then uses the asset-based sales charge to recoup those sales commissions and the
costs for financing them. See the SAI for more details regarding this plan.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P. serves as independent accountants to the Funds.
LEGAL COUNSEL:
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.
46
<PAGE>
HOW THE FUNDS ARE
ORGANIZED
_______________________
| |
___________________| SHAREHOLDERS |
| | |
| |_____________________|
| |
| |
| |
| |
| ______________________|_______________________
| | FINANCIAL SERVICES FIRMS AND |
| | THEIR INVESTMENT PROFESSIONALS |
| | |
| | Advise current and prospective |
| | shareholders on their fund investments. |
| |_____________________________________________|
| |
| |
| |
| ______________________________________________
| | |
| | TRANSFER AGENT/SERVICING AGENT |
| | State Street Bank and Trust Company |
| | 225 Franklin Street |
| | Boston, MA 02110 |
| | |
| | Boston Financial Data Services |
| | |
|_______| Two Heritage Drive |
| Quincy, MA 02171 |
| |
| Handles services such as record-keeping, |
| statements, processing of buy and |
| sell requests, distribution of dividends, |
| and servicing of shareholder's accounts. |
|_____________________________________________|
|
|
______________________________________ | ____________________________________
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND | | | |
| FUND ACCOUNTANT | | | Key Trust Company of Ohio, N.A. |
| BISYS Fund Services, Inc. and | | | 127 Public Square |
| BISYS Fund Services Ohio, Inc. | | | |
| 3435 Stelzer Road | | | Cleveland, OH 44114 |
| |__|__| |
| Columbus, OH 43219 | | |
| | | |
|Markets the Funds, distributes shares| | Provides for safekeeping of the |
| through investment professionals, | | Funds' investments and cash, and |
| and calculates the value of shares. | |settles trades made by the Funds. |
|_____________________________________| |__________________________________|
47
<PAGE>
ADDITIONAL INFORMATION
****Some additional information you should know about the Funds.****
The Funds offer only the classes of shares described in this prospectus, but at
some future date, the Funds may offer additional classes of shares through a
separate prospectus.
YOUR RIGHTS AS A SHAREHOLDER. All shareholders have equal voting, liquidation,
and other rights. As a shareholder of a Fund, you have rights and privileges
similar to those enjoyed by other corporate shareholders. Delaware Trust law
limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of the Fund, may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.
CODE OF ETHICS. Victory and the Advisers have each adopted a Code of Ethics to
which all investment personnel and all other access persons to the Fund must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination.
BANKING LAWS. Banking laws, including the Glass-Steagall Act, prevent a bank
holding company or its affiliates from sponsoring, organizing, or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian or
shareholder servicing agent. They also may purchase shares of such a company for
their customers and pay third parties for performing these functions. The Funds
may process trades through an affiliate subject to procedures approved by the
Board. Should these laws ever change in the future, the Trustees would consider
selecting another qualified firm so that all services would continue.
SHAREHOLDER COMMUNICATIONS. You will receive unaudited Semi-Annual Reports and
audited Annual Reports on a regular basis from each Fund. In addition, you also
may receive updated prospectuses or supplements to this prospectus. In order to
eliminate duplicate mailings to an address at which two or more shareholders
with the same last name reside, the Fund will send only one copy of the above
communications. ****If you would like to receive additional copies of any
materials, please call the Funds at 800-KEY-FUND.****
48
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists some of the types of securities each of the Funds may
choose to purchase. Each Fund invests primarily in equity securities. However,
the Funds also are permitted to invest in the non-equity securities as shown in
the table below and in the SAI.
For temporary defensive purposes, each Fund may hold up to 100% of its total
assets in cash or short-term money market instruments.
% Percent of TOTAL assets
# No limitation of usage; Fund may be using currently.
~ Indicates a "derivative security," whose value is linked to, or derived from
another security, instrument or index.
49
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCED DIVERSIFIED VALUE STOCK OHIO GROWTH
LIST OF ALLOWABLE INVESTMENTS IN FUNDS FUND STOCK FUND FUND INDEX FUND REGIONAL FUND
STOCK FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EQUITY SECURITIES. Can include common stock, 70% # # # # #
preferred stock, and convertible preferred stock.
FUTURES CONTRACTS AND OPTIONS. Contracts involving 5% 5% 5% 5% 5% 5%
the right or obligation to deliver or receive 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3%
assets or money depending on the performance of one
or more assets or an economic index. To reduce the
effects of leverage, liquid assets equal to the
contract commitment are set aside to cover the
commitment limit; 5% or less in margins or premiums;
and 33-1/3% or less of assets subject to futures and
options. The Funds may invest in futures and options
in an effort to hedge against market risk.
- ----------------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES. Debt securities of foreign 20% 20% 20% # 20% 20%
issuers including international bonds traded in the
United States and abroad.
- ----------------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT OBLIGATIONS. Debt instruments 25% # # # 20% 35%
issued by public corporations. They may be secured
or unsecured.
- ----------------------------------------------------------------------------------------------------------------------------------
WARRANTS. The right to purchase an equity security 10% 10% 10% 10% 10% 10%
at a stated price for a limited period of time.
- ----------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3%
security that is purchased for delivery at a later
time. The market value may change before the
delivery date.
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT OBLIGATIONS. INCLUDING BANKERS' # # # # # #
ACCEPTANCES, CERTIFICATES OF DEPOSIT, PRIME QUALITY
COMMERCIAL PAPER, CASH, AND CASH EQUIVALENTS.
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES. Securities issued or 20% 20% 20% 20% 20% 20%
guaranteed by the U.S. government, its agencies, or
instrumentalities. Some are direct obligations of
the U.S. Treasury; others are obligations only of
the U.S. agency.
- ----------------------------------------------------------------------------------------------------------------------------------
RECEIPTS. Separately traded interest or principal 20% 20% 20% 20% 20% 20%
components of U.S. Government securities.
- ----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The purchase of a security 20% 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3%
that must later be sold back to the seller at the
same price plus interest. The seller's obligation
is secured by collateral.
- ----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER. Short-term obligations issued by # # # # # #
corporations and financial institutions. The Funds
only use prime quality commercial paper.
- -----------------------------------------------------------------------------------------------
SPECIAL SPECIAL INTER-
LIST OF ALLOWABLE INVESTMENTS IN FUNDS VALUE GROWTH NATIONAL
FUND FUND GROWTH
FUND
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY SECURITIES. Can include common stock, # # #
preferred stock, and convertible preferred stock.
FUTURES CONTRACTS AND OPTIONS. Contracts involving 5% 5% 5%
the right or obligation to deliver or receive 33-1/3% 33-1/3% 33-1/3%
assets or money depending on the performance of one
or more assets or an economic index. The Funds may
invest in futures and options in an effort to hedge
against market risk.
- -----------------------------------------------------------------------------------------------
FOREIGN SECURITIES. Debt securities of foreign 20% 20% 20%
issuers including international bonds traded in the
United States and abroad.
- -----------------------------------------------------------------------------------------------
CORPORATE DEBT OBLIGATIONS. Debt instruments # # 20%
issued by public corporations. They may be secured
or unsecured.
- -----------------------------------------------------------------------------------------------
WARRANTS. The right to purchase an equity security 10% 10% 10%
at a stated price for a limited period of time.
- -----------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A 33-1/3% 33-1/3% 33-1/3%
security that is purchased for delivery at a later
time. The market value may change before the
delivery date.
- -----------------------------------------------------------------------------------------------
SHORT-TERM DEBT OBLIGATIONS. INCLUDING BANKERS' # # #
ACCEPTANCES, CERTIFICATES OF DEPOSIT, PRIME QUALITY
COMMERCIAL PAPER, CASH, AND CASH EQUIVALENTS.
- -----------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES. Securities issued or 20% 20% 20%
guaranteed by the U.S. government, its agencies, or
instrumentalities. Some are direct obligations of
the U.S. Treasury; others are obligations only of
the U.S. agency.
- -----------------------------------------------------------------------------------------------
RECEIPTS. Separately traded interest or principal 20% 20% 20%
components of U.S. Government securities.
- -----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The purchase of a security 33-1/3% 33-1/3% 33-1/3%
that must later be sold back to the seller at the
same price plus interest. The seller's obligation
is secured by collateral.
- -----------------------------------------------------------------------------------------------
COMMERCIAL PAPER. Short-term obligations issued by # # #
corporations and financial institutions. The Funds
only use prime quality commercial paper.
</TABLE>
50
<PAGE>
THE VICTORY FUNDS
800-KEY-FUND
OR
800-539-3863
THE VICTORY
FUND FOR INCOME
GOVERNMENT MORTGAGE FUND
INTERMEDIATE INCOME FUND
INVESTMENT QUALITY BOND FUND
LIMITED TERM INCOME FUND
PROSPECTUS
MARCH 1, 1997
<PAGE>
TABLE OF CONTENTS PAGE
- ----------------- ----
Introduction 2
AN OVERVIEW OF EACH OF THE FUNDS 3
A fund-by-fund analysis which includes objectives,
strategies, expenses, and financial highlights
Fund for Income 4
Government Mortgage Fund 7
Intermediate Income Fund 10
Investment Quality Bond Fund 13
Limited Term Income Fund 16
Investment Policies and Strategies 19
Risk Factors 19
Investment Limitations 20
Investment Performance 20
Share Price 21
Dividends, Distributions, and Taxes 21
INVESTING WITH VICTORY 23
How to Purchase Shares 24
How to Exchange Shares 25
How to Redeem Shares 26
Organization and Management of the Funds 27
Additional Information 30
Other Securities and Investment Practices 32
Key to Fund Information:
(1) Objective and Strategy: The goals and the strategy that a Fund plans to
use in pursuing its objective.
(2) Risk Factors: The risks that you will assume as an investor in a Fund.
(3) Expenses: The costs that you will pay as an investor in a Fund, including
sales charges and ongoing expenses.
(4) Financial Highlights: A table which shows the historical performance of a
Fund by share class. This table also summarizes previous operating
expenses.
SHARES OF THE FUNDS ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, KEYBANK, ANY OF
ITS AFFILIATES, OR ANY OTHER BANK;
o SUBJECT TO INVESTMENT RISKS,INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
<PAGE>
THE VICTORY PORTFOLIOS
FUND FOR INCOME
GOVERNMENT MORTGAGE FUND
INTERMEDIATE INCOME FUND
INVESTMENT QUALITY BOND FUND
LIMITED TERM INCOME FUND
800-KEY-FUND OR 800-539-3863
INTRODUCTION
This prospectus describes the following funds:
Fund for Income
Government Mortgage Fund
Intermediate Income Fund
Investment Quality Bond Fund
Limited Term Income Fund
The five Victory Funds discussed in this prospectus (the Funds) are a part of
The Victory Portfolios (Victory), an open-end investment management company. The
Funds are diversified mutual funds. This prospectus explains the objectives,
risks, and strategies of the Funds. You should read this prospectus before
investing in one of these Funds and keep it for future reference. A detailed
Statement of Additional Information (SAI) describing each of the Funds is also
available for your review. The SAI has been filed with the Securities and
Exchange Commission (SEC), and is incorporated into this prospectus by
reference. If you would like a free copy of the SAI, please request one by
calling us at 800-KEY-FUND.
(1)INVESTMENT OBJECTIVE:
The FUND FOR INCOME seeks to provide a high level of current income consistent
with preservation of shareholders' capital.
The GOVERNMENT MORTGAGE FUND seeks to provide a high level of current income
consistent with safety of principal.
The INTERMEDIATE INCOME FUND seeks to provide a high level of income.
The INVESTMENT QUALITY BOND FUND seeks to provide a high level of income.
The LIMITED TERM INCOME FUND seeks to provide income consistent with limited
fluctuation of principal.
(1)INVESTMENT STRATEGY:
Each of the Funds pursues its objective by investing primarily in debt
securities. However, each of the Funds has unique investment strategies and its
own risk/reward profile. Please review the section about the Fund in which you
are interested in investing and "Other Securities and Investment Practices" for
an overview of the Funds.
(2)RISK FACTORS:
The Funds are not insured by the FDIC. In addition, there are other potential
risks, discussed in the section "Risk Factors."
2
<PAGE>
WHO SHOULD INVEST:
o Investors seeking income over the long term
o Investors with a moderate risk tolerance
o Investors seeking higher potential returns than provided by money
market funds
o Investors willing to accept price and dividend fluctuations
o Investors seeking capital appreciation and preservation of capital
(3)FEES AND EXPENSES:
All of the Funds in this prospectus offer only Class A shares. If you purchase
Class A shares of a Fund, you may pay a sales charge of up to 4.75% of the
offering price, depending on the Fund in which you invest and the amount you
invest. You also will incur expenses for investment advisory, management,
administrative, and shareholder services, all of which are included in a Fund's
expense ratio. See "Choosing a Share Class."
PURCHASES:
The minimum initial investment is $500 for most accounts ($250 for Individual
Retirement Accounts) and $25 thereafter. An initial investment must be
accompanied by a Fund's Account Application. Fund shares may be purchased by
check, Automated Clearing House, or wire. See "How to Purchase Shares."
REDEMPTIONS:
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, a Fund will redeem the
shares and credit your bank account or send the proceeds to the address
designated on your account application. See "How to Redeem Shares."
DIVIDENDS/DISTRIBUTIONS:
Income is accrued by each Fund daily and is paid monthly. Any capital gains
realized by a Fund are paid as dividends at least annually. A Fund can send your
dividends directly to you by mail, credit them to your bank account, reinvest
them in the Fund, or invest them in another fund of the Victory Group. The
"Victory Group" includes other funds of The Victory Portfolios and Key Mutual
Funds. You can make this choice when you fill out an account application. See
"Dividends, Distributions, and Taxes."
OTHER SERVICES:
Victory offers a number of other services to better serve shareholders including
exchange privileges and automated investment and withdrawal plans. See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.
3
<PAGE>
AN OVERVIEW OF EACH OF THE FUNDS:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ESTIMATED ANNUAL EXPENSES
AFTER WAIVERS (AS A % OF
VICTORY FUND INCEPTION DATE NET ASSETS) MAXIMUM SALES CHARGE NEWSPAPER ABBREVIATION*
------------ -------------- ------------------------- -------------------- -----------------------
Fund for Income
Class A 5/8/87 1.00% 2.00% Victory Incm
Government Mortgage Fund 4.75% Victory Gvt Mtg
Class A 5/18/90 .90%
Intermediate Income Fund
Class A 12/10/93 .95% 4.75% Victory IntmInc
Investment Quality Bond Fund
Class A 12/10/93 1.00% 4.75% Victory InvQulBd
Limited Term Fund Class A 10/20/89 .86% 2.00% Victory Ltd In
*All newspapers do not use the same abbreviation.
The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, risks, expenses, and financial
history to determine which Fund will best suit your risk tolerance and
investment needs. You also should review the "Other Securities and Investment
Practices" section for additional information about the individual securities in
which the Funds can invest and the risks related to these investments.
</TABLE>
4
<PAGE>
FUND FOR INCOME
(1)INVESTMENT OBJECTIVE: The Fund for Income seeks to provide a high level of
current income consistent with preservation of shareholders' capital.
(1)INVESTMENT POLICIES AND STRATEGY: The Fund for Income pursues its investment
objective by investing at least 65% of the Fund's total assets in
mortgage-related securities rated in the top two rating categories by an NRSRO.
Under normal conditions, the Fund for Income primarily invests in:
o Mortgage-related securities issued by non-governmental entities
o Collateralized mortgage obligations and real estate mortgage investment
conduits
o Government mortgage-backed securities
Important Characteristics of the Fund for Income's Investments:
o Quality: Mortgage-related securities rated AA or above by S&P, Fitch, Moody's
or another NRSRO, or, if unrated, of comparable quality. For more
information on ratings, see the Appendix to the SAI.
o Maturity: The dollar weighted effective average maturity of the Fund for
Income generally will not exceed 10 years. Individual assets held by the Fund
for Income may vary from the average maturity of the Fund for Income. Under
certain market conditions, the Portfolio Manager may go outside these
boundaries.
An NRSRO is a nationally recognized statistical ratings organization like
Standard & Poors Corp. ("S&P"), Fitch, or Moody's which assigns credit ratings
to securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
For liquidity and flexibility, the Fund for Income may invest up to 35% of total
assets in short-term investment-grade corporate securities, Commercial paper,
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, short-term obligations of domestic or foreign branches of
U.S. banks, futures contracts, and options related to these securities. When
market conditions warrant a defensive strategy, the Fund for Income may invest
more than 35% in these types of securities.
(2)The Fund for Income is subject to the risks common to mutual funds that
invest in debt securities: Interest rate risk, credit risk, reinvestment risk,
and inflation risk. It also is subject to the risks common to mortgage-related
securities, like prepayment and extension risk. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Robert H. Fernald is the Portfolio Manager of the Fund for
Income, a position he has held since May, 1996. A Senior Portfolio Manager and
Director of Society Asset Management, Inc., he has been working in the fixed
income markets for over 20 years.
5
<PAGE>
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Fund for Income.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A
--------------------------------- -------
Maximum Sales Charge Imposed on Purchases 2.00%
(as a percentage of offering price)
Sales Charge None Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
These examples illustrate the estimated operating expenses that you will incur
as a shareholder of the Fund for Income. THESE EXPENSES ARE CHARGED DIRECTLY TO
THE FUND FOR INCOME. Expenses include management fees as well as the costs of
maintaining accounts, administering the Fund for Income, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical or projected expenses of the Fund for Income.
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS
(as a percentage of average daily net assets)
CLASS A SHARES
--------------
Management Fees(1) .20%
Other Expenses(1) .80%
-----
Total Fund Operating Expenses(1)(2) 1.00%
====
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .50%, and Total Fund Operating Expenses would be
1.39%.
(2) Other Expenses include an estimate of shareholder servicing fees the Fund
for Income expects to pay. (See "Organization and Management of the Funds
-- Shareholder Servicing Plan.")
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Fund for Income.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $30 $51 $74 $140
THIS TABLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
6
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Fund for Income's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Fund for Income for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996 periods, and by other auditors for all earlier periods. This
information should be read in conjunction with the Fund for Income's most recent
Annual Report to shareholders, which is incorporated by reference into the SAI.
If you would like a copy of the Annual Report, write or call the Fund for Income
at 800-KEY-FUND (800-539-3863).
Variability, as shown by year-to-year total return (%): (Insert performance
chart showing "Total Return" in table below.)
FUND FOR INCOME
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED FEB. 1, 1994
OCT. 31, OCT. 31, TO OCT. 31,
1996 1995(d) 1994(c) 1994(c) 1993(c)
---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.93 $9.43 $10.14 $10.57 $10.55
- ------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.68 0.73 0.52 0.80 0.80
Net realized and unrealized gains
(losses) on investments (0.08) 0.43 (0.71) (0.41) 0.06
- ------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.60 1.16 (0.19) 0.39 0.86
- ------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.68) (0.66) (0.51) (0.80) (0.80)
In excess of net investment income (0.03) ----- (0.01) ----- -----
Net realized gains ----- ----- ----- (0.02) (0.04)
Tax return of capital (0.05) ----- ----- ----- -----
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.76) (0.66) (0.52) (0.82) (0.84)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.77 $9.93 $9.43 $10.14 $10.57
- ------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 6.35% 12.75% (1.99%)(a) 3.75% 8.45%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period $20,816 $22,756 $29,358 $46,632 $55,075
Ratio of expenses to average net assets 1.02% 1.12% 1.12%(b) 1.13% 1.12%
Ratio of net investment income to average
net assets 7.05% 7.62% 7.21%(b) 7.65% 7.56%
Ratio of expenses to average net assets(e) 1.73% 1.58% 1.26%(b)
Ratio of net investment income to
average net assets(e) 6.34% 7.16% 7.07%(b)
Portfolio turnover 25% 35% 18% 47% 23%
<CAPTION>
YEAR ENDED JANUARY 31,
1992(c) 1991(c) 1990(c) 1989(c) 1988(c)(f)
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.19 $9.90 $9.73 $9.95 $10.00
- ---------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.85 0.91 0.93 0.94 0.66
Net realized and unrealized gains
(losses) on investments 0.36 0.29 0.17 (0.22) (0.05)
- ---------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.21 1.20 1.10 0.72 0.61
- ---------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.85) (0.91) (0.93) (0.94) (0.66)
In excess of net investment income ----- ----- ----- ----- -----
Net realized gains ----- ----- ----- ----- -----
Tax return of capital ----- ----- ----- ----- -----
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.85) (0.91) -0.93 (0.94) (0.66)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.55 $10.19 $9.90 $9.73 $9.95
- ---------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 12.34% 12.75% 11.77% 7.58%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period $58,055 $44,097 $35,788 $22,664 $6,221
Ratio of expenses to average net assets 0.92% 0.50% 0.29% 0.22% 0.12%
Ratio of net investment income to average
net assets 8.18% 9.15% 9.34% 9.53% 6.72%
Ratio of expenses to average net assets(e)
Ratio of net investment income to
average net assets(e)
Portfolio turnover 24% 5% 5% 15% 20%
</TABLE>
(a) Not annualized.
(b) Annualized.
(c) Audited by other auditors.
(d) Effective June 5, 1995, the Victory Fund for Income Portfolio became the
Fund For Income.
(e) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(f) Information for the year ended January 31, 1988 is presented from May 8,
1987, the date registration became effective under the Investment Company
Act of 1940, as amended.
7
<PAGE>
THE GOVERNMENT MORTGAGE FUND
(1)INVESTMENT OBJECTIVE: The Government Mortgage Fund seeks to provide a high
level of current income consistent with safety of principal.
(1)INVESTMENT POLICIES AND STRATEGY: The Government Mortgage Fund pursues its
investment objective by investing exclusively in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
In addition to the above securities, the Government Mortgage Fund may also
invest in the following:
o Receipts, and strips, which are sold as zero coupon securities
o Collateralized mortgage obligations
o Reverse repurchase agreements
o Futures contracts and put and call options on futures contracts
o Treasury notes and agencies
o IOs and POs
Important Characteristics of the Government Mortgage Fund's Investments:
o Quality: Since the mortgage-related securities purchased by the Government
Mortgage Fund are guaranteed by the U.S. Government, they are considered to
be of the highest quality. For more information on ratings, see the Appendix
to the SAI.
o Maturity: The dollar-weighted effective average maturity of the Government
Mortgage Fund generally will not exceed 10 years. Under certain market
conditions, the Portfolio Manager may go outside these boundaries.
o Separately Traded Registered Interest and Principal Securities (STRIPS),
Interest Only (IOs), and Principal Only (POs) are derivatives of bonds. Banks
or brokerage firms separate the interest or principal payments from a bond or
mortgage-backed security and sell only that portion as one of the above
securities
(2)The Government Mortgage Fund is subject to the risks common to mutual funds
that invest in debt securities: interest rate risk, credit risk, reinvestment
risk, and inflation risk. It also is subject to the risks common to
mortgage-related securities, like prepayment and extension risk. PLEASE READ
"RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Robert H. Fernald is the Portfolio Manager of the
Government Mortgage Fund, a position he has held since May, 1996. A Senior
Portfolio Manager and Director of Society Asset Management, Inc., he has been
working in the fixed income markets for over 20 years.
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Government Mortgage Fund.
SHOLDELDER TRANSACTION EXPENSES* CLASS A SHARES
--------------
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price) 4.75%
Sales Charge None Imposed on Reinvested
Dividends
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
8
<PAGE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
These examples illustrate the estimated operating expenses that you will incur
as a shareholder of the Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE
GOVERNMENT MORTGAGE FUND. Expenses include management fees as well as the costs
of maintaining accounts, administering the Government Mortgage Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on historical or projected expenses of the Government Mortgage Fund.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
CLASS A SHARES
--------------
Management Fees .50%
Other Expenses(1) .40%
----
Total Fund Operating Expenses(1) .90%
===
(1) Other Expenses includes an estimate of shareholder servicing fees the
Government Mortgage Fund expects to pay. (See "Organization and Management
of the Funds -- Shareholder Servicing Plan.")
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Government Mortgage
Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $56 $75 $95 $153
THIS TABLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
9
<PAGE>
FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Government Mortgage Fund's returns and
operating expenses over time. The following table shows the results of an
investment in one share of the Government Mortgage Fund for each of the periods
indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Fund's most recent Annual
Report to shareholders, which is incorporated by reference into the SAI. If you
would like a copy of the Annual Report, write or call the Government Mortgage
Fund at 800-KEY-FUND (800-539-3863).
Variability, as shown by year-to-year total return (%):
GOVERNMENT MORTGAGE FUND
<TABLE>
<CAPTION>
MAY 18
1990
TO
YEAR ENDED OCTOBER 31, OCT 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.86 $10.33 $11.36 $11.07 $10.73 $10.18 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.70 0.72 0.68 0.66 0.74 0.80 0.35
Net realized and unrealized gains
(losses) on investments (0.12) 0.62 (1.02) 0.32 0.34 0.55 0.18
- -----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.58 $1.34 (0.34) 0.98 1.08 1.35 0.53
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.67) (0.71) (0.67) (0.66) (0.74) (0.80) (0.35)
Net realized gains -- -- (0.02) (0.03) --
In excess of net realized gains -- (0.08) -- -- --
Tax return of capital (0.01) (0.02) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.68) (0.81) (0.69) (0.69) (0.74) (0.80) (0.35)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.76 $10.86 $10.33 $11.36 $11.07 $10.73 $10.18
===================================================================================================================================
Total Return (excludes sales charge) 5.54% 13.55% (3.01%) 9.05% 10.34% 13.77% 5.37%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) 125,992 $136,103 $148,168 $132,738 $73,660 $42,616 $31,972
Ratio of expenses to average net assets 0.89% 0.77% 0.76% 0.75% 0.77% 0.78% 0.82%(b)
Ratio of net investment income to average net assets 6.46% 6.81% 6.38% 5.92% 6.82% 7.68% 7.98%(b)
Ratio of expenses to average net assets (d) 0.90% 0.79% 0.96% 0.76%
Ratio of net investment income to average net assets (d) 6.45% 6.80% 6.18% 5.92%
Portfolio turnover 127% 59% 132% 50% 11% 21%
</TABLE>
(a) Period from commencement of operations.
(b) Annualized.
(c) Not annualized.
(d) During the period, certain fees were voluntarily waived or the expenses
reimbursed. If such voluntary waivers or reimbursements had not occurred,
the ratios would have been as indicated.
(e) This information is not included in the financial statements audited by
Coopers & Lybrand L.L.P.
10
<PAGE>
INTERMEDIATE INCOME FUND
(1)INVESTMENT OBJECTIVE: The Intermediate Income Fund seeks to provide a high
level of income.
(1)INVESTMENT POLICIES AND STRATEGIES: The Intermediate Income Fund pursues its
investment objective by investing in debt securities. Some of these debt
securities are issued by corporations, the U.S. Government and its agencies and
instrumentalities.
Under normal conditions, the Intermediate Income Fund will invest at least 65%
of its total assets in:
o Short-term investment-grade bonds, debentures, and notes
o Investment grade corporate securities, including asset-backed securities and
convertible and exchangeable debt securities
o Mortgage-related securities
o First mortgage loans and participation certificates in pools of mortgages
issued or guaranteed by the U.S. Government
Important Characteristics of the Intermediate Income Fund's Investments:
o Quality: Investment grade corporate securities rated in the top four rating
categories by S&P, Fitch, Moody's or another NRSRO, or if unrated, of
comparable quality.
o Maturity: The dollar-weighted effective average maturity of the
Intermediate Income Fund generally will range from 3 to 10 years. Under certain
market conditions, the Portfolio Manager may go outside these boundaries.
Up to 20% of the Intermediate Income Fund's total assets may be invested in
preferred stocks, short-term notes, commercial paper, short-term obligations of
domestic and foreign branches of U.S. banks, and separately traded interest and
principal component parts of U.S. Treasury obligations.
(2)The Intermediate Income Fund also is permitted to invest in international
bonds, foreign securities, and future contracts and options related to these
securities. Some of the securities in which the Intermediate Income Fund invests
may have warrants or options attached. These investments tend to be riskier than
some of the other investments of the Intermediate Income Fund. The Intermediate
Income Fund is subject to the risks common to mutual funds that invest in debt
securities: interest rate risk, credit risk, reinvestment risk, and inflation
risk. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: David M. Baccile is the portfolio manager of the
Intermediate Income Fund, a position he has held since March, 1996. A Portfolio
Manager of Society Asset Management, Inc., he has been in the investment
advisory business since 1993.
(3)FUND EXPENSES
This section will help you understand the costs and expense you would pay,
directly or indirectly, if you invested in the Intermediate Income Fund.
SHAREHOLDER TRANSACTION EXPENSE CLASS A SHARES
--------------
Maxiaximum Sales Charge Imposed on Purchases
(as a percentage of offering price. 4.75%
Maximum Sales NoneCharge Imposed on Reinvested None
Dividends
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
11
<PAGE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
These examples illustrate the estimated operating expenses that you will incur
as a shareholder of the Intermediate Income Fund. THESE EXPENSES ARE CHARGED
DIRECTLY TO THE INTERMEDIATE INCOME FUND. Expenses include management fees as
well as the costs of maintaining accounts, administering the Intermediate Income
Fund, providing shareholder services, and other activities. The expenses shown
are estimated based on historical or projected expenses of the Intermediate
Income Fund.
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (as a
percentage of average daily net assets)
CLASS A SHARES
--------------
Management Fees .57%
Other Expenses(1) .38%
---
Total Fund Operating Expenses(1)(2) .95%
====
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .75% and Total Fund Operating Expenses as a
percentage of average daily net assets would be 1.13%.
(2) These amounts include an estimate of the shareholder servicing fees the
Intermediate Income Fund expects to pay (see "Organization and Management
of the Fund -- Shareholder Servicing Plan.")
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Intermediate Income
Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $57 $76 $98 $159
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
12
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Intermediate Income Fund's returns and
operating expenses over time. The following table shows the results of an
investment in one share of the Intermediate Income Fund for each of the periods
indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Intermediate Income Fund's
most recent Annual Report to shareholders, which is incorporated by reference
into the SAI. If you would like a copy of the Annual Report, write or call the
Intermediate Income Fund at 800-KEY-FUND (800-539-3863).
Variability, as shown by year-to-year total return (%):
INTERMEDIATE INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED, YEAR ENDED DEC. 10, 1993 TO
OCT. 31, 1996 OCT. 31, 1995 OCT. 31, 1994
------------- ------------- ----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.69 $9.25 $10.00
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.56 0.60 0.52
Net realized and unrealized gains (losses) on investments (0.13) 0.44 (0.76)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.43 1.04 (0.24)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.56) (0.60) (0.51)
In excess of net investment income ----- ----- -----
Tax return of capital ----- ----- -----
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.60) (0.51)
======
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.56 $9.69 $9.25
Total Return (excludes sales charge) 4.56% 11.65% (2.48%)(b)
Net Assets, End of Period (000) $272,087 $163,281 $112,923
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets 0.94% 0.82% 0.79%(c)
Ratio of net investment income to average net assets 5.81% 6.32% 6.23%(c)
Ratio of expenses to average net assets(d) 1.11% 1.06% 1.25%(c)
Ratio of net investment income to average net assets(d) 5.64% 6.08% 5.77%(c)
Portfolio turnover 164% 98% 55%
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
13
<PAGE>
INVESTMENT QUALITY BOND FUND
(1)INVESTMENT OBJECTIVE: The Investment Quality Bond Fund seeks to provide a
high level of income.
(1)INVESTMENT POLICIES AND STRATEGY: The Investment Quality Bond Fund pursues
its investment objective by investing primarily in investment-grade bonds issued
by corporations and the U.S. Government and its agencies or instrumentalities.
****"Investment grade" obligations are rated within the top four rating
categories by an NRSRO.****
Normally, the Investment Quality Bond Fund invests at least 65% of its total
assets in the following securities:
o Investment grade corporate securities, including asset-backed securities and
convertible and exchangeable debt securities
o Mortgage-related securities issued by non-governmental entities
o Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities
o Government mortgage-backed securities
Important Characteristics of the Investment Quality Bond Fund's Investments:
o Quality: All instruments will be rated, at the time of purchase, within the
four highest rating categories by S&P, Fitch, Moody's, or another NRSRO, or,
if unrated, be of comparable quality. For more information on ratings, see
the Appendix to the SAI.
o Maturity: The dollar-weighted effective average maturity of the Investment
Quality Bond Fund will range from 5 to 15 years. Individual assets held by
the Investment Quality Bond Fund may vary from the average maturity of the
Investment Quality Bond Fund. Under certain market conditions, the Portfolio
Manager may go outside these boundaries.
Up to 20% of the Investment Quality Bond Fund's total assets may be invested in
preferred stocks, short-term notes, commercial paper, short-term obligations of
domestic and foreign branches of U.S. banks, and separately traded interest and
principal component parts by U.S. Treasury obligations.
(2)The Investment Quality Bond Fund also is permitted to invest in international
bonds, foreign securities, futures contracts and options related to these
securities. These investments tend to be riskier than some of the other
investments of the Investment Quality Bond Fund. The Investment Quality Bond
Fund is subject to the risks common to mutual funds that invest in debt
securities: interest rate risk, credit risk, reinvestment risk, and inflation
risk. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Richard T. Heine is the Portfolio Manager of the
Investment Quality Bond Fund, a position he has held since its inception in
1993. A Vice President and Portfolio Manager with Society Asset Management,
Inc., he has been in the investment advisory business since 1977.
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Investment Quality Bond Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES
--------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.75%
Maximum Sales Charge Imposed on Reinvested
Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
14
<PAGE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
These examples illustrate the estimated operating expenses that you will incur
as a shareholder of the Investment Quality Bond Fund. THESE EXPENSES ARE CHARGED
DIRECTLY TO THE INVESTMENT QUALITY BOND FUND. Expenses include management fees
as well as the costs of maintaining accounts, administering the Investment
Quality Bond Fund, providing shareholder services, and other activities. The
expenses shown are estimated based on historical or projected expenses of the
Investment Quality Bond Fund.
ANNUAL FUND OPERATING EXPENSES (AFTER EXPENSE WAIVERS AND REIMBURSEMENTS) (as a
percentage of average daily net assets)
CLASS A SHARES
--------------
Management Fees .62%
Other Expenses .38%
---
Total Fund Operating Expenses(1)(2) 1.00%
====
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .75% and Total Fund Operating Expenses as a
percentage of average daily net assets would be 1.13%.
(2) These amounts include an estimate of the shareholder servicing fees the
Investment Quality Bond Fund expects to pay (see "Organization and
Management of the Fund -- Shareholder Servicing Plan.")
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Investment Quality Bond
Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class A Shares $57 $76 $98 $159
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
15
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Investment Quality Bond Fund's returns
and operating expenses over time. The following table shows the results of an
investment in one share of the Investment Quality Bond Fund for each share of
the Investment Quality Bond Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Investment Quality Bond
Fund's most recent Annual Report to shareholders, which is incorporated by
reference into the SAI. If you would like a copy of the Annual Report, write or
call the Investment Quality Bond Fund at 800-KEY-FUND (800-539-3863).
Variability, as shown by year-to-year total return (%): (Insert performance
chart showing "Total Return" in table below.)
INVESTMENT QUALITY BOND FUND
<TABLE>
<CAPTION>
YEAR YEAR DECEMBER 10,
ENDED ENDED 1993 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995(d) 1994(a)
----- ------- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.76 $9.10 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.57 0.62 0.53
Net realized and unrealized gains (losses)
on investments (0.13) 0.67 (0.92)
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.44 1.29 (0.39)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.56) (0.62) (0.51)
In excess of net investment income ----- (0.01) -----
- ----------------------------------------------------------------------------------------------------------------------------
Tax Return of capital (0.01) ----- -----
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.57) (0.63) (0.51)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.63 $9.76 $9.10
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 4.65% 14.63% (3.92%)(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $150,807 $125,248 $94,685
Ratio of expenses to average net assets 1.01% 0.88% 0.79%(c)
Ratio of net investment income to average net assets 5.99% 6.59% 6.33%(c)
Ratio of expenses to average net assets(e) 1.14% 1.10% 1.25%(c)
Ratio of net investment income to average net assets(e) 5.86% 6.37% 5.87%(c)
PORTFOLIO TURNOVER 182% 160% 90%
</TABLE>
(a) Period from commencement of operations.
(b) Not Annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Corporate Bond Portfolio merged into the
Investment Quality Bond Fund. Financial highlights for the periods prior to
June 5, 1995 represent the Investment Quality Bond Fund.
(e) During the period,certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
16
<PAGE>
LIMITED TERM INCOME FUND
INVESTMENT OBJECTIVE: The Limited Term Income Fund seeks to provide income
consistent with limited fluctuation of principal.
INVESTMENT POLICIES AND STRATEGY: The Limited Term Income Fund pursues its
investment objective by investing in a portfolio of high grade, fixed income
securities with a dollar-weighted average maturity of one to five years, based
on remaining maturities.
o Investment-grade corporate securities, including asset-backed securities and
convertible and exchangeable debt securities
o Mortgage-related securities issued by non-governmental entities
Under normal conditions, the Limited Term Income Fund invests primarily in
o Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities
o Commercial Papers
o Government mortgage-backed securities
Important characteristics of the Limited Term Income Fund's investments:
o Quality: The Limited Term Income Fund will only invest in high-grade debt
securities rated in one of the top three rating category by S&P, Fitch,
Moody's, or another NRSRO, or if unrated, of comparable quality. For more
information on ratings, see the Appendix to the SAI.
o Maturity: The dollar-weighted effective maturity of the Limited Term Income
Fund will generally range from 1 o 5 years. Under certain market conditions,
the Portfolio Manager may go outside these boundaries.
(2)The Limited Term Income Fund is permitted also to invest in international
bonds, foreign securities, futures contracts separate traded interest and
principal component parts of U.S. Treasury obligations. Some of the securities
in which the Limited Term Income Fund Invests may have warrants or options
attached. These investments tend to be riskier than some of the other
investments of the Limited Term Income Fund. The Limited Term Income Fund is
subject to the risks common to mutual funds that invest in debt securities:
interest rate risk, credit risk, reinvestment risk, and inflation risk. PLEASE
READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Robert H. Fernald is the Limited Term Income Fund's
Portfolio Manager, a position he has held since January, 1995. A Senior
Portfolio Manager and Director of Society Asset Management, Inc., he has been
working in the fixed income markets for over 20 years.
(3)FUND EXPENSES
This section will help you understand the costs and expense you would pay,
directly or indirectly, if you invested in the Limited Term Income Fund.
SHAREHOLDER TRANSACTION EXPENSE* CLASS A SHARES
--------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 2.00%
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
17
<PAGE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
These examples illustrate the estimated operating expenses that you will incur
as a shareholder of the Limited Term Income Fund. THESE EXPENSES ARE CHARGED
DIRECTLY TO THE LIMITED TERM INCOME FUND. Expenses include management fees as
well as the costs of maintaining accounts, administering the Limited Term Income
Fund, providing shareholder services, and other activities. The expenses shown
are estimated based on historical or projected expenses of the Limited Term
Income Fund.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets) CLASS A SHARES
--------------
Management Fees .50%
Other Expenses(1) .36%
-----
Total Fund Operating Expense 0.86%
=====
(1) Other Expenses include an estimate of the shareholder servicing fees the
Limited Term Income Fund expects to pay. (See "Organization and Management
of the Funds --Shareholder Servicing Plan.")
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Limited Term Income
Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class A Shares $29 $47 $67 $124
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
18
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Limited Term Income Fund's returns and
operating expenses over time. The following table shows the results of an
investment in one share of the Limited Term Income Fund for each of the periods
indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Fund's most recent Annual
Report to shareholders, which is incorporated by reference into the SAI. If you
would like a copy of the Annual Report, write or call the Limited Term Income
Fund at 800-KEY-FUND (800-539-3863).
Variability, as shown by year-to-year total return (%): (Insert performance
chart showing "Total Return" in table below.)
LIMITED TERM INCOME FUND
<TABLE>
<CAPTION>
OCTOBER 20,
1989 TO
YEARS ENDED OCTOBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1991 1990 1989
---- ------- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.15 $9.88 $10.53 $10.45 $10.33 $10.02 $10.04 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.63 0.57 0.54 0.57 0.64 0.73 0.76 0.02
Net realized and unrealized gains
(losses) from investments (0.14) 0.27 (0.61) 0.08 0.13 0.31 (0.01) 0.02
- --------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.49 0.84 (0.07) 0.65 0.77 1.04 0.75 0.04
- --------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.62) (0.57) (0.54) (0.57) (0.64) (0.73) (0.77) -----
In excess of net investment income (0.01) ----- ----- ----- ----- ----- ----- -----
Net realized gains ----- ----- (0.04) ----- (0.01)
----- ----- ------ ----- ------
Total Distributions (0.63) (0.57) (0.58) (0.57) (0.65) (0.73) (0.77) -----
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.01 $10.15 $9.88 $10.53 $10.45 $10.33 $10.02 $10.04
================================================================================================================================
Total Return (excludes sales charge) 4.94% 8.77% (0.66%) 6.39% 7.77% 10.82% 7.75% 0.40%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $90,019 $172,002 $79,150 $81,771 $55,565 $43,763 $31,303 $29,834
Ratio of expenses to average net assets 0.86% 0.78% 0.79% 0.77% 0.78% 0.80% 0.82% 0.64%(b)
Ratio of net investment income to average net assets 5.90% 5.77% 5.29% 5.49% 6.18% 7.20% 7.63% 7.56%(b)
Ratio of expenses to average net assets(e) 0.89% 0.79% 0.97% 0.78%
Ratio of net investment income to average net assets(e) 5.87% 5.76% 5.10% 5.48%
Portfolio turnover 221% 97% 41% 50% 15% 10%
</TABLE>
(a) Period from commencement of operations.
(b) Annualized.
(c) Not Annualized.
(d) Effective June 5, 1995, the Victory Short-Term Government Income Portfolio
merged into the Limited Term Income Fund. Financial highlights for the
periods prior to June 5, 1995 represent the Limited Term Income Fund.
(e) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
19
<PAGE>
(1)RISK FACTORS
This prospectus describes some of the risks that you may assume as an investor
in the Funds. By matching your investment objective with a comfortable level of
risk, you can create your own customized investment plan. Some limitations on
the Funds' investments are described in the section that follows. As with any
mutual fund, there is no guarantee that a Fund will earn income or show a
positive total return over time. A Fund's price, yield, and total return will
fluctuate. You may lose money if a Fund's investments do not perform well.
****It is important to keep in mind one basic principle of investing: the
greater the risk, the greater the potential reward. The reverse also is
generally true: the lower the risk, the lower the potential reward.****
The following risks are common to ALL MUTUAL FUNDS:
o MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for it, or less than the security was worth at an earlier
time. Market risk may affect a single issuer, an industry, a sector of the
economy, or the entire market and is common to all investments.
o MANAGER RISK is the chance that a Fund's Portfolio Manager may use a strategy
that does not produce the intended result.
o LIQUIDITY RISK is the risk that a Fund may be unable to find a buyer for a
particular security.
The following risks are common to mutual funds that invest in DEBT SECURITIES:
o INTEREST RATE RISK. The value of a debt security typically changes in the
opposite direction from a change in interest rates. Therefore, when interest
rates go up, the value of a fixed-rate security typically goes down. When
interest rates go down, the value of these securities typically goes up.
Generally, the market values of securities with longer maturities are more
sensitive to changes in interest rates.
o INFLATION RISK is the risk that inflation will erode the purchasing power of
the cash flows generated by debt securities held by a Fund. Fixed-rate debt
securities are more susceptible to this risk than floating-rate debt
securities.
o REINVESTMENT RISK is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested at a
lower interest rate. Generally, interest rate risk and reinvestment risk have
offsetting effects.
o CREDIT RISK (OR DEFAULT RISK) is the risk that an issuer of a debt security
will be unable to make timely payments of interest or principal. Although the
Funds generally invest in only high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities.
The following risks are common to mutual funds that invest in MORTGAGE-RELATED
SECURITIES:
o PREPAYMENT RISK. Prepayments of principal of mortgage-related securities
affect the average life of a pool of mortgage-related securities. Mortgage
prepayments are affected by the level of interest rates and other factors. In
periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related securities.
Prepayment risk is the risk that, because prepayments generally occur when
interest rates are falling, a Fund may have to reinvest the proceeds of
prepayments at lower interest rates than those of its previous investments.
o EXTENSION RISK is the risk that anticipated prepayments may not occur
typically because of a rise in interest rates.
20
<PAGE>
(1)INVESTMENT LIMITATIONS
****The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.****
To help reduce risk, the Funds have adopted limitations on some investment
policies. These limits involve a Fund's ability to borrow money and the amount
it can invest in various types of securities including illiquid securities.
Certain limitations can be changed only with the approval of shareholders.
Victory's Board of Trustees can change other investment limitations without
shareholder approval. See "Other Securities and Investment Practices" and the
SAI for more information.
Each Fund limits to 25% of total assets the amount it may invest in any single
industry (other than U.S. Government obligations and U.S. banks). Each Fund
limits its borrowing to 33-1/3% of total assets. Borrowing would be in the form
of selling a security and then repurchasing that security later at a higher
price.
Each Fund is "diversified" according to certain federal securities provisions
regarding the diversification of its assets. Generally, under those provisions,
at least 75% of a Fund's total assets must be invested so that no more than 5%
of the Fund's total assets are invested in the securities of any one issuer.
Each Fund also intends to comply with certain federal tax requirements regarding
the diversification of its assets, which generally are less restrictive than the
securities provisions. These diversification provisions and requirements are
discussed in the SAI.
INVESTMENT PERFORMANCE
****Past performance does not guarantee future results. You may obtain the
current 30-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 7:00 p.m. Eastern Time Monday
through Friday.****
Victory may advertise the performance of a Fund by comparing it to other mutual
funds with similar objectives and policies. Performance information may also
appear in various publications. Any fees charged by Investment Professionals may
not be reflected in these performance calculations. Performance information is
contained in the annual and semi-annual reports. You may obtain a copy free of
charge by calling 800-KEY-FUND.
The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to have the same yield
throughout that year. To calculate 30-day yield, a Fund's net investment income
per share for the most recent 30 days is divided by the maximum offering price
per share for Class A shares.
To calculate "total return," a Fund starts with the total number of shares that
you could buy for $1,000 at the beginning of the period. Then all the additional
shares that you would have purchased within the period are added with reinvested
dividends and distributions (this takes into account the Fund's income, if any).
The total number of shares is multiplied by the net asset value on the last day
of the period and the result is divided by the initial $1,000 investment to
determine the percentage gain or loss. For periods of more than one year, the
cumulative total return is adjusted to get an average annual total return.
21
<PAGE>
o Yield is a measure of dividend income.
o Average annual total return (or "annualized total return") is a measure of
past dividend income plus capital appreciation. It is the sum of all parts of
your investment return.
Whenever you see information on a Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.
SHARE PRICE
The net asset value (the "NAV") for each Fund is calculated each business day
(normally at 4:00 p.m. Eastern time, also known as the "Valuation Time"). Shares
are purchased at the next share price calculated after your order is received
and accepted. A business day is a day on which the New York Stock Exchange is
open for trading or any day in which enough trading has occurred in the
securities held by a Fund to materially affect the NAV. If your account is
established with an Investment Professional or a bank, you may not be able to
purchase or sell shares on other holidays when the Federal Reserve Bank of
Cleveland is closed.
The NAV is calculated by adding up the total value of a Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund:
Total Assets - Liabilities
NAV = ------------------------------------------------
Number of Shares Outstanding
****The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own, gives you the dollar amount and value of
your investment.****
Each Fund's net asset value can be found daily in The Wall Street Journal and
other local newspapers.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of distributions. Dividend distributions are the net interest earned on
investments. If a Fund makes a capital gain distribution, it usually occurs in
December. As with any investment, you should consider the tax consequences of an
investment in a Fund.
Ordinarily, income earned on securities owned by a Fund accrues daily and is
paid monthly on or around the first business day of the next month. Any added
capital gains realized by a Fund are paid as dividends at least annually.
Shareholders who receive a dividend check for less than $10.00 will have future
dividends reinvested automatically into their accounts.
Distributions can be received in one of the following ways:
o REINVESTMENT OPTION: You can have distributions automatically reinvested in
additional shares of a Fund. If you do not indicate another choice on your
Account Application, you will be assigned this option automatically.
o CASH OPTION: You will be mailed a check no later than 7 days after the pay
date.
22
<PAGE>
o INCOME EARNED OPTION: Dividends can be automatically reinvested in the Fund
in which you have invested and your capital gains can be paid in cash; or
capital gains can be reinvested and dividends paid in cash. DIRECTED
o DIVIDENDS OPTION: You can have distributions automatically reinvested in
shares of another fund of the Victory Group. The "Victory Group" includes
other funds of The Victory Portfolios and Key Mutual Funds complex. If
distributions from Class A shares are reinvested in Class A shares of another
fund, you will not pay a sales charge on the reinvested distributions.
o DIRECTED BANK ACCOUNT OPTION: In most cases, distributions can be
automatically transferred to your bank checking or savings account. Under
normal circumstances, dividends will be transferred within 7 days of the
dividend payment date. The bank account must have a registration identical to
that of your Fund account.
****Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you presently use, please
call the Transfer Agent at 800-KEY-FUND.****
****BUYING A DIVIDEND: You should check a Fund's distribution schedule before
you invest. If you buy shares of a fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.****
IMPORTANT INFORMATION ABOUT TAXES: Each Fund intends to qualify as a regulated
investment company, in which case it will pay no federal income tax on the
earnings it distributes to its shareholders.
o Dividends from the Fund's long-term capital gain are taxable as capital gain;
dividends from other sources are generally taxable as ordinary income.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
o Dividends from the Funds that are attributable to interest on certain U.S.
Government obligations will be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to U.S.
Government obligations will be shown on the tax statements you receive from a
Fund.
o Certain dividends paid to you in January will be taxable as if they had been
paid to you the previous December.
o You will receive tax statements from a Fund every January showing the
amounts and tax status of distributions made to you.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
****THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION.
YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN THE FUND.****
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account for yourself or a
minor child, or to add money to an existing account, Victory can help. The
sections that follow will serve as a guide to your investments with Victory. The
following sections will describe how to access information on your account, how
to open an account, and how to purchase, exchange, and redeem shares of a
Fund. We want to make it simple for you to do business with us. If you have
questions about any of this
23
<PAGE>
information, please call one of our customer service representatives at
800-KEY-FUND. They will be happy to assist you.
The Funds in this prospectus offer only Class A shares. Class A shares have a
front-end sales charge of 2.00% to 4.75%, depending upon which Fund you invest
in. Please look at the "Fund Expenses" section of the Fund in which you are
investing to find the sales charge. ****For historical expense information, see
the "Financial Highlights" in the Fund overviews earlier in this prospectus.****
CALCULATION OF SALES CHARGES: Class A shares are sold at their public offering
price, which includes the initial sales charge. The sales charge as a percentage
of your investment decreases as your investment amount increases. The current
sales charge rates and commissions paid to Investment Professionals are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------- -------------------- ---------------------- --------------------
YOUR INVESTMENT IN THE GOVERNMENT SALES CHARGE AS SALES CHARGE AS DEALER
MORTGAGE FUND, INTERMEDIATE INCOME A % OF OFFERING A % OF YOUR REALLOWANCE
FUND, OR INVESTMENT QUALITY BOND PRICE INVESTMENT AS A % OF THE
FUND SALES CHARGE OFFERING PRICE
- -------------------------------------- -------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Up to $50,000 4.75% 4.99% 4.00%
$50,000 up to $100,000 4.50% 4.71% 4.00%
$100,000 up to $250,000 3.50% 3.63% 3.00%
$250,000 up to $500,000 2.25% 2.30% 2.00%
$500,000 up to $1,000,000 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
<TABLE>
<CAPTION>
YOUR INVESTMENT IN THE FUND SALES CHARGE SALES CHARGE DEALER
FOR INCOME OR THE LIMITED AS A % AS A % OF YOUR REALLOWANCE
TERM INCOME FUND OFFERING PRICE INVESTMENT AS A % OF THE
OFFERING PRICE
- -------------------------------------- -------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Up to $50,000 2.00% 2.04% 1.50%
$50,000 up to $100,000 1.75% 1.78% 1.25%
$100,000 up to $250,000 1.50% 1.52% 1.00%
$250,000 up to $500,000 1.25% 1.27% 0.75%
$500,000 up to $1,000,000 1.00% 1.01% 0.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
*There is no initial sales charge on purchases of $1 million or more.
However, a CDSC of up to 1.00% of the purchase price will be charged if
shares are redeemed in the first year after purchase, or at .50% within two
years of the purchase. This charge will be based on either the cost of the
shares or current net asset value, whichever is lower. There will be no
CDSC on reinvested distributions. Investment Professionals may be paid at a
rate of up to 1.00% of the purchase price.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
****There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.****
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES: You may qualify for
reduced sales charges in the following cases:
24
<PAGE>
1. A Letter of Intent lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at one time. You must start with a minimum initial investment of
5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A shares of multiple Funds (excluding the Money
Market Funds) for purposes of calculating the sales charge. The combination
privilege also allows you to combine total investments from the accounts of
members of your immediate family for a reduced sales charge.
4. Waivers for certain investors:
a) Current and retired Fund Trustees, employees, directors, trustees, and
family members of KeyCorp or "Affiliated Providers"* and dealers who
have an agreement with the Distributor and any trade organization to
which the Advisers or the Administrator belong.
b) Investors who purchase shares for non-discretionary trust or other
advisory accounts established with KeyCorp or its affiliates.
c) Investors who reinvest a distribution from a deferred compensation
plan, agency, trust, or custody account that was maintained by the
Victory Group or invested in a fund of the Victory Group.
d) Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales
charge for those shares.
e) Investment Professionals in place of Financial Representatives using
funds shares in fee-based investment products under agreement with the
Victory Group, and selling brokers and their sales representatives.
Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organizations that provide services to Victory and Key Mutual Funds (the
"Victory Group").
HOW TO PURCHASE SHARES
Class A Shares can be purchased in a number of different ways. ****All you need
to do to get started is to fill out an application. ****You can send in your
investment by check, wire transfer, exchange from another Victory Fund, or
through arrangements with your Investment Professional. An Investment
Professional is a salesperson, financial planner, investment adviser, or trust
officer who provides you with investment information. Sometimes they will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by the Funds.
MAKE YOUR CHECK PAYABLE TO:
The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
REGULAR U.S. MAIL ADDRESS:
Send completed Account Applications with your check, bank draft, or money order
to:
The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
25
<PAGE>
OVERNIGHT MAIL ADDRESS:
Use this address ONLY for overnight packages:
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
WIRE ADDRESS:
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND. BEFORE wiring
funds to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert account number, name and
control number assigned by the Transfer Agent)
ACH. After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. A fee is not currently being charged for
ACH transfers; however, the Funds may charge a fee at some future dates.
Notification would be sent out prior to implementing a fee.
TELEPHONE NUMBER:
800-KEY-FUND
800-539-3863
STATEMENTS AND REPORTS. You will receive a periodic statement reflecting any
transactions that affect the balance or registration of your account. You will
receive a confirmation after any purchase, exchange, or redemption. If your
account has been set up by an Investment Professional, account activity will be
detailed in their statements to you. Share certificates are not issued. Twice a
year, you will receive the financial reports of the Funds. By January 31 of each
year, you will receive an IRS Form reporting account activity for the previous
year which will also be filed with the IRS.
SYSTEMATIC INVESTMENT PLAN. To enroll in the Systematic Investment Plan, you
should check this box on the Account Application. We will need your bank
information and the amount and frequency of your investment. You can select
monthly, quarterly, semi-annual, or annual investments. You should attach a
voided personal check so the proper information can be obtained. You must first
meet the minimum investment requirement of $500, then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it into shares of a Fund.
RETIREMENT PLANS. You can use the Funds as part of your retirement portfolio.
Your investment professional can set up your new account under one of several
tax sheltered plans. Please contact your investment professional for details
regarding an IRA or other retirement plan that works best for your financial
situation.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. ****If you
would like to make additional investments after your account is already
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.**** The Transfer Agent
26
<PAGE>
may reject any purchase order, in its sole discretion. If your check is returned
for any reason, you will be charged for any resulting fees and/or losses. Third
party checks will not be accepted. You may only invest or exchange into fund
shares legally available in your state. If your account falls below $500, we may
ask you to re-establish the minimum investment. If you do not do so within 60
days, we may close your account and send you the value of your account.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges. (See Item 3 below for the exception.) The "Victory Group"
includes funds offered as a part of the Victory Funds and Key Mutual Funds
complex. Key Mutual Funds is affiliated with KeyCorp.
You can exchange shares of the Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Fund, you should keep the
following in mind:
1. Shares of the fund selected for exchange must be available for sale in your
state of residence.
2. The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
3. Shares of a Fund may be exchanged at relative net asset value. This means
that if you own Class A shares of a Fund, you can only exchange them for
Class A shares of another fund. This means that if you exchange into a fund
with a higher sales charge, you pay the percentage-point difference between
that fund's sales charge and any sales charge you have previously paid in
connection with the shares you are exchanging. If you exchange from the
Fund for Income or the Limited Term Income Fund to purchase Class A shares
of another fund in the Victory Group that has a 4.75% sales charge, you
would pay the 2.75% difference in sales charge.
4. You must meet the minimum purchase requirements for the fund you purchase
by exchange.
5. The registration and tax identification numbers of the two accounts must be
identical.
6. You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any business day.
7. Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
****You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-FUND.****
HOW TO REDEEM SHARES
****There are a number of convenient ways to redeem shares of the Funds. You can
use the same mailing and wiring addresses listed for purchases. You will earn
dividends up to and including the date your redemption request is processed.****
BY TELEPHONE. The easiest way to redeem shares is by calling 800-KEY-FUND. When
you fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when you're ready to redeem, call us and tell us
which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via the Automated Clearing House (ACH).
27
<PAGE>
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory now its servicing Agents, the Adviser, nor the Transfer Agent
will be responsible for any losses. Should these procedures not be followed, the
Transfer Agent may be liable to you for losses resulting from unauthorized
instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
BY MAIL. Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE. If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 4:00 p.m. Eastern time,
your funds will be wired on the next business day.
BY ACH. Normally, your redemption will be processed on the same day or the next
day if received after 4:00 p.m. Eastern Time. It will be transferred by ACH as
long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividends accrued will be included with the redemption proceeds.
SYSTEMATIC WITHDRAWAL PLAN. If you check this box on the Account Application, we
will send monthly, quarterly, semi-annual, or annual payments to the person you
designate. The minimum withdrawal is $25, and you must have a balance of $5,000
or more. Once again, we will need a voided personal check to activate this
feature. You should be aware that your account may eventually be depleted.
However, you cannot automatically close your account using the Systematic
Withdrawal Plan. If your balance falls below $500, we may ask you to bring the
account back to the minimum balance. If you decide not to increase your account
to the minimum balance, your account may be closed and the proceeds mailed to
you.
ORGANIZATION AND MANAGEMENT OF THE FUND
****We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
service the shareholders. They are paid a fee for their services.****
28
<PAGE>
ABOUT VICTORY:
Each Fund is a member of the Victory Funds, a family of 26 distinct investment
portfolios. Victory has been operating continuously since 1983, and was
organized as a Delaware business trust on February 29, 1996.
The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.
****The Funds are supervised by the Board of Trustees, who monitors the services
provided to investors.****
THE INVESTMENT ADVISERS:
One of the Funds' most important contracts is its Advisory Agreement with Key
Asset Management Inc. One of the Fund's most important contracts is with its
investment adviser, Key Asset Management Inc. (KAM or the Adviser), a New York
corporation registered as an investment adviser with the SEC. KAM is a
subsidiary of KeyBank National Association, a wholly-owned subsidiary of
KeyCorp. Effective February 28, 1997, KAM became the surviving corporation of
the reorganization of four indirect investment adviser subsidiaries of KeyCorp.
Affiliates of the Adviser manage approximately $50 billion for a limited number
of institutional clients.
The Advisory Agreement allows the Adviser to hire employees of its affiliates as
sub-advisers to the Funds. It also allows KAM to choose brokers or dealers to
handle the purchases and sales of a Fund's securities. Prior to February 28,
1997, KeyCorp Mutual Fund Advisers, Inc. was the adviser and Society Asset
Management, Inc. (formerly the adviser) was the sub-adviser to each of the
Funds. During the fiscal year ended October 31, 1996, KeyCorp Mutual Fund
Advisers, Inc. was paid an annual rate based on a percentage of the average
daily net assets of each Fund in advisory fees as follows:
An advisory agreement authorizes Key Management to choose brokers or dealers to
handle the purchases and sales of a Fund's securities. During the fiscal year
ended October 31, 1996, the Adviser was paid an annual rate based on a
percentage of the average daily net assets of each Fund in advisory fees as
follows:
<TABLE>
<CAPTION>
- -------------------- -------------------- ---------------------- --------------------- -------------------- ----------------------
Government Mortgage Intermediate Income Investment Quality Limited Term Income
Fund for Income Fund Fund Bond Fund Fund
<S> <C> <C> <C> <C> <C>
- -------------------- -------------------- ---------------------- --------------------- -------------------- ----------------------
Advisory Fees .50% .50% .75% .75% .50%
- -------------------- -------------------- ---------------------- --------------------- -------------------- ----------------------
</TABLE>
MANAGEMENT OF THE FUNDS
--------------------------------------------------
| |
| TRUSTEES |
| |
| Supervise each Fund's activities. |
| |
--------------------------------------------------
|
|
--------------------------------------------------
| INVESTMENT ADVISER |
| Key Asset Management Inc. |
| 127 Public Square |
| Cleveland, OH 44114 |
| |
| Manages each Fund's business |
| and investment activities. |
---------------------------------------------------
29
<PAGE>
THE ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT:
BISYS Fund Services is the Administrator and the Distributor. BISYS is paid a
fee of .15% of each Fund's average daily net assets on a monthly basis as the
Administrator, but does not charge a fee for its services as Distributor. BISYS
Fund Services Ohio, Inc. receives a fee as the Fund Accountant.
The Distributor may provide cash or other compensation to dealers for selling
shares of a Fund. Payments may be in the form of trips, tickets, and/or
merchandise offered through sales contests. It does this at its own expense, and
not at the expense of a Fund or its shareholders.
SHAREHOLDER SERVICING PLAN:
Victory has a Shareholder Servicing Plan for each class of shares of the Funds.
The shareholder servicing agent performs a number of services for its customers
who are shareholders of a Fund. It establishes and maintains accounts and
records, processes dividend and distribution payments, arranges for bank wires,
assists in transactions, and changes account information. For these services a
Fund pays up to .25% of the average daily net assets of the share of the class.
The Funds have agreements with various shareholder servicing agents, including
the Distributor, the Custodian and its affiliates, other financial institutions,
and securities brokers. Shareholder servicing agents may waive all or a portion
of their fee periodically.
DISTRIBUTION PLAN:
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Funds. Class A Shares of the Funds
currently do not pay direct expenses under this plan.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P. serves as independent account to the Funds.
LEGAL COUNSEL:
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.
30
<PAGE>
HOW THE FUNDS ARE
ORGANIZED
_______________________
| |
___________________| SHAREHOLDERS |
| | |
| |_____________________|
| |
| |
| |
| |
| ______________________|_______________________
| | FINANCIAL SERVICES FIRMS AND |
| | THEIR INVESTMENT PROFESSIONALS |
| | |
| | Advise current and prospective |
| | shareholders on their fund investments. |
| |_____________________________________________|
| |
| |
| |
| ______________________________________________
| | |
| | TRANSFER AGENT/SERVICING AGENT |
| | State Street Bank and Trust Company |
| | 225 Franklin Street |
| | Boston, MA 02110 |
| | |
| | Boston Financial Data Services |
| | |
|_______| Two Heritage Drive |
| Quincy, MA 02171 |
| |
| Handles services such as record-keeping, |
| statements, processing of buy and |
| sell requests, distribution of dividends, |
| and servicing of shareholder's accounts. |
|_____________________________________________|
|
|
______________________________________ | ____________________________________
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND | | | |
| FUND ACCOUNTANT | | | Key Trust Company of Ohio, N.A. |
| BISYS Fund Services, Inc. and | | | 127 Public Square |
| BISYS Fund Services Ohio, Inc. | | | |
| 3435 Stelzer Road | | | Cleveland, OH 44114 |
| |__|__| |
| Columbus, OH 43219 | | |
| | | |
|Markets the Funds, distributes shares| | Provides for safekeeping of the |
| through investment professionals, | | Funds' investments and cash, and |
| and calculates the value of shares. | |settles trades made by the Funds. |
|_____________________________________| |__________________________________|
<PAGE>
ADDITIONAL INFORMATION
****Some additional information you should know about the Funds.****
The Funds offer only the classes of shares described in this prospectus, but at
some future date, the Funds may offer additional classes of shares through a
separate prospectus.
YOUR RIGHTS AS A SHAREHOLDER. All shareholders have equal voting, liquidation,
and other rights. As a shareholder of a Fund, you have rights and privileges
similar to those enjoyed by other corporate shareholders. Delaware Trust law
limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of Trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of a Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.
CODE OF ETHICS. Victory and the Adviser have each adopted a Code of Ethics to
which all investment personnel and all other access persons to the Funds must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination.
BANKING LAWS. Banking laws, including the Glass-Steagall Act, prevent a bank
holding company or its affiliates from sponsoring, organizing or controlling a
registered, open-end investment company. However, bank holding companies may act
as investment adviser, transfer agent, custodian, or shareholder servicing
agent. They may also purchase shares of such a company for their customers and
pay third parties for performing these functions. Should these laws change in
the future, the Trustees would consider selecting another qualified firm so that
all services would continue.
SHAREHOLDER COMMUNICATIONS. You will receive unaudited Semi-Annual Reports and
audited Annual Reports on a regular basis from each Fund. In addition, you may
also receive updated prospectuses or supplements to this prospectus. In order to
eliminate duplicate mailings to an address at which two or more shareholders
with the same last name reside, the Funds will send only one copy of the above
communications. ****If you would like to receive additional copies of any
materials, please call the Funds at 800-KEY-FUND.****
The securities described in this prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No salesman, dealer, or other
person is authorized to give any information or make any representation other
than those contained in this prospectus and the SAI.
31
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists some of the types of securities each of the Funds may
choose to purchase. The majority of the portfolio for each of the Funds is made
up of mortgage-backed securities and corporate debt obligations. However, the
Funds are also permitted to invest in the securities in the table below and in
the SAI.
% Percentage of total assets.
# No limitation of usage; Fund may be using currently.
Indicates a "derivative security," whose value is linked to, or derived from
another security, instrument, or index.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
INVEST-MENT
GOVERNMENT INTERMEDIATE QUALITY BOND LIMITED TERM
LIST OF ALLOWABLE INVESTMENTS IN FUNDS FUND FOR INCOME MORTGAGE FUND INCOME FUND FUND INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES. Securities
issued or guaranteed by the U.S. government,
its agencies or instrumentalities. Some
are direct obligations of the U.S. Treasury;
others are obligations only of the U.S. agency. # # # # #
- -----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES. Investments
received by pools of mortgages. # # # # #
o U.S. GOVERNMENT . Issued or
guaranteed by agencies of the U.S.
Government; i.e., GNMAs, FNMAs,
SLMAs.
o NON-U.S. GOVERNMENT. Secured by
non-government entities. # # 25% 25% 25%
- -----------------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT OBLIGATIONS. Debt
instruments issued by public
corporations. They may be secured or
unsecured. # -- # # #
- -----------------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS.
Debt obligations that are secured by
mortgage-backed certificates. Some are
issued by U.S. government agencies and
instrumentalities. # # # # #
- -----------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE OR EXCHANGEABLE CORPORATE
DEBT OBLIGATIONS. Debt instruments which
may be exchanged or converted to other
securities. # # # # #
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER. Short-term obligations
issued by public corporations. The Funds
only use prime quality commercial paper. 20% 20% 20% 20% 20%
- -----------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED-DELIVERY
SECURITIES. A security that is purchased
for delivery at a later time. The market
value may change before the delivery
date. 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3%
- -----------------------------------------------------------------------------------------------------------------------------------
ZERO COUPON BONDS. These securities are
purchased at a discount from the face
value. The face value is received at
maturity, with no interest payments
before then. These may be subject to
greater risks of price fluctuation. # # # # #
- -----------------------------------------------------------------------------------------------------------------------------------
VARIABLE & FLOATING RATE SECURITIES.
Investment grade instruments, some of
which may be illiquid, with interest
rates that reset periodically. # # # # #
- -----------------------------------------------------------------------------------------------------------------------------------
YANKEE SECURITIES. Debt instruments
issued by non-domestic issuers and
traded in domestic currency. # # # # #
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
INVEST-MENT
GOVERNMENT INTERMEDIATE QUALITY BOND LIMITED TERM
LIST OF ALLOWABLE INVESTMENTS IN FUNDS FUND FOR INCOME MORTGAGE FUND INCOME FUND FUND INCOME FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOREIGN SECURITIES. Debt securities of
foreign issuers including international
bonds denominated in foreign or domestic
currencies traded in the United States
and abroad. -- -- 20% 20% 20%
- -----------------------------------------------------------------------------------------------------------------------------------
FUTURES CONTRACTS AND OPTIONS. Contracts
involving the right or obligation to
deliver or receive assets or money
depending on the performance of one or
more assets or an economic index. To
reduce the effects of leverage, liquid assets
equal to the contract commitment are set aside
to cover the assets involved will
to cover the commitment limit; 5% or less in 5% 5% 5% 5%
margins or premiums; and 33-1/3% or less
of assets subject to futures and options.
The Funds may invest in futures and options
in an effort to hedge against Srisk. -- 33-1/3% 33-1/3% 33-1/3% 33-1/3%
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SECURITIES.
Shares of other mutual funds with
similar investment objectives. The
following limitations apply: (1) No
more than 5% of the Fund's total
assets may be invested in one
mutual fund, (2) a Fund may not own
more than 3% of the securities of
any one mutual fund, and (3) No 5% 5% 5% 5% 5%
more than 10% of the Fund's total assets 3% 3% 3% 3% 3%
in combined mutual fund holdings. 10% 10% 10% 10% 10%
- -----------------------------------------------------------------------------------------------------------------------------------
RECEIPTS. Separately traded interest or
principal components of U.S. Government
securities. -- 20% 20% 20% 20%
- -----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. An agreement to
purchase a security at a stated price
plus interest that must later be sold
back to the seller at the same price
plus interest. The seller's obligation
is secured by collateral. 10% 33-1/3% 33-1/3% 33-1/3% 33-1/3%
- -----------------------------------------------------------------------------------------------------------------------------------
TAX, REVENUE AND BOND ANTICIPATION
NOTES. Issued in expectation of future
revenues. Only purchased when their
yields are competitive with taxable
obligations. # # # # #
- -----------------------------------------------------------------------------------------------------------------------------------
LOWER-RATED DEBT SECURITIES. Sometimes
called "Junk Bonds" these securities
have lower ratings by the NRSROs and are
of a speculative nature. -- -- P P --
- -----------------------------------------------------------------------------------------------------------------------------------
WARRANTS. The right to purchase an
equity security at a stated price for a
limited period of time. # # # # #
- -----------------------------------------------------------------------------------------------------------------------------------
DOLLAR WEIGHTED EFFECTIVE AVERAGE
MATURITY. Based on the value of a Fund's
investments in securities with different
maturity dates. Longer term debt
securities are more volatile because
their values change with interest rate
changes. Therefore, the NAV of the Fund
tends to fluctuate more when its dollar
weighted effective average maturity is
longer. 10 years 10 years 3 -10 years 5 - 15 years 1 - 5 years
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For temporary defensive purposes the Funds may hold up to 100% of their total
assets in cash or short-term obligations. For more information on ratings and
detailed descriptions of each of the above investment vehicles, see the SAI.
33
<PAGE>
THE VICTORY FUNDS
800-KEY-FUND(R)
OR
800-539-3863
THE VICTORY
NATIONAL MUNICIPAL BOND FUND
NEW YORK TAX-FREE FUND
OHIO MUNICIPAL BOND FUND
PROSPECTUS
MARCH 1, 1997
<PAGE>
TABLE OF CONTENTS PAGE
Introduction 2
AN OVERVIEW OF EACH OF THE FUNDS 3
A fund-by-fund analysis which includes objectives, policies,
strategies, expenses, and financial highlights
National Municipal Bond Fund 4
New York Tax-Free Fund 7
Ohio Municipal Bond Fund 10
Risk Factors 13
Investment Limitations 14
Investment Performance 15
Share Price 15
Dividends, Distributions, and Taxes 16
INVESTING WITH VICTORY 17
Choosing a Share Class 17
How to Purchase Shares 19
How to Exchange Shares 21
How to Redeem Shares 21
Organization and Management of the Funds 22
Additional Information 26
Other Securities and Investment Practices 27
Key to Fund Information:
(1) Objective and Strategy: The goals and the strategy that a Fund plans to use
in pursuing its investment objective.
(2) Risk Factors: The risks that you may assume as an investor in a Fund.
(3) Expenses: The costs you will pay as an investor in a Fund, including sales
charges and ongoing expenses.
(4) Financial Highlights: A table which shows a Fund's historical performance by
share class. This table also summarizes previous operating expenses.
SHARES OF THE FUNDS ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, KEYBANK, ANY
OF ITS AFFILIATES, OR ANY OTHER BANK;
o SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
<PAGE>
THE VICTORY PORTFOLIOS
NATIONAL MUNICIPAL BOND FUND
NEW YORK TAX-FREE FUND
OHIO MUNICIPAL BOND FUND
800-KEY-FUND OR 800-539-3863
INTRODUCTION
This prospectus describes the following funds:
National Municipal Bond Fund
New York Tax-Free Fund
Ohio Municipal Bond Fund
The three Victory Funds (the Funds) discussed in this prospectus are
non-diversified mutual funds and are a part of The Victory Portfolios (Victory),
an open-end investment management company. This prospectus explains the
objectives, policies, risks, and strategies of the Funds. You should read this
prospectus before investing in one of these Funds and keep it for future
reference. A detailed Statement of Additional Information (the SAI) describing
each of the Funds is also available for your review. The SAI has been filed with
the Securities and Exchange Commission (the SEC), and is incorporated into this
prospectus by reference. If you would like a free copy of the SAI, please
request one by calling us at 800-KEY-FUND.
(1)INVESTMENT OBJECTIVE:
The NATIONAL MUNICIPAL BOND FUND seeks to provide a high level of current
interest income exempt from federal income tax, as is consistent with the
preservation of capital.
The NEW YORK TAX-FREE FUND seeks to provide a high level of current income
exempt from federal, New York State and New York City income taxes,
consistent with the preservation of shareholders' capital.
The OHIO MUNICIPAL BOND FUND seeks to provide a high level of current interest
income which is exempt from both federal income tax and Ohio personal
income tax.
(1)INVESTMENT STRATEGY:
Each of the Funds pursues its investment objective by investing primarily in
general obligation bonds and revenue bonds. However, each of the Funds has
unique investment strategies and its own risk/reward profile. Please review the
section about the Fund in which you are interested in investing and "Other
Securities and Investment Practices" for an overview of the Funds.
(2)RISK FACTORS:
The Funds are not insured by the FDIC. The New York Tax-Free and Ohio Municipal
Bond Fund generally limit their investments to a single state. Therefore, an
investment in one of these Funds may involve additional risks, including
economic, political, or credit risks specific to that state. In addition, there
are other potential risks, which are discussed in the section "Risk Factors."
2
<PAGE>
WHO SHOULD INVEST:
o Investors in higher tax brackets seeking tax-exempt income
o Investors seeking income over the long term
o Investors with moderate risk tolerance
o Investors seeking higher potential returns than are provided by
money market funds
o Investors willing to accept price and dividend fluctuations
(3)FEES AND EXPENSES:
The National Municipal Bond Fund and New York Tax-Free Fund offer two classes of
shares: Class A and Class B. The Ohio Municipal Bond Fund offers only Class A
shares. If you purchase Class A shares of a Fund, you may pay a sales charge of
up to 4.75% of the offering price, depending on the amount you invest. If you
purchase Class B shares of a Fund, you will not pay an initial sales charge;
however, you may pay a deferred sales charge if you sell ("redeem") your shares
within six years of purchase, and you will pay additional distribution expenses.
In either case, you also will incur expenses for investment advisory,
management, administrative, and shareholder services, all of which are included
in a Fund's expense ratio. See "Choosing a Share Class."
PURCHASES:
The minimum initial investment is $500 for most accounts ($250 for Individual
Retirement Accounts) and $25 thereafter. An initial investment must be
accompanied by a Fund's Account Application. Fund shares may be purchased by
check, Automated Clearing House, or wire. See "How to Purchase Shares."
REDEMPTIONS:
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, a Fund will redeem the
shares and credit your bank account or send the proceeds to the address
designated on your account application. See "How to Redeem Shares."
DIVIDENDS/DISTRIBUTIONS:
Income is accrued daily and is paid monthly. Any net capital gains realized by a
Fund are paid as dividends annually. A Fund can send your dividends directly to
you by mail, credit them to your bank account, reinvest them in the Fund, or
invest them in another fund of the Victory Group. The "Victory Group" includes
other funds of The Victory Portfolios and Key Mutual Funds. You can make this
choice when you fill out an account application.
See "Dividends, Distributions, and Taxes."
OTHER SERVICES:
Victory offers a number of other services to better serve shareholders including
exchange privileges and automated investment and withdrawal plans. See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.
3
<PAGE>
AN OVERVIEW OF EACH OF THE FUNDS:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL
EXPENSES AFTER
WAIVERS MAXIMUM SALES NEWSPAPER
VICTORY FUND INCEPTION DATE (AS A % OF NET ASSETS) CHARGE ABBREVIATION*
------------ -------------- ---------------------- ------ --------------
<S> <C> <C> <C> <C>
National Municipal Bond Fund - Victory
Class A 2/11/91 0.90% 4.75% NatMunA
National Municipal Bond Fund - Victory
Class B 9/6/94 1.85% 5.00% NatMunB
Victory
New York Tax-Free Fund - Class A 2/11/91 .95% 4.75% NYTxFA
Victory
New York Tax-Free Fund - Class B 9/6/94 1.75% 5.00% NYTxFB
Ohio Municipal Bond Fund - Class Victory
A 5/18/90 .90% 4.75% OH Muni
</TABLE>
*All newspapers do not carry the same abbreviation.
The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, risks, expenses, and financial
history to determine which Fund will best suit your risk tolerance and
investment needs. You also should review "Other Securities and Investment
Practices" section for additional information about the individual securities in
which the Funds can invest and the risks related to these investments.
4
<PAGE>
NATIONAL MUNICIPAL BOND FUND
(1)INVESTMENT OBJECTIVE: The National Municipal Bond Fund seeks to provide a
high level of current interest income exempt from federal income tax, as is
consistent with the preservation of capital.
(1)INVESTMENT POLICIES AND STRATEGY: The National Municipal Bond Fund pursues
its investment objective by investing primarily in domestic municipal bonds. The
interest on these bonds is exempt from federal income tax. Under normal
circumstances, at least 80% of the National Municipal Bond Fund's income
distributions will be exempt from federal income taxes, including the
alternative minimum tax.
Under normal market conditions, the National Municipal Bond Fund invests
primarily in:
o Municipal securities with fixed, variable, or floating interest rates
o Zero coupon, tax, revenue, and bond anticipation notes
o Tax-exempt commercial paper
Important Characteristics of the National Municipal Bond Fund's investments:
o Quality: Municipal securities rated A or above by S&P, Fitch, Moody's, or
another NRSRO. For more information on ratings, see the Appendix to the
SAI.
o Maturity: The dollar-weighted effective average maturity of the Fund
generally will range from 5 to 11 years. Under certain market conditions,
the Portfolio Manager may go outside these boundaries.
Municipal securities are issued to raise money for public purposes. General
obligation bonds are backed by the taxing power of a state or municipality. This
means the agency has the authority to raise taxes to cover the payments. Revenue
bonds are backed by revenues from a specific tax, project, or facility.
Principal and interest payments on some municipal securities are insured by
private insurance companies.
An NRSRO is a nationally recognized statistical ratings organization such as
Standard & Poors ("S&P"), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
(2)RISK: The National Municipal Bond Fund invests primarily in municipal
securities from several states, rather than from a single state. The National
Municipal Bond Fund is subject to the risks common to mutual funds that invest
in debt securities, that is, interest rate risk, credit risk, reinvestment risk,
and inflation risk. It is also subject to the risks common to mutual funds that
invest in municipal debt securities. These include the risk that certain
investments could lose their tax-exempt status. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.
5
<PAGE>
PORTFOLIO MANAGEMENT:
Paul A. Toft has served as the Portfolio Manager for all three Funds since
September, 1994. He is a Senior Portfolio Manager and Director of Key Asset
Management Inc., and has been in the investment business since 1986.
NATIONAL MUNICIPAL BOND FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the National Municipal Bond Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES CLASS B SHARES
- --------------------------------- -------------- --------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.75% None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None 5.00%**
Redemption Fees None None
Exchange Fees None None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
**5% in the first year, declining to 1% in the sixth
year, with no charge after the sixth year.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the National
Municipal Bond Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE NATIONAL
MUNICIPAL BOND FUND. Expenses include management fees as well as the costs of
maintaining accounts, administering the National Municipal Bond Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on historical or projected expenses of the National Municipal Bond Fund.
ANNUAL FUND OPERATING EXPENSES (AFTER EXPENSE WAIVERS AND REIMBURSEMENTS)
(as a percentage of average
daily net assets) CLASS A SHARES CLASS B SHARES
-------------- --------------
Management Fee(1) None .None
Rule 12b-1 Distribution Fees None .75%
Other Expenses(2) .90 % 1.10%
Total Fund Operating Expenses(1) .90% 1.85%
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .55%; and the Total Fund Operating Expenses would
be 1.45% for Class A Shares, and would be 2.40% for Class B Shares..
(2) Other Expenses includes an estimate of shareholder servicing fees the
National Municipal Bond Fund expects to pay. See "Organization and
Management of the Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the National Municipal Bond
Fund.
6
<PAGE>
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
National Municipal Bond Fund: assuming (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $56 $75 $95 $153
CLASS B SHARES $69 $88 $120 $192
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
7
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the National Municipal Bond Fund's returns
and operating expenses over time. This table shows the results of an investment
in one share of the National Municipal Bond Fund for each of the periods
indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996; periods and by other auditors for all earlier periods. This
information should be read in conjunction with the National Municipal Bond
Fund's most recent Annual Report to shareholders, which is incorporated by
reference into the SAI. If you would like a copy of the Annual Report, write or
call the National Municipal Bond Fund at 800-KEY-FUND.
Variability, as shown by year-to-year return: (Insert chart showing Total
Return)
NATIONAL MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS B CLASS A
----------------------------------- -------------------------------------------------
YEAR SIX MONTHS SEPT. 26, YEAR SIX MONTHS YEAR FEB. 3,
ENDED ENDED 1994 TO ENDED ENDED ENDED 1994 TO
OCT. 31, OCT. 31 APRIL 30, OCT. 31, OCT. 31 APRIL 30, APRIL 30,
1996 1995(d) 1995 (e) 1996 1995 1995(d) 1994 (a)
---- ------- -------- ---- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.07 $ 9.59 $ 9.53 $ 10.06 $ 9.59 $ 9.64 $ 10.00
- --------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net Investment Income 0.35 0.20 0.28 0.44 0.24 0.44 0.08
Net realized and unrealized gains
(losses) from investments 0.13 0.47 0.05 0.13 0.46 (0.05) (0.36)
- --------------------------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 0.48 0.67 0.33 0.57 0.70 0.39 (0.28)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.35) (0.19) (0.27) (0.44) (0.23) (0.44) (0.08)
In excess of net investment
income (0.01) -- -- -- -- -- --
Net realized gains (0.03) -- -- -- -- -- --
In excess of net realized gains -- -- -- (0.03) -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.39) (0.19) (0.27) (0.47) (0.23) (0.44) (0.08)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.16 $ 10.07 $ 9.59 $ 10.16 $ 10.06 $ 9.59 $ 9.64
- --------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 4.85% 6.99%(b) 3.54%(b) 5.83% 7.39%(b) 4.21% (2.82%)(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 1,808 $ 456 $ 147 $36,958 $ 11,964 $ 5,118 $ 494
Ratio of expenses to average
net assets 1.20% 0.96%(c) (0.05%)(c) 0.29% 0.02%(c) 0.20% 0.65%(c)
Ratio of net investment income
(loss) to average net income 3.50% 4.15%(c) 4.35%(c) 4.37% 5.11%(c) 5.01% 3.15%(c)
Ratio of expenses to average net
assets (g) 2.17% 3.67%(c) 2.63%(c) 1.35% 2.57%(c) 3.95% 26.10%(c)
Ratio of net investment income
(loss) to average net assets (g) 2.53% 1.44%(c) 1.67%(c) 3.31% 2.56%(c) 1.26% (22.30%)(c)
Portfolio turnover (f) 143% 72% 52% 143% 72% 52% 13%
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory National Municipal Bond Portfolio
became the National Municipal Bond Fund.
(e) Effective September 26, 1994, the National Municipal Bond Fund designated
the existing shares as Class A Shares and commenced offering Class B
Shares.
(f) Portfolio turnover is calculated on the basis of the National Municipal
Bond Fund as a whole without distinguishing between the classes of shares
issued.
(g) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
8
<PAGE>
NEW YORK TAX-FREE FUND
(1)INVESTMENT OBJECTIVE: The New York Tax-Free Fund seeks to provide a high
level of current income exempt from federal, New York State, and New York City
income taxes, consistent with the preservation of shareholders' capital.
(1)INVESTMENT POLICIES AND STRATEGY: The New York Tax-Free Fund pursues its
objective by investing at least 80% of its total assets in securities that have
interest income that is exempt from federal income tax, including the federal
alternative minimum tax. At least 65% of the portfolio will be invested in
insured municipal securities that have interest that is exempt from New York
State and New York City income taxes.
Under normal market conditions, the New York Tax-Free Fund invests primarily in:
o Municipal securities with fixed, variable, and floating interest rates
o Zero coupon, tax, and revenue anticipation notes
o Tax-exempt commercial paper
Important Characteristics of the New York Tax-Free Fund's Investments:
o Quality: Municipal securities rated A or above by S&P, Fitch, Moody's, or
another NRSRO. For more information on ratings, see the Appendix to the
SAI.
o Maturity: The dollar-weighted effective average maturity of the New York
Tax-Free Fund generally will range from 5 to 15 years. Under certain market
conditions, the Portfolio Manager may go outside these boundaries.
Insurance policies for the municipal securities held by the Fund generally are
obtained either by the issuer of the security or by a third party from a private
insurer. The insurance company guarantees timely payments of principal and
interest. This insurance reduces risk, but these high quality bonds may yield
less than uninsured bonds.
(2)RISK: The New York Tax-Free Fund primarily invests in municipal securities
issued by the State of New York and its municipalities, including New York City.
The New York Tax-Free Fund is subject to the risks common to mutual funds that
invest in debt securities, that is, interest-rate risk, credit risk,
reinvestment risk, and inflation risk. It also is subject to the risks common to
mutual funds that invest in municipal debt securities. These include the risk
that certain investments could lose their tax exempt status. The New York
Tax-Free Fund is subject to additional risks because it concentrates its
investments in a single geographic area, and it may invest more than 5% of its
assets in the securities of a single issuer. This could make the New York
Tax-Free Fund more susceptible to economic, political, or credit risks than a
fund that invests in a more diversified geographic area. In the past, New York
State, New York City, and other municipalities have experienced financial
difficulties that jeopardized their ability to repay their debt obligations. If
similar difficulties were to occur again, the New York Tax-Free Fund's
investments may lose value or default. The SAI explains the risks specific to
investments in New York municipal securities. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT:
Paul A. Toft has served as the Portfolio Manager for all three Funds since
September, 1994. He is a Senior Portfolio Manager and Director of Key Asset
Management Inc., and has been in the investment business since 1986.
9
<PAGE>
NEW YORK TAX-FREE FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the New York Tax Free Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A CLASS B
SHARES SHARES
-------- -------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.75% None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None 5.00%**
Redemption Fees None None
Exchange Fees None None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
**5% in the first year, declining to 1% in the sixth year, with no charge after
the sixth year.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the New York Tax-Free
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE NEW YORK TAX-FREE FUND.
Expenses include management fees as well as the costs of maintaining accounts,
administering the New York Tax-Free Fund, providing shareholder services, and
other activities. The expenses shown are estimated based on historical or
projected expenses of the New York Tax-Free Fund.
ANNUAL FUND OPERATING EXPENSES (AFTER EXPENSE WAIVERS AND REIMBURSEMENTS) (as a
percentage of average daily net assets)
CLASS A CLASS B
SHARES SHARES
------ ------
Management Fee(1) .12% .12%
Rule 12b-1 Distribution Fees None .75%
Other Expenses(2) .83% .88%
--- ----
Total Fund Operating Expenses(1)(2) .95% 1.75%
=== ====
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .55%, and the Total Fund Operating Expenses would be
1.47% for Class A Shares and would be 2.27% for Class B Shares.
(2) Other Expenses includes an estimate of shareholder servicing fees the New
York Tax-Free Fund expects to pay. See "Organization and Management of the Funds
- -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the New York Tax-Free Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the New
York Tax-Free Fund assuming: (1) a 5% annual return; and (2) redemption at the
end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $57 $76 $98 $159
CLASS B SHARES $68 $85 $115 $185
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
10
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the New York Tax-Free Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the New York Tax-Free Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996 periods; other auditors for all earlier periods. This information
should be read in conjunction with the New York Tax-Free Fund's most recent
Annual Report to shareholders, which is incorporated by reference into the SAI.
If you would like a copy of the Annual Report, write or call the New York
Tax-Free Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing "Total
Return" )
NEW YORK TAX-FREE FUND
<TABLE>
<CAPTION>
CLASS B CLASS A
-------------------------------------------------- --------------------------------
PERIOD FROM PERIOD FROM
YEAR YEAR SEPT. 26, YEAR YEAR JAN. 1, YEAR
ENDED ENDED 1994 TO ENDED ENDED 1994 TO ENDED
OCT. 31 OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31, DEC. 31,
1996 1995(d) 1994(d) 1996 1995(d) 1994(d) 1993(d)
---- ------- ------- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.86 $12.39 $12.62 $12.85 $12.39 $13.54 $12.76
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.57 0.85 0.07 0.68 0.87 0.57 0.70
Net realized and unrealized gains
(losses) from investments (0.10) 0.36 (0.23) (0.11) 0.42 (1.15) 0.84
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.47 1.21 (0.16) 0.57 1.29 (0.58) 1.54
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net investment income (0.57) (0.74) (0.07) (0.68) (0.83) (0.57) (0.70)
In excess of net investment income (0.01) ----- ----- ----- ----- ----- -----
Net realized gains (0.01) ----- ----- (0.01) ----- ----- (0.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.59) (0.74) (0.07) (0.69) (0.83) (0.57) (0.76)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.74 $12.86 $12.39 $12.73 $12.85 $12.39 $13.54
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 3.72% 10.18% (1.25%)(b) 4.53% 10.82% (4.31%)(b) 12.34%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $2,515 $1,953 (e) $13,754 $15,374 $17,840 $28,530
Ratio of expenses to average net assets 1.65% 2.02% 0.52%(c) 0.93% 1.16% 0.91%(c) 0.87%
Ratio of net investment income (loss) to
average net assets 4.52% 5.94% 5.94%(c) 5.25% 5.50% 5.33%(c) 5.28%
Ratio of expenses to average net assets(g) 2.34% 2.25% 0.86%(c) 1.58% 1.96% 1.25%(c) 0.96%
Ratio of net investment income (loss) to
average net assets(g) 3.83 5.71% 5.60%(c) 4.60% 4.70% 4.99%(c) 5.19%
Portfolio turnover(f) 0% 18% 18% 0% 18% 18% 12%
CLASS A
------------------------------
PERIOD FROM
YEAR FEB. 11,
ENDED 1991 TO
DEC. 31, DEC. 31,
1992(d) 1991 (d)(h)
------- -----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.50 $12.00
- --------------------------------------------------------------------------------
Investment Activities:
Net investment income 0.74 0.64
Net realized and unrealized gains
(losses) from investments 0.26 0.5
- --------------------------------------------------------------------------------
Total from Investment Activities 1.00 1.14
- --------------------------------------------------------------------------------
Distributions:
Net investment income (0.74) (0.64)
In excess of net investment income ----- -----
Net realized gains ----- -----
- --------------------------------------------------------------------------------
Total Distributions (0.74) (0.64)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.76 $12.50
- --------------------------------------------------------------------------------
Total Return (excludes sales charge) 8.26% 11.06%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $26,034 $20,995
Ratio of expenses to average net assets 0.66% 0.45%(c)
Ratio of net investment income (loss) to
average net assets 5.89% 6.28%(c)
Ratio of expenses to average net assets(g) 0.96% 0.95%(c)
Ratio of net investment income (loss) to
average net assets(g) 5.59% 5.78%(c)
Portfolio turnover(f) 14% 61%
</TABLE>
(a) Effective June 5, 1995, the Victory New York Tax-Free Portfolio became the
New York Tax-Free Fund.
(b) Not annualized.
(c) Annualized.
(d) Effective September 26, 1994, the Fund designated the existing shares as
Class A Shares and commenced offering Class B Shares.
(e) Amount is less than $1,000.
(f) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(g) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(h) Period from commencement of operations.
11
<PAGE>
OHIO MUNICIPAL BOND FUND
(1) INVESTMENT OBJECTIVE: The Ohio Municipal Bond Fund seeks to provide a high
level of current interest income which is exempt from both federal income tax
and Ohio personal income tax.
(1) INVESTMENT POLICIES AND STRATEGY: The Ohio Municipal Bond Fund pursues its
investment objective by investing at least 80% of its total assets in investment
grade obligations. The interest on these obligations is exempt from federal
income taxes, including the federal alternative minimum tax. The Ohio Municipal
Bond Fund expects to invest at least 65% of its total assets in bonds that pay
interest which is also exempt from Ohio state income tax.
Under normal market conditions, the Ohio Municipal Bond Fund invests primarily
in:
o Municipal securities with fixed, variable, or floating interest rates
o Zero coupon, tax, revenue, and bond anticipation notes
o Tax-exempt commercial paper
Important Characteristics of the Ohio Municipal Bond Fund's Investments:
o Quality: Municipal securities rated A or above by S&P, Fitch, Moody's, or
another NRSRO. For more information on ratings, see the Appendix to the
SAI.
o Maturity: The dollar-weighted effective average maturity of the Ohio
Municipal Bond Fund generally will range from 5 to 15 years. Under certain
market conditions, the Portfolio Manager may go outside these boundaries.
Ohio's economic activity includes the service sector, durable goods
manufacturing, and agricultural industries. Manufacturing activity is
concentrated in cyclical industries; therefore, the Ohio economy may be more
cyclical than other states.
(2) RISK: The Ohio Municipal Bond Fund primarily invests in municipal securities
issued by the State of Ohio and its municipalities. The Ohio Municipal Bond Fund
is subject to the risks common to mutual funds that invest in debt securities;
that is, interest-rate risk, credit risk, reinvestment risk, and inflation risk.
It also is subject to the risks common to mutual funds that invest in municipal
debt securities. These include the risk that certain investments could lose
their tax-exempt status. The Ohio Municipal Bond Fund is subject to additional
risks because it concentrates its investments in a single geographic area, and
it may invest more than 5% of its assets in the securities of a single issuer.
This could make the Ohio Municipal Bond Fund more susceptible to economic,
political, or credit risks than a fund that invests in a more diversified
geographic area. The SAI explains the risks specific to investments in Ohio
municipal securities. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT:
Paul A. Toft has served as the Portfolio Manager for all three Funds since
September, 1994. He is a Senior Portfolio Manager and Director of Key Asset
Management Inc., and has been in the investment business since 1986.
12
<PAGE>
OHIO MUNICIPAL BOND FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Ohio Municipal Bond Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A
SHARES
------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.75%
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fee None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will pay as a shareholder of the Ohio Municipal Bond
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE OHIO MUNICIPAL BOND FUND.
Expenses included management fees as well as the costs of maintaining accounts,
administering the Ohio Municipal Bond Fund, providing shareholder services, and
other activities. The expenses shown are estimated based on historical or
projected expenses of the Ohio Municipal Bond Fund.
ANNUAL FUND OPERATING EXPENSES (AFTER EXPENSE WAIVERS AND REIMBURSEMENTS)
(as a percentage of average daily net assets)
CLASS A SHARES
--------------
.46%
Management Fee (1) .44%
Other Expenses (2) ---
.90%
Total Fund Operating Expenses (1) ===
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .60% and Total Fund Operating Expenses would be
1.04%.
(2) Other Expenses include an estimate of the shareholder servicing fees the
Ohio Municipal Bond Fund expects to pay. See "Organization and Management
of the Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Ohio Municipal Bond
Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the Ohio
Municipal Bond Fund: assuming (1) a 5% annual return, and (2) redemption at the
end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A SHARES $56 $75 $95 $153
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
13
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Ohio Municipal Bond Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Ohio Municipal Bond Fund for each of the periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996; periods and by other auditors for all earlier periods. This
information should be read in conjunction with the Ohio Municipal Bond Fund's
most recent Annual Report to shareholders, which is incorporated by reference
into the SAI. If you would like a copy of the Annual Report, write or call the
Ohio Municipal Bond Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing "Total
Return" )
OHIO MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
MAY 18,
YEARS ENDED OCTOBER 31, 1990 TO
---------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990(a)(e)
---- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.32 $10.33 $11.52 $10.52 $10.37 $10.06 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.54 0.52 0.49 0.52 0.60 0.65 0.28
Net realized and unrealized gains
(losses) from investments 0.11 1.00 (0.94) 1.00 0.15 0.31 0.04
- -------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.65 1.52 (0.45) 1.52 0.75 0.96 0.32
- -------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.54) (0.52) (0.49) (0.52) (0.60) (0.65) (0.26)
In excess of net investment income ----- (0.01) ----- ----- ----- ----- -----
Net realized gains ----- ----- (0.25) ----- ----- ----- -----
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.54) (0.53) (0.74) (0.52) (0.60) (0.65) (0.26)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.43 $11.32 $10.33 $11.52 $10.52 $10.37 $10.06
- -------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 5.87% 15.03% (4.08%) 14.75% 7.34% 9.87% 3.27%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period $73,463 $60,031 $57,704 $50,676 $17,676 $8,042 $6,315
Ratio of expenses to average net assets 0.89% 0.66% 0.51% 0.42% 0.09% 0.01% 0.38%(b)
Ratio of net investment income to
average net assets 4.72% 4.78% 4.58% 4.77% 5.76% 6.39% 6.11%(b)
Ratio of expenses to average net assets(d) 1.05% 0.94% 1.09% 0.86% 0.84% 1.17%(b)
Ratio of net investment income to
average net assets(d) 4.56% 4.49% 4.01% 4.33% 5.01% 5.32%(b)
Portfolio turnover 81% 125% 53% 151% 47% 15% 18%
</TABLE>
(a) Period from commencement of operations.
(b) Annualized.
(c) Not annualized.
(d) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(e) This information is not included in the financial statements audited by
Coopers & Lybrand L.L.P.
14
<PAGE>
(1)RISK FACTORS
This prospectus describes some of the risks that you may assume as an investor
in the Funds. By matching your investment objective with a comfortable level of
risk, you can create your own customized investment plan. Some limitations on
the Funds' investments are described in the section that follows. "Other
Securities and Investment Practices" at the end of this Prospectus provides
additional information on the securities mentioned in the overview of each of
the Funds. As with any mutual fund, there is no guarantee that a Fund will earn
income or show a positive total return over time. A Fund's price, yield, and
total return will fluctuate. You may lose money if a Fund's investments do not
perform well. ****It is important to keep in mind one basic principle of
investing: the greater the risk, the greater the potential reward. The reverse
is also generally true: the lower the risk, the lower the potential reward.****
The following risks are common to ALL MUTUAL FUNDS:
o MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price a
Fund originally paid for it, or less than the security was worth at an
earlier time. Market risk may affect a single issuer, an industry, a sector
of the economy, or the entire market and is common to all investments.
o MANAGER RISK is the risk that a Fund's Portfolio Manager may use a strategy
that does not produce the intended result.
The following risks are common to mutual funds that invest in DEBT SECURITIES:
o INTEREST RATE RISK. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a fixed-rate security typically goes down. When interest
rates go down, the value of these securities typically goes up. Generally,
the market values of securities with longer maturities are more sensitive
to changes in interest rates.
o INFLATION RISK is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed rate
debt securities are more susceptible to this risk than floating-rate debt
securities.
o REINVESTMENT RISK is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested at a
lower interest rate. Generally, interest rate risk and reinvestment risk
have offsetting effects.
o CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although
the Funds generally invest in only high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities.
The following risk is common to mutual funds that invest in MUNICIPAL DEBT
o SECURITIES: TAX-EXEMPT STATUS RISK is the risk that a municipal debt
security issued as a tax-exempt security may be declared by the Internal
Revenue Service to be taxable.
The following risk is common to mutual funds that invest in the SECURITIES OF A
SINGLE STATE:
o CONCENTRATION AND DIVERSIFICATION RISK is the risk that only a limited
number of high-quality securities of a particular type may be available.
Concentration and diversification risk is greater for funds that invest
primarily in the securities of a single state.
The following risks are common to mutual funds that invest in MORTGAGE-RELATED
SECURITIES:
o PREPAYMENT RISK. Prepayments of principal of mortgage-related securities
affect the average life of a pool of mortgage-related securities. Mortgage
prepayments are affected by the level of interest rates and other factors.
In periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related securities.
Prepayment risk is the risk that, because prepayments generally occur when
interest rates are falling, a Fund may have to reinvest the proceeds of
prepayments at lower interest rates than those of its previous investments.
o EXTENSION RISK is the risk that anticipated prepayments may not occur
typically because of a rise in interest rates.
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<PAGE>
INVESTMENT LIMITATIONS
****The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.****
To help reduce risk, the Funds have adopted limitations on some investment
policies. These limits involve a Fund's ability to borrow money and the amount
it can invest in various types of securities, including illiquid securities.
Certain limitations can be changed only with the approval of shareholders.
Victory's Board of Trustees can change other investment limitations without
shareholder approval. See "Other Securities and Investment Practices" and the
SAI for more information.
Each Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations). Each Fund limits its
borrowing to 33-1/3% of its total assets (a Fund would borrow by selling a
security that it owns and then repurchasing that security later at a higher
price).
The Funds are not "diversified" according to certain federal securities
provisions regarding diversification of their assets. However, each Fund intends
to comply with certain federal tax requirements regarding the diversification of
its assets. Generally, under those requirements, at least 50% of a Fund's total
assets must be invested so that no more than 5% of the Fund's total assets are
invested in the securities of any one issuer. These diversification provisions
and requirements are discussed in the SAI.
INVESTMENT PERFORMANCE
****Past performance is not a guarantee of future results. You may obtain the
current 30-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 7:00 p.m. Eastern Time Monday
through Friday.****
Victory may advertise the performance of a Fund by comparing it to other mutual
funds with similar objectives and policies. Performance information may also
appear in various publications. Any fees charged by Investment Professionals may
not be reflected in these performance calculations. Performance information is
contained in the annual and semi-annual reports. You may obtain a copy free of
charge by calling 800-KEY-FUND.
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<PAGE>
The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to have the same yield
throughout that year. To calculate 30-day yield, a Fund's net investment income
per share for the most recent 30 days is divided by the maximum offering price
per share for Class A shares. This number is divided by the NAV for Class B
shares.
To calculate "total return," a Fund starts with the total number of shares that
you could buy for $1,000 at the beginning of the period. Then all the additional
shares that you would have purchased within the period are added with reinvested
dividends and distributions (this takes into account the Fund's income, if any).
The number of these shares is multiplied by the net asset value on the last day
of the period and the result is divided by the initial $1,000 investment to
determine the percentage gain or loss. For periods of more than one year, the
cumulative total return is adjusted to get an average annual total return.
o YIELD is a measure of dividend income.
o TAX-EQUIVALENT YIELD shows the yield you would have to earn before taxes to
receive a yield equal to an investment in one of the Funds.
o AVERAGE ANNUAL TOTAL RETURN (OR "ANNUALIZED TOTAL RETURN") is a measure of
past dividend income plus capital appreciation. It is the sum of all parts
of your investment return.
Whenever you see information on the Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.
SHARE PRICE
Each Fund's share price, called its net asset value (NAV), is calculated each
business day (normally at 4:00 p.m. Eastern time). Shares are purchased at the
next share price calculated after your order is received and accepted. A
business day is a day on which the New York Stock Exchange is open for trading
or any day in which enough trading has occurred in the securities held by a Fund
to materially affect the NAV. If your account is established with an Investment
Professional or a bank, you may not be able to purchase or sell shares on other
holidays when the Federal Reserve Bank of Cleveland is closed, but the New York
Stock Exchange is open.
The NAV is calculated by adding up the total value of a Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund:
Total Assets - Liabilities
NAV = -------------------------------------
Number of Shares Outstanding
****The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own, gives you the dollar amount and value of
your investment.****
Each Fund's net asset value can be found daily in The Wall Street Journal and
other newspapers.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES
As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of distributions. Dividend distributions are the net interest earned on
investments. If a Fund makes a capital gain distribution, it usually occurs in
December. As with any investment, you should consider the tax consequences of an
investment in a Fund.
Ordinarily, income earned on securities owned by a Fund accrues daily and is
paid monthly on or around the first business day of the next month. Any capital
gains realized by a Fund are paid at least annually as dividends. The National
Municipal Bond Fund and New York Tax-Free Fund declare and pay dividends
separately for Class A and Class B shares. Shareholders who receive a dividend
check for less than $10.00 will have future dividends reinvested automatically
into their accounts. Distributions can be received in one of the following ways:
o REINVESTMENT OPTION: You can have distributions automatically reinvested in
additional shares of a Fund. If you do not indicate another choice on your
Account Application, this option will be assigned to you automatically.
o CASH OPTION: A check will be mailed to you no later than 7 days after the
pay date.
o INCOME EARNED OPTION: Dividends can be automatically reinvested in a Fund
in which you have invested and your capital gains can be paid in cash, or
capital gains can be reinvested and dividends paid in cash.
o DIRECTED DIVIDENDS OPTION: You can have distributions automatically
reinvested in shares of another fund of the Victory Group. The "Victory
Group" includes other funds of The Victory Portfolios and Key Mutual Funds.
If distributions from Class A shares are reinvested in Class A shares of
another fund, you will not pay a sales charge on the reinvested
distributions.
o DIRECTED BANK ACCOUNT OPTION: In most cases, you can have distributions
automatically transferred to your bank checking or savings account. Under
normal circumstances, dividends will be transferred within 7 days of the
dividend payment date. The bank account must have a registration identical
to that of your Fund account.
****Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you presently use, please
call the Transfer Agent at 800-KEY-FUND.****
****BUYING A DIVIDEND: You should check a Fund's distribution schedule before
you invest. If you buy shares of a fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.****
IMPORTANT INFORMATION ABOUT TAXES: Each Fund intends to qualify as a regulated
investment company, in which case it will pay no federal income tax on the
earnings or capital gains it distributes to shareholders.
o Certain dividends from a Fund will be "exempt-interest dividends," which
are exempt from federal income tax. However, exempt-interest dividends are
not necessarily exempt from state or local taxes.
o Ordinary dividends from a Fund are taxable as ordinary income; dividends
from a Fund's long-term capital gain are taxable as capital gain.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
o Certain dividends paid to you in January may be taxable as if they had been
paid to you December of the previous year.
o You will receive tax statements from the Fund every January showing the
amounts and tax status of distributions made to you.
o Certain dividends from the Ohio Municipal Bond Fund will be exempt from
certain Ohio taxes.
o Certain dividends from the New York Tax-Free Fund will be exempt from
certain New York taxes.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
****THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION.
YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN A FUND.****
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<PAGE>
INVESTING WITH VICTORY
****ALL YOU NEED TO DO TO GET STARTED IS TO FILL OUT AN APPLICATION.****
If you are looking for a convenient way to open an account for yourself or a
minor child, or to add money to an existing account, Victory can help. The
section on "Choosing a Share Class" will help you decide whether it would be
more to your advantage to purchase Class A or Class B shares of a Fund. The
following sections will describe how to access information on your account, how
to open an account, and how to purchase, exchange, and redeem shares of a Fund.
We want to make it simple for you to do business with us. The sections that
follow will serve as a guide to your investments with Victory. If you have
questions about any of this information, please call one of our customer service
representatives at 800-KEY-FUND. They will be happy to assist you.
CHOOSING A SHARE CLASS
The Ohio Municipal Bond Fund offers only Class A shares. The National Municipal
Bond Fund and the New York Tax-Free Fund offer two classes of shares: Class A
and Class B. Each class has its own cost structure, allowing you to choose the
one that best meets your requirements. Your Investment Professional also can
help you decide.
CLASS A
o Front-end sales charges, as described below. There are several ways to
reduce these charges.
o Lower annual expenses than Class B shares.
CLASS B
o No front-end sales charge. All your money goes to work for you immediately.
o Higher annual expenses than Class A shares.
o A deferred sales charge on shares you sell within 6 years of
purchase, as described below.
o Automatic conversion to Class A shares after 8 years, thus
reducing future annual expenses.
****For historical expense information on Class A and B shares, see the
financial highlights in the fund overviews earlier in this prospectus.****
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<PAGE>
CALCULATION OF SALES CHARGES -- CLASS A: Class A shares are sold at their
public offering price, which includes the initial sales charge. The sales charge
as a percentage of your investment decreases as your investment amount
increases. The current sales charge rates and commissions paid to Investment
Professionals are as follows:
` DEALER
SALES CHARGE SALES CHARGE REALLOWANCE
AS A % OF AS A % OF AS A % OF THE
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT OFFERING PRICE
--------------- -------------- --------------- --------------
Up to $50,000 4.75% 4.99% 4.00%
$50,000 up to $100,000 4.50% 4.71% 4.00%
$100,000 up to $250,000 3.50% 3.63% 3.00%
$250,000 up to $500,000 2.25% 2.30% 2.00%
$500,000 up to $1,000,000 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
*There is no initial sales charge on purchases of $1 million or more.
However, a CDSC of up to 1.00% of the purchase price will be charged if
shares are redeemed in the first year after purchase, or at .50% within two
years of the purchase. This charge will be based on either the cost of the
shares or current net asset value, whichever is lower. There will be no
CDSC on reinvested distributions. Investment Professionals may be paid at a
rate of up to 1.00% of the purchase price.
The Distributor reserves the right to reallow the entire commission to
dealers. If that occurs, the dealer may be considered an "underwriter"
under federal securities laws.
****There are several ways you can combine multiple purchases in the
Victory Funds and take advantage of reduced sales charges.****
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES: You may qualify for
reduced sales charges in the following cases:
1. A Letter of Intent lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at one time. You must start with a minimum initial investment of
5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A shares of multiple Victory Funds (excluding the
Money Market Funds) for purposes of calculating the sales charge. The
combination privilege also allows you to combine the total investments from
the accounts of members of your immediate family for a reduced sales charge
at the time of purchase.
4. Waivers for certain investors:
a) Current and retired Fund Trustees, employees, directors, trustees, and
family members of KeyCorp or "Affiliated Providers"* and dealers who
have an agreement with the Distributor and any trade organization to
which the Adviser or the Administrator belong.
b) Investors who purchase shares for non-discretionary trust or other
advisory accounts established with KeyCorp or its affiliates.
c) Investors who reinvest a distribution from a deferred compensation
plan, agency, trust, or custody account that was maintained by the
Victory Group or invested in a fund of the Victory Group.
d) Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales
charge for those shares.
e) Investment Professionals utilizing funds shares in fee-based
investment products under agreement with the Victory Group, and
selling brokers and their sales representatives.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organizations that provide services to Victory and Key Mutual Funds (the
"Victory Group").
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<PAGE>
DEFERRED SALES CHARGES - CLASS B: Shares are offered at their NAV per share,
without an initial sales charge. When you sell the shares within six years of
buying them, there is a contingent deferred sales charge ("CDSC"). The CDSC is
based on the original purchase cost of your investment. ****There is no CDSC on
reinvested dividends.**** The longer the time between the purchase and sale of
shares, the lower the rate of the CDSC.
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
-------------------- -------------------------
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
After 6 Years None
Eight years after Class B shares are purchased, they will automatically convert
to Class A shares. These shareholders are not subject to the asset-based sales
charge that would normally apply, as described in "Distribution Plan for Class B
Shares." Also see the SAI for additional details.
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS B SHARES: The CDSC will be waived
for the following redemptions:
1. Distributions from retirement plans if the distributions are made:
a) under the Systematic Withdrawal Plan after age 59-1/2 for up to 12% of
the account value annually; or
b) following the death or disability of the participant or beneficial
owner;
2. Redemptions from accounts other than retirement accounts following the
death or disability of the shareholder;
3. Returns of excess contributions to retirement plans;
4. Distributions of less than 12% of the annual account value under a
Systematic Withdrawal Plan;
5. Shares sold to the Adviser or its affiliates; and
6. Shares issued in a plan of reorganization sponsored by Victory, or shares
redeemed involuntarily in a similar situation.
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<PAGE>
HOW TO PURCHASE SHARES
Class A and Class B Shares can be purchased in a number of different ways.
****All you need to do to get started is to fill out an application.**** You can
send in your payment by check, wire transfer, exchange from another Victory
Fund, or through arrangements with your Investment Professional. An Investment
Professional is a salesperson, financial planner, investment adviser, or trust
officer who provides you with investment information. Sometimes they will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by a Fund.
MAKE YOUR CHECK PAYABLE TO:
The Victory Funds
Keep the following addresses handy for purchase, exchange, or redemption:
REGULAR U.S. MAIL ADDRESS:
Send completed Account Applications with your check, bank draft or money order
to:
The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
OVERNIGHT MAIL ADDRESS:
Use this address ONLY for overnight packages:
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
WIRE ADDRESS:
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring funds
to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert account number, name, and
control number assigned by the Transfer Agent)
TELEPHONE NUMBER:
800-KEY-FUND 800-539-3863
ACH. After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. The Funds do not currently charge a fee
for ACH transfers; however, the Funds may charge a fee at some future date.
Notification would be sent out prior to implementing a fee.
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<PAGE>
STATEMENTS AND REPORTS. You will receive a periodic statement reflecting any
transactions that affect the balance or registration of your account. You will
receive a confirmation after any purchase, exchange, or redemption. If your
account has been set up by an Investment Professional, account activity will be
detailed in their statements to you. Share certificates are not issued. Twice a
year, you will receive the financial reports of the Funds. By January 31 of each
year, you will receive an IRS Form 1099-DIV, which will also be filed with the
IRS. Form 1099 DIV reports account activity from the previous year.
SYSTEMATIC INVESTMENT PLAN. To enroll in the Systematic Investment Plan, you
should check this box on the Account Application. We will need your bank
information and the amount and frequency of your investment. You can select
monthly, quarterly, semi-annual, or annual investments. You should attach a
voided personal check so the proper information can be obtained. You must first
meet the minimum investment requirement of $500, then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it into shares of a Fund.
RETIREMENT PLANS. You can use the Funds as part of your retirement portfolio.
Your Investment Professional can set up your new account under one of several
tax sheltered plans. Please contact your Investment Professional for details
regarding an IRA or other retirement plan that works best for your financial
situation.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. ****If you
would like to make additional investments after your account is already
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.**** The Transfer Agent may
reject any purchase order, in its sole discretion. If your check is returned for
any reason, you will be charged for any resulting fees and/or losses. Third
party checks will not be accepted. You may only invest or exchange into fund
shares legally available in your state. If your account falls below $500, we may
ask you to re-establish the minimum investment. If you do not do so within 60
days, we may close your account and send you the value of your account.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges. The "Victory Group" includes funds offered as a part of the
Victory Funds and Key Mutual Funds complex. Key Mutual Funds is affiliated with
KeyCorp.
You can exchange shares of the Funds by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Funds, you should keep the
following in mind:
o Shares of the fund selected for exchange must be available for sale in your
state of residence.
o The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
o Shares of the Fund may be exchanged at relative net asset value. This means
that if you own Class A shares of the Fund, you can only exchange them for
Class A shares of another fund. The same rules apply to Class B shares.
o You must meet the minimum purchase requirements for the fund you purchase
by exchange.
o The registration and tax identification numbers of the two accounts must be
identical.
o You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any business day.
o Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
****You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-FUND.****
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<PAGE>
HOW TO REDEEM SHARES
****There are a number of convenient ways to redeem shares of a Fund. You can
use the same mailing and wiring addresses listed for purchases. You will earn
dividends up to and including the date your redemption request is processed.****
BY TELEPHONE. The easiest way to redeem shares is by calling 800-KEY-FUND. When
you fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when you are ready to redeem, call us and tell
us which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via the Automated Clearing House (ACH).
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory nor its servicing agents, the Adviser, nor the Transfer Agent
will be responsible for any losses. If these procedures are not be followed, the
Transfer Agent may be liable to you for losses resulting from unauthorized
instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
BY MAIL. Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
o Redemption's over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o If the redemption proceeds are being transferred to another Victory
Group account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE. If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 4:00 p.m. Eastern time,
your funds will be wired on the next business day.
BY ACH. Normally, your redemption will be processed on the same day or the next
day if received after 4:00 p.m. Eastern Time. It will be transferred by ACH as
long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividends accrued will be included with the redemption proceeds.
SYSTEMATIC WITHDRAWAL PLAN. If you check this box on the Account Application, we
will send monthly, quarterly, semi-annual, or annual payments to you or the
person you designate. The minimum withdrawal is $25, and you must have a balance
of $5,000 or more. Once again, we will need a voided personal check to activate
this feature. You should be aware that your account eventually may be depleted.
However, you cannot automatically close your account using the Systematic
Withdrawal Plan. If your balance falls below $500, we may ask you to bring the
account back to the minimum balance. If you decide not to increase your account
to the minimum balance, your account may be closed and the proceeds mailed to
you.
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<PAGE>
ORGANIZATION AND MANAGEMENT OF THE FUNDS
****We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
service their shareholders. They are paid a fee for their services.****
ABOUT VICTORY:
Each Fund is a member of the Victory Funds, a family of 26 distinct investment
portfolios. Victory has been operating continuously since 1983, and was
organized as a Delaware business trust on February 29, 1996.
The Board of Trustees of Victory has the overall responsibility for the
management of the Funds.
THE INVESTMENT ADVISERS:
One of a Fund's most important contracts is its Advisory Agreement with Key
Asset Management Inc. (KAM or the Adviser), a New York corporation registered as
an investment adviser with the SEC. KAM is a subsidiary of KeyBank National
Association, a wholly-owned subsidiary of KeyCorp. Effective Februrary 28, 1997,
KAM became the surviving corporation after the reorganization of four indirect
investment advisor subsidiaries of KeyCorp. Affiliates of the Adviser manage
approximately $50 billion for a limited number of institutional clients.
The Advisory Agreement allows the Adviser to hire employees of its affilaites as
sub-advisers to the Funds. It also allows KAM to choose brokers or dealers to
handle the purchases and sales of a Fund's securities. Prior to February 28,
1997, KeyCorp Mutual Fund Advisers, Inc. (formerly the Adviser) was the adviser
and Society Asset Management, Inc. was the sub-adviser to each of the Funds.
During the fiscal year ended October 31, 1996 KeyCorp. Mutual Fund Advisers,
Inc. was paid an annual rate based on a percentage of the average daily net
assets of each Fund in advisory fees as follows:
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<PAGE>
National Municipal New York Ohio Municipal
Bond Fund Tax-Free Fund Bond Fund
Advisory Fees 55% .55% .60%
MANAGEMENT OF THE FUNDS
--------------------------------------------------
| |
| TRUSTEES |
| |
| Supervise each Fund's activities. |
| |
--------------------------------------------------
|
|
--------------------------------------------------
| INVESTMENT ADVISER |
| Key Asset Management Inc. |
| 127 Public Square |
| Cleveland, OH 44114 |
| |
| Manages each Fund's business |
| and investment activities. |
---------------------------------------------------
****The Fund is supervised by the Board of Trustees who monitors the services
provided to investors.****
THE ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT:
BISYS Fund Services is the Administrator and Distributor. BISYS is paid a fee of
.15% of the Fund's average daily net assets on a monthly basis as the
Administrator, but does not charge a fee for its services as Distributor. BISYS
Fund Services Ohio, Inc. receives a fee as the Fund Accountant.
The Distributor may provide cash or other compensation to dealers for selling
shares of a Fund. Payments may be in the form of trips, tickets, and/or
merchandise offered through sales contests. It does this at its own expense, and
not at the expense of a Fund or its shareholders.
SHAREHOLDER SERVICING PLAN:
Victory has a Shareholder Servicing Plan for each class of shares of the Fund.
The shareholder servicing agent performs a number of services for its customers
who are shareholders of the Funds. It establishes and maintains accounts and
records, processes dividend and distribution payments, arranges for bank wires,
assists in transactions, and changes account information. For these services a
Fund pays up to .25% of the average daily net assets of a class. The Funds have
agreements with various shareholder servicing agents, including the Distributor,
the Custodian and its affiliates, other financial institutions, and securities
brokers. Shareholder servicing agents may waive all or a portion of their fee
periodically.
26
<PAGE>
DISTRIBUTION PLAN:
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Class A shares of the National Municipal
Bond Fund and the New York Tax-Free Fund. The Class A Shares currently do not
pay direct expenses under this plan.
Victory has adopted a Distribution and Service Plan for Class B Shares of the
National Municipal Bond Fund and the New York Tax-Free Fund. Victory pays the
Distributor an annual asset-based sales charge of 0.75%. The fee is computed on
the average daily net assets of those Funds and paid monthly. The Distributor
pays sales commissions of 4.00% of the purchase price to dealers at the time of
sale. The Distributor then uses the asset-based sales charge to recoup those
sales commissions and the costs for financing them. See the SAI for more details
regarding this plan.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P. serves as independent accountant to the Funds.
LEGAL COUNSEL:
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.
27
<PAGE>
HOW THE FUNDS ARE
ORGANIZED
_______________________
| |
___________________| SHAREHOLDERS |
| | |
| |_____________________|
| |
| |
| |
| |
| ______________________|_______________________
| | FINANCIAL SERVICES FIRMS AND |
| | THEIR INVESTMENT PROFESSIONALS |
| | |
| | Advise current and prospective |
| | shareholders on their fund investments. |
| |_____________________________________________|
| |
| |
| |
| ______________________________________________
| | |
| | TRANSFER AGENT/SERVICING AGENT |
| | State Street Bank and Trust Company |
| | 225 Franklin Street |
| | Boston, MA 02110 |
| | |
| | Boston Financial Data Services |
| | |
|_______| Two Heritage Drive |
| Quincy, MA 02171 |
| |
| Handles services such as record-keeping, |
| statements, processing of buy and |
| sell requests, distribution of dividends, |
| and servicing of shareholder's accounts. |
|_____________________________________________|
|
|
______________________________________ | ____________________________________
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND | | | |
| FUND ACCOUNTANT | | | Key Trust Company of Ohio, N.A. |
| BISYS Fund Services, Inc. and | | | 127 Public Square |
| BISYS Fund Services Ohio, Inc. | | | |
| 3435 Stelzer Road | | | Cleveland, OH 44114 |
| |__|__| |
| Columbus, OH 43219 | | |
| | | |
|Markets the Funds, distributes shares| | Provides for safekeeping of the |
| through investment professionals, | | Funds' investments and cash, and |
| and calculates the value of shares. | |settles trades made by the Funds. |
|_____________________________________| |__________________________________|
28
<PAGE>
ADDITIONAL INFORMATION
****Some additional information you should know about the Funds.****
The Funds offer only the classes of shares described in this prospectus, but at
some future date, the Funds may offer additional classes of shares through a
separate prospectus.
YOUR RIGHTS AS A SHAREHOLDER. All shareholders of each class have equal voting,
liquidation, and other rights. As a shareholder of a Fund, you have rights and
privileges similar to those enjoyed by other corporate shareholders. Delaware
Trust law limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of a Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.
CODE OF ETHICS. Victory and the Adviser have each adopted a Code of Ethics to
which all investment personnel and all other access persons to the Funds must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination.
BANKING LAWS. Banking laws, including the Glass-Steagall Act, prevent a bank
holding company or its affiliates from sponsoring, organizing or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian, or
shareholder servicing agent. They may also purchase shares of such a company for
their customers and pay third parties for performing these functions. Should
these laws change in the future, the Trustees would consider selecting another
qualified firm so that all services would continue.
SHAREHOLDER COMMUNICATIONS. You will receive unaudited Semi-Annual Reports and
audited Annual Reports on a regular basis from each Fund. In addition, you may
also receive updated prospectuses or supplements to this prospectus. In order to
eliminate duplicate mailings to an address at which two or more shareholders
with the same last name reside, the Funds will send only one copy of the above
communications. ****If you would like to receive additional copies of any
materials, please call the Funds at 800-KEY-FUND.****
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
29
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists some of the types of securities each of the Funds may
choose to purchase. The majority of the portfolio for each of the Funds is made
up of general obligation bonds and revenue bonds. However, the Funds are also
permitted to invest in securities as shown in the table below and in the SAI.
For temporary defensive purposes each Fund may hold up to 100% of its total
assets in cash or short-term money market instruments.
% Percentage of total assets.
# No limitation of usage; Fund may be using currently.
~ Indicates a "derivative security," whose value is linked to, or derived
from another security, instrument, or index.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NATIONAL NEW YORK OHIO
MUNICIPAL BOND TAX-FREE MUNICIPAL
LIST OF ALLOWABLE INVESTMENTS IN FUNDS FUND FUND BOND FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE SECURITIES. Payable only from the proceeds of a # # #
specific revenue source, such as the users of a
municipal facility.
GENERAL OBLIGATION SECURITIES. Secured by the issuer's full
faith and credit and taxing power for payment of interest
and principal. # # #
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A security that
is purchased for delivery at a later time. The market value
may change before the delivery date. 33-1/3% 33-1/3% 33-1/3%
ZERO COUPON BONDS. These securities are purchased at a
discount from the face value. The face value is received at
maturity, with no interest payments before then. These may
be subject to greater risks of price fluctuation. # # #
INVESTMENT COMPANY SECURITIES. Shares of other mutual funds 5% 5% 5%
with similar investment objectives, including shares of 3% 3% 3%
Victory money market funds (whose advisory fees are waived). 10% 10% 10%
The following limitations apply: (1) No more than 5% of the
Fund's total assets may be invested in one mutual fund, (2) a
Fund may not own more than 3% of the securities of any one
mutual fund, (3) no more than 10% of the Fund's total assets
in combined mutual fund holdings.
MUNICIPAL LEASE OBLIGATIONS. Issued to acquire land, 30% 30% 30%
equipment, or facilities. They may become taxable if the
lease is assigned. The lease could terminate, resulting in
default.
CERTIFICATES OF PARTICIPATION. General obligation bonds from 20% 20% 20%
which annual lease payments are received.
REFUNDING CONTRACTS. Issued to refinance an issuer's debt. # # #
The Fund buys these at a stated price and yield on a future
settlement date.
TAX, REVENUE, AND BOND ANTICIPATION NOTES. Issued in
expectation of future revenues. # # #
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed
by the U.S. government, its agencies, or instrumentalities.
Some are direct obligations of the U.S. Treasury; others are
obligations only of the U.S. agency. 20% 20% 20%
~VARIABLE & FLOATING RATE SECURITIES. Investment grade # # #
instruments, some of which may be illiquid, with interest
rates that reset periodically.
30
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
NATIONAL NEW YORK OHIO
MUNICIPAL BOND TAX-FREE MUNICIPAL
LIST OF ALLOWABLE INVESTMENTS IN FUNDS FUND FUND BOND FUND
- ------------------------------------------------------------------------------------------------------------------------------------
~MORTGAGE-BACKED SECURITIES, TAX-EXEMPT. Investments secured 35% 35% 35%
by pools of mortgages which are tax-exempt.
o U.S. GOVERNMENT Issued or guaranteed by agencies of the
U.S. Government; i.e., GNMAs, FNMAs, SLMAs.
o NON-U.S. GOVERNMENT. Secured by non-government entities. 50% 50% 50%
RESOURCE RECOVERY BONDS. Issued to build waste-to-energy # # #
facilities and equipment.
TAX PREFERENCE ITEMS. Tax-exempt obligations subject to the 20% 20% 20%
federal "alternative minimum tax."
INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS. 25% 25% 25%
Secured by lease payments made by a corporation, these bonds
are issued for financing large industrial projects; i.e.,
building industrial parks or factories.
COLLATERALIZED MORTGAGE OBLIGATIONS. Debt obligations that 25% 25% 25%
are secured by mortgage-backed certificates. Some are issued
by U.S. government agencies and instrumentalities.
TAX EXEMPT COMMERCIAL PAPER. Short-term obligations that are # # #
exempt from state and federal income tax.
FUTURES CONTRACTS AND OPTIONS. Contracts involving the right 5% 5% 5%
or obligation to deliver or receive assets or money 33-1/3% 33-1/3% 33-1/3%
depending on the performance of one or more assets or an
economic index. The Funds may invest in futures and options
in an effort to hedge against market risk..
REPURCHASE AGREEMENTS. An agreement to purchase a security # # #
at a stated price plus interest that must later be sold back
to the seller at the same price plus interest. The seller's
obligation is secured by collateral.
DEMAND FEATURES, OR "PUTS". Contract for the right to sell a # # #
specified number of shares of a security at a predetermined
price on or before a stated date. Usually the issuer obtains
letters of credit or guarantees from banks as backup.
STAND-BY COMMITMENTS. The right, but not the obligation, to # # #
sell a security during a specific time period at a set
price.
TAXABLE OBLIGATIONS. Only used for temporary investments. 20% 20% 20%
The Fund does not intend to use.
DOLLAR WEIGHTED EFFECTIVE AVERAGE MATURITY. Based on the 5 - 11 5 - 15 5 - 15
value of a fund's investments in securities with different years years years
maturity dates. This measures the sensitivity of a debt
security's value to changes in interest rates. Longer term
debt securities are more volatile than shorter term debt
securities because their values change with interest rate
changes. Therefore, the NAV of a fund with a longer dollar
weighted effective average maturity may fluctuate more.
- --------------------------------------------------------------------------------
</TABLE>
The Funds may also hold cash for temporary defensive purposes. For more
information on ratings and detailed descriptions of each of the above investment
vehicles, see the SAI.
31
<PAGE>
THE VICTORY FUNDS
800-KEY-FUND(R)
OR
800-539-3863
FINANCIAL RESERVES FUND
OHIO MUNICIPAL MONEY MARKET FUND
PRIME OBLIGATIONS FUND
TAX-FREE MONEY MARKET FUND
U.S. GOVERNMENT OBLIGATIONS FUND
PROSPECTUS
MARCH 1, 1997
<PAGE>
TABLE OF CONTENTS PAGE
Introduction 2
AN OVERVIEW OF EACH OF THE FUNDS 4
A fund-by-fund analysis which includes objectives, strategies,
policies, expenses, and financial highlights
Financial Reserves Fund 5
Ohio Municipal Money Market Fund 8
Prime Obligations Fund 12
Tax-Free Money Market Fund 16
U.S. Government Obligations Fund 19
Risk Factors 22
Investment Limitations 22
Investment Performance 23
Share Price 23
Dividends, Distributions, and Taxes 24
INVESTING WITH VICTORY 25
How to Purchase Shares 25
How to Exchange Shares 27
How to Redeem Shares 28
Organization and Management of the Funds 29
Additional Information 33
Other Securities and Investment Practices 34
Key to Fund Information:
(1) Objective and Strategy: The goals and the strategy that a Fund plans to use
in pursuing its investment objective.
(2) Risk Factors: The risks that you may assume as an investor in a Fund.
(3) Expenses: The costs that you will pay as an investor in a Fund, including
sales charges and ongoing expenses.
(4) Financial Highlights: A table which shows a Fund's historical performance.
This table also summarizes previous operating expenses.
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT A FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. SHARES OF THE FUNDS ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYBANK, ANY OF
ITS AFFILIATES, OR ANY OTHER BANK;
o SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
<PAGE>
THE VICTORY PORTFOLIOS
FINANCIAL RESERVES FUND
OHIO MUNICIPAL MONEY MARKET FUND
PRIME OBLIGATIONS FUND
TAX-FREE MONEY MARKET FUND
U.S. GOVERNMENT OBLIGATIONS FUND
800-KEY-FUND OR 800-539-3863
INTRODUCTION
This prospectus describes the following funds:
Financial Reserves Fund
Ohio Municipal Money Market Fund
Prime Obligations Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund
The five Victory Funds (the Funds) discussed in this prospectus are diversified
money market mutual funds, except the Ohio Municipal Money Market Fund, which is
a non-diversified money market mutual fund. All five Funds are a part of The
Victory Portfolios (Victory), an open-end investment management company. This
prospectus explains the objective, policies, risks, and strategies of the Funds.
You should read this prospectus before investing in one of these Funds and keep
it for future reference. A detailed Statement of Additional Information (the
SAI) describing each of the Funds is also available for your review. The SAI has
been filed with the Securities and Exchange Commission (the SEC), and is
incorporated into this prospectus by reference. If you would like a free copy of
the SAI, please request one by calling us at 800-KEY-FUND.
(1)INVESTMENT OBJECTIVE:
The FINANCIAL RESERVES FUND seeks to provide as high a level of current income
as is consistent with preserving capital and providing liquidity.
The OHIO MUNICIPAL MONEY MARKET FUND seeks to provide current income exempt
from federal regular income tax and the personal income taxes imposed by
the State of Ohio and Ohio municipalities consistent with stability of
principal.
The PRIME OBLIGATIONS FUND seeks to provide current income consistent with
liquidity and stability of principal.
The TAX-FREE MONEY MARKET FUND seeks to provide current interest income
free from federal income taxes consistent with relative liquidity and
stability of principal.
The U.S. GOVERNMENT OBLIGATIONS FUND seeks to provide current income consistent
with liquidity and stability of principal.
(1)INVESTMENT STRATEGY:
Each of the Funds pursue its investment objective by investing in a diversified
portfolio of high-quality, short-term U.S. dollar-denominated money market
instruments. However, each of the Funds has unique investment strategies and its
own risk/reward profile. The Funds seek to maintain a constant net asset value
of $1.00 per share, and shares are offered at net asset value. Please review the
section about the Fund in which you are interested in investing and "Other
Securities and Investment Practices" for an overview of the Funds.
2
<PAGE>
(2)RISK FACTORS:
The Funds are not insured by the FDIC, and while each Fund attempts to maintain
a $1.00 per share price, there is no guarantee that it will be able to do so. In
addition, there are other potential risks which are discussed in the section
"Risk Factors."
WHO SHOULD INVEST:
o Investors seeking relative safety and easy access to investments
o Investors with a low risk tolerance
o Investors seeking preservation of capital Investors willing to accept lower
potential returns in return for safety
(3)FEES AND EXPENSES:
NO LOAD or sales commission is charged to investors in the Funds. You will,
however, incur expenses for investment advisory, management, administrative, and
shareholder services, all of which are included in a Fund's expense ratio. The
U.S. Government Obligations Fund offers two classes of shares: Investor Shares
and Select Shares. The Investor Shares are available to certain institutions or
individuals that meet minimum investment requirements, and are not subject to a
shareholder servicing fee. The Select Shares are available to certain
institutions and are subject to a shareholder servicing fee of up to .25% of the
net assets of that class. See "Choosing a Share Class."
PURCHASES:
The minimum initial investment is $500 for most accounts ($250 for Individual
Retirement Accounts) and $25 thereafter. An initial investment must be
accompanied by a Fund's Account Application. Fund shares may be purchased by
check, Automated Clearing House, or wire. See "How to Purchase Shares."
REDEMPTIONS:
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, a Fund will redeem the
shares and credit your bank account or send the proceeds to the address
designated on your account application. See "How to Redeem Shares."
DIVIDENDS/DISTRIBUTIONS:
Income is accrued by each Fund daily and is paid monthly. Any net capital gains
realized by a Fund are paid as dividends annually. A Fund can send your
dividends directly to you by mail, credit them to your bank account, reinvest
them in the Fund, or invest them in another fund of the Victory Group. The
"Victory Group" includes other funds of The Victory Portfolios and Key Mutual
Funds. You can make this choice when you fill out an account application. See
"Dividends, Distributions, and Taxes."
OTHER SERVICES:
Victory offers a number of other services to better serve shareholders including
exchange privileges, automated investment and withdrawal plans, and free check
writing services for certain funds (minimum $100 per check). See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.
3
<PAGE>
AN OVERVIEW OF EACH OF THE FUNDS:
ESTIMATED ANNUAL
EXPENSES AFTER
INCEPTION WAIVERS (AS A % NEWSPAPER
VICTORY FUND DATE OF NET ASSETS) ABBREVIATION*
- --------------------------------------------------------------------------------
Financial Reserves Fund 4/4/83 .65% Victory FRF
Ohio Municipal Money Market Fund 7/3/85 .65% Victory OH
Prime Obligations Fund 11/18/86 .90% Victory PrOb
Tax-Free Money Market Fund 8/24/88 .79% Victory TF
U.S. Government Obligations Fund -
Investor Shares 1/7/97 .60% VictryUSGvI
U.S. Government Obligations Fund -
Select Shares 11/18/86 .85% VictryUSGvS
*All newspapers do not carry the same abbreviation.
The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, risks, expenses, and financial
history to determine which Fund will best suit your risk tolerance and
investment needs. You should also review "Other Securities and Investment
Practices" for additional information about the individual securities in which
the Funds can invest and the risks related to these investments.
4
<PAGE>
FINANCIAL RESERVES FUND
(1)INVESTMENT OBJECTIVE: The Financial Reserves Fund seeks to provide as high a
level of current income as is consistent with preserving capital and providing
liquidity.
(1)INVESTMENT POLICIES AND STRATEGY: The Financial Reserves Fund pursues its
investment objective by investing primarily in a portfolio of high-quality U.S.
dollar-denominated money market instruments.
Under normal market conditions, the Financial Reserves Fund invests primarily
in:
o Negotiable certificates of deposit, time deposits, and bankers' acceptances
of U.S. and foreign banks
o Short-term corporate obligations, such as commercial paper, notes, and
bonds
o Repurchase Agreements
o Reverse Repurchase Agreements
o Other debt obligations such as master demand notes, short-term funding
agreements, Eurodollars, variable and floating rate securities, and private
placement investments
o U.S. Treasury obligations and obligations of government sponsored agencies
such as GNMA, FNMA, SLMA, FFCB, FHL, and FHLMC
o When-issued or delayed-delivery securities
o Eurodollar debt obligations
Important Characteristics of the Financial Reserves Fund's Investments:
o Quality: Normally, the Financial Reserves Fund invests only in instruments
that are rated in the highest category by two or more NRSROs,* or in the
highest category if rated by only one NRSRO, or if unrated, determined to
be of equivalent quality. The Board of Trustees has established policies to
ensure that the Financial Reserves Fund invests in high quality, liquid
instruments. For more information on ratings, see the Appendix to the SAI.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to 397
days.
*An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poors ("S&P"), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
For more information about other securities in which the Financial Reserves Fund
can invest, see "Other Securities and Investment Practices" and the SAI.
The Financial Reserves Fund is only available to certain institutions or
individuals that meet minimum investment requirements and have trust accounts
set up through KeyCorp or its affiliates.
(2)RISK: The Financial Reserves Fund is subject to credit risk, interest rate
risk, inflation risk, liquidity risk, and market risk. PLEASE READ "RISK
FACTORS" CAREFULLY BEFORE INVESTING.
FINANCIAL RESERVES FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Financial Reserves Fund. You will
note in the table that you do not pay fees of any kind when you purchase,
exchange, or redeem shares of the Financial Reserves Fund.
5
<PAGE>
SHAREHOLDER TRANSACTION EXPENSES*
Sales Charge Imposed on Purchases (as a percentage of
the offering price) None
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Financial
Reserves Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE FINANCIAL RESERVES
FUND. Expenses include management fees as well as the costs of maintaining
accounts, administering the Financial Reserves Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical or projected expenses of the Financial Reserves Fund.
ANNUAL FUND OPERATING EXPENSES (AFTER EXPENSE WAIVERS AND REIMBURSEMENTS) (as a
percentage of average daily net assets):
Management Fee(1) .42%
Other Expenses(2) .23%
---
Total Fund Operating Expenses(1) .65%
===
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .50% and Total Fund Operating Expenses would be
.73%.
(2) Other Expenses includes an estimate of the shareholder servicing fees the
Financial Reserves Fund expects to pay. See "Organization and Management of
the Funds--Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Financial Reserves
Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
Financial Reserves Fund, assuming: (1) a 5% annual return, and (2) redemption at
the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
FINANCIAL RESERVES FUND $7 $21 $36 $81
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
6
<PAGE>
(4) FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Financial Reserves Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Financial Reserves Fund for each of the periods indicated.****
The Financial Highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996 periods, and by other auditors for all earlier periods. This
information should be read in conjunction with the Financial Reserves Fund's
most recent Annual Report to shareholders, which is incorporated by reference
into the SAI. If you would like a copy of the Annual Report, write or call the
Financial Reserves Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing total
return)
<TABLE>
FINANCIAL RESERVES FUND
<CAPTION>
Year Ended October 31
-----------------------------------------------------------------------------
1996 1995(c) 1994(b) 1993(a)(b) 1992(a)(b) 1991(a)(b)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Investment Activities
Net investment income 0.049 0.054 0.035 0.03 0.04 0.06
Distributions
Net investment income (0.049) (0.054) (0.035) (0.030) (0.040) (0.060)
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Total Return 5.00% 5.50% 3.57% 2.81% 3.76% 6.28%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $767,990 $762,693 $433,266 $457,872 $523,889 $412,542
Ratio of expenses to average net assets 0.67% 0.60% 0.57% 0.55% 0.55% 0.55%
Ratio of net investment income to average net assets 4.89% 5.40% 3.48% 2.78% 3.67% 6.12%
Ratio of expenses to average net assets(d) 0.75% 0.76% 0.73% 0.70% 0.70% 0.62%
Ratio of net investment income to average net
assets(d) 4.81% 5.24% 3.32% 2.63% 3.52% 6.05%
1990(b) 1989(b) 1988(b) 1987(b) 1986(b)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.000 $1.000 $1.000 $1.000 $1.000
Investment Activities
Net investment income 0.08 0.09 0.07 0.06 0.07
Distributions
Net investment income (0.080) (0.090) (0.070) (0.060) (0.070)
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00
Total Return 8.12% 9.14% 7.13% 6.19% 6.87%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $432,905 $369,582 $409,440 $388,938 $231,823
Ratio of expenses to average net assets 0.55% 0.56% 0.54% 0.56% 0.57%
Ratio of net investment income to average net assets 7.84% 8.77% 6.92% 6.06% 6.55%
Ratio of expenses to average net assets(d)
Ratio of net investment income to average net
assets(d)
</TABLE>
(a) Effective May 16, 1991, Ameritrust Company National Association became
investment adviser to the Fund. Effective March 16, 1992, Ameritrust was
acquired by Society Corporation and merged into Society National Bank, a
wholly-owned subsidiary of Society Corporation, on July 13, 1992. On
January 7, 1993, Society Asset Management, Inc., a wholly-owned subsidiary
of Society Corporation, was named investment adviser to the Fund.
(b) Audited by other auditors. The information for the fiscal year ended
October 31, 1994 was audited by KPMG Peat Marwick LLP, and by Price
Waterhouse LLP for all earlier periods.
(c) Effective June 5, 1995, the Victory Financial Reserves Portfolio became the
Financial Reserves Fund.
(d) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
7
<PAGE>
OHIO MUNICIPAL MONEY MARKET FUND
(1)INVESTMENT OBJECTIVE: The Ohio Municipal Money Market Fund seeks to provide
current income exempt from federal regular income tax and the personal income
taxes imposed by the State of Ohio and Ohio municipalities consistent with
stability of principal.
(1)INVESTMENT POLICIES AND STRATEGY: The Ohio Municipal Money Market Fund
pursues its investment objective by investing at least 80% of its total assets
in short-term Ohio municipal securities. The interest income on these securities
is exempt from federal regular income tax. Federal regular income tax does not
include the individual or corporate federal alternative minimum tax. The Ohio
Municipal Money Market Fund expects to invest at least 65% of its total assets
in debt securities that pay interest which is also exempt from Ohio state income
tax.
Under normal market conditions, the Ohio Municipal Money Market Fund primarily
invests in:
o Short-term municipal obligations, such as commercial paper, notes, and
bonds
o Tax, revenue, and bond anticipation notes
o Variable rate demand notes, municipal bonds, and participation interests in
any of the above obligations
Important Characteristics of the Ohio Municipal Money Market Fund's Investments:
o Quality: Normally, the Ohio Municipal Money Market Fund invests only in
instruments that are rated in the highest category by two or more NRSROs,*
in the highest category if rated by only one NRSRO, or if unrated,
determined to be of equivalent quality. The Board of Trustees has
established policies to ensure that the Ohio Municipal Money Market Fund
invests in high quality, liquid instruments. For more information on
ratings, see the Appendix to the SAI.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to 397
days.
For more information about other securities in which the Ohio Municipal Money
Market Fund can invest, see "Other Securities and Investment Practices" and the
SAI.
*An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poors ("S&P"), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
(2)RISK: The Ohio Municipal Money Market Fund primarily invests in securities
issued by the State of Ohio and its municipalities. This could make the Ohio
Municipal Money Market Fund more susceptible to economic, political, or credit
risks than a fund that invests in a more diversified geographic area. The SAI
explains the risks specific to investments in Ohio securities. A large portion
of the securities held by the Ohio Municipal Money Market Fund are supported by
letters of credit from U.S. or foreign banks. Changes in the credit quality of
other banks could cause losses to the Ohio Municipal Money Market Fund and
affect its share price. The Ohio Municipal Money Market Fund is subject to
credit risk, interest rate risk, inflation risk, liquidity risk, and market
risk. The Ohio Municipal Money Market Fund is also subject to the risks common
to mutual funds that invest in municipal debt securities, i.e., tax-exempt
status risk, concentration, and diversification risk. PLEASE READ "RISK FACTORS"
CAREFULLY BEFORE INVESTING.
8
<PAGE>
OHIO MUNICIPAL MONEY MARKET FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Ohio Municipal Money Market Fund.
You will note in the table that you do not pay fees of any kind when you
purchase, exchange, or redeem shares of the Ohio Municipal Money Market Fund.
SHAREHOLDER TRANSACTION EXPENSES*
Sales Charge Imposed on Purchases (as a percentage of
the offering price) None
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Ohio Municipal
Money Market Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE OHIO MUNICIPAL
MONEY MARKET FUND. Expenses include management fees as well as the costs of
maintaining accounts, administering the Ohio Municipal Money Market Fund,
providing shareholder services, and other activities. The expenses shown are
estimated based on historical or projected expenses of the Ohio Municipal Money
Market Fund.
ANNUAL FUND OPERATING EXPENSES (AFTER EXPENSE WAIVERS AND REIMBURSEMENTS) (as a
percentage of average daily net assets):
Management Fee(1) .20%
Other Expenses(2) .45%
----
Total Fund Operating Expenses(1) .65%
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .50% and Total Fund Operating Expenses would be
.95%.
(2) Other Expenses includes an estimate of the shareholder servicing fees the
Ohio Municipal Money Market Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Ohio Municipal Money
Market Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the Ohio
Municipal Money Market Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
OHIO MUNICIPAL MONEY MARKET FUND $7 $21 $36 $81
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
9
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Ohio Municipal Money Market Fund's
returns and operating expenses over time. This table shows the results of an
investment in one share of the Ohio Municipal Money Market Fund for each of the
periods indicated.****
The Financial Highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996 periods, and by other auditors for all earlier periods. This
information should be read in conjunction with the Ohio Municipal Money Market
Fund's most recent Annual Report to shareholders, which is incorporated by
reference into the SAI. If you would like a copy of the Annual Report, write or
call the Ohio Municipal Money Market Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing total
return)
<TABLE>
OHIO MUNICIPAL MONEY MARKET FUND
<CAPTION>
Year Two Months
Ended Ended
October 31, October 31, Year Ended August 31,
1996 1995 1995(b) 1994(c) 1993(a)(c) 1992(a)(c)
---- ---- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Investment Activities
Net investment income 0.030 0.006 0.033 0.021 0.021 0.031
Distributions
Net investment income (0.030) (0.006) (0.033) (0.021) (0.021) (0.031)
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ======= ======= ======= ======= =======
Total Return 3.11% 0.55%(d) 3.33% 2.10% 2.14% 3.18%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $561,131 $510,632 $502,453 $318,132 $262,681 $252,705
Ratio of expenses to
average net assets 0.67% 0.64%(e) 0.63% 0.65% 0.65% 0.65%
Ratio of net interest income
to average net assets 3.03% 3.31%(e) 3.33% 2.08% 2.12% 3.13%
Ratio of expenses to
average net assets(f) 0.97% 0.92%(e) 0.94% 0.76% 0.72% 0.68%
Ratio of net interest income
to average net assets(f) 2.73% 3.03%(e) 3.02% 1.97% 2.05% 3.10%
1991(a)(c) 1990(c) 1989(c) 1988(c) 1987(c) 1986(c)
------ ------- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Investment Activities
Net investment income 0.046 0.053 0.056 0.044 0.036 0.045
Distributions
Net investment income (0.046) (0.053) (0.056) (0.044) (0.036) (0.045)
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
======= ======= ======= ======= ======= ======
Total Return 4.67% 5.50% 5.76% 4.50% 3.75% 4.60%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $253,177 $297,845 $278,337 $257,002 $223,677 $160,061
Ratio of expenses to
average net assets 0.64% 0.65% 0.65% 0.63% 0.62% 0.63%
Ratio of net interest income
to average net assets 4.59% 5.36% 5.60% 4.41% 3.71% 4.30%
Ratio of expenses to
average net assets(f) 0.66% 0.66% 0.73%
Ratio of net interest income
to average net assets(f) 4.57% 4.38% 4.21%(f)
</TABLE>
(a) Effective February 27, 1991, Ameritrust Company National Association became
investment adviser to the Fund. Effective March 16, 1992, Ameritrust was
acquired by Society Corporation, and merged into Society National Bank, a
wholly-owned subsidiary of Society Corporation on July 13, 1992. Effective
February 3, 1993, Society Asset Management, Inc., a wholly-owned subsidiary
of Society Corporation, was named investment adviser to the Fund.
(b) Effective June 5, 1995, the Victory Ohio Municipal Money Market Portfolio
became the Ohio Municipal Money Market Fund.
(c) Audited by other auditors. The information for the fiscal year ended August
31, 1994 was audited by KPMG Peat Marwick LLP, and by Ernst & Young LLP for
all earlier periods.
(d) Not annualized.
(e) Annualized.
(f) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
10
<PAGE>
PRIME OBLIGATIONS FUND
(1)INVESTMENT OBJECTIVE: The Prime Obligations Fund seeks to provide current
income consistent with liquidity and stability of principal.
(1)INVESTMENT POLICIES AND STRATEGY: The Prime Obligations Fund pursues its
investment objective by investing primarily in short-term, high-quality debt
instruments.
Normally, the Prime Obligations Fund invests only in instruments that are rated
in the highest category by two or more NRSROs,* or in the highest category if
rated by only one NRSRO, or if unrated, determined to be of equivalent quality.
The Board of Trustees has established policies to ensure that the Prime
Obligations Fund invests in high quality, liquid instruments.
Under normal market conditions, the Prime Obligations Fund invests primarily in:
o Negotiable certificates of deposit, time deposits, and bankers' acceptances
of U.S. and foreign banks.
o Short-term corporate obligations, such as commercial paper, notes, and
bonds.
o Repurchase Agreements
o Reverse Repurchase Agreements
o Other debt obligations such as master demand notes, short-term funding
agreements, Eurodollars, variable and floating rate securities, and private
placement investments.
o U.S. Government obligations which may be backed by the creditworthiness of
the issuing agency, such as GNMAs, FNMAs, and SLMAs.
o When-issued or delayed-delivery securities.
Important Characteristics of the Prime Obligations Fund's Investments:
o Quality: Instruments rated A or above by S&P, Fitch, Moody's, or another
NRSRO. For more information on ratings, see the Appendix to the SAI.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to 397
days.
For more information about other securities in which the Prime Obligations Fund
can invest, see "Other Securities and Investment Practices" and the SAI.
*An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poors ("S&P"), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
(2)RISK: The Prime Obligations Fund is subject to credit risk, interest rate
risk, inflation risk, liquidity risk, and market risk. PLEASE READ "RISK
FACTORS" CAREFULLY BEFORE INVESTING.
PRIME OBLIGATIONS FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Prime Obligations Fund. You will
note in the table that you do not pay fees of any kind when you purchase,
exchange, or redeem shares of the Prime Obligations Fund.
11
<PAGE>
SHAREHOLDER TRANSACTION EXPENSES*
Sales Charge Imposed on Purchases (as a percentage of
the offering price) None
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Prime Obligations
Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE PRIME OBLIGATIONS FUND.
Expenses include management fees as well as the costs of maintaining accounts,
administering the Prime Obligations Fund, providing shareholder services, and
other activities. The expenses shown are estimated based on historical or
projected expenses of the Prime Obligations Fund.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Management Fee .35%
Other Expenses(1) .55%
---
Total Fund Operating Expenses .90%
===
(1) Other Expenses includes an estimate of the shareholder servicing fees the
Prime Obligations Fund expects to pay. See "Organization and Management of the
Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Prime Obligations Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
Prime Obligations Fund, assuming: (1) a 5% annual return, and (2) redemption at
the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
PRIME OBLIGATIONS FUND $9 $29 $50 $111
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
12
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Prime Obligations Fund's returns and
operating expenses over time. This table shows the results of an investment in
one share of the Prime Obligations Fund for each of the periods indicated.****
The Financial Highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Prime Obligations Fund's most
recent Annual Report to shareholders, which is incorporated by reference into
the SAI. If you would like a copy of the Annual Report, write or call the Prime
Obligations Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing total
return)
<TABLE>
PRIME OBLIGATIONS FUND
YEAR ENDED OCTOBER 31,
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.047 0.051 0.035 0.030 0.037
Net realized losses from
investment transactions ---- ---- (0.003) ---- ----
------
Total from Investment
Activities 0.047 0.051 0.032 0.030 0.037
Distributions
Net investment income (0.047) (0.051) (0.035) (0.030) (0.037)
------- ------ ------ ------- ------
Capital transactions ---- ---- 0.003(a) -- -- -- --
-------- --------- -- -------- ------ -----
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ========= ========== ========== =========
Total Return 4.81% 5.26% 3.57% 3.05% 3.77%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $496,019 $456,266 $782,303 $720,024 $524,338
Ratio of expenses to average
net assets 0.87% 0.74% 0.62% 0.60% 0.61%
Ratio of net investment income
to average net assets 4.72% 5.09% 3.52% 2.96% 3.68%
Ratio of expenses to average
net assets (c) 0.79%
Ratio of net investment income
to average net assets(c) 3.35%
1991 1990(b) 1989(b)
---- ------- -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.061 0.078 0.087
Net realized losses from
investment transactions ---- ---- ----
Total from Investment
Activities 0.061 0.078 0.087
Distributions
Net investment income (0.061) (0.078) (0.087)
------ ------ ------
Capital transactions ---- ---- ----
---- ---- ----
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000
========= ========= ========
Total Return 6.32% 8.06% 9.02%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $442,263 $444,238 $304,186
Ratio of expenses to average
net assets 0.62% 0.62% 0.61%
Ratio of net investment income
to average net assets 6.14% 7.76% 8.69%
Ratio of expenses to average
net assets (c)
Ratio of net investment income
to average net assets(c)
</TABLE>
(a) During 1994, KeyCorp made a capital contribution of approximately $2,506,000
for losses realized from the disposition of certain securities.
(b) This information is not included in the financial statements audited by
Coopers & Lybrand L.L.P.
(c) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
13
<PAGE>
TAX-FREE MONEY MARKET FUND
(1)INVESTMENT OBJECTIVE: The Tax-Free Money Market Fund seeks to provide current
interest income free from federal income taxes consistent with relative
liquidity and stability of principal.
(1)INVESTMENT POLICIES AND STRATEGY: The Tax-Free Money Market Fund pursues its
investment objective by investing at least 80% of its total assets in
short-term, high-quality municipal securities issued by or on behalf of U.S.
states, territories and possessions. The interest income on these securities is
exempt from federal regular income tax. Federal regular income tax does not
include the individual or corporate federal alternative minimum tax.
Under normal market conditions, the Tax-Free Money Market Fund invests primarily
in:
o General obligation and revenue securities.
o Moral obligation securities and refunded bonds.
o Variable rate demand notes and municipal bonds.
Important Characteristics of the Tax-Free Money Market Fund's Investments:
o Quality: Normally, the Tax-Free Money Market Fund invests only in
instruments that are rated in the highest category by two or more NRSROs,
or in the highest category if rated by only one NRSRO, or if unrated,
determined to be of equivalent quality. The Board of Trustees has
established policies to ensure that the Tax-Free Money Market Fund invests
in high quality, liquid instruments. For more information on ratings, see
the Appendix to the SAI.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to 397
days.
For more information about other securities in which the Tax-Free Money Market
Fund can invest, see "Other Securities and Investment Practices" and the SAI.
(2)RISK: A large portion of the securities held by the Tax-Free Money Market
Fund are supported by letters of credit from U.S. or foreign banks. Changes in
the credit quality of other banks could cause losses to the Tax-Free Money
Market Fund and affect its share price. This Tax-Free Money Market Fund is
subject to credit risk, interest rate risk, inflation risk, liquidity risk, and
market risk. The Tax-Free Money Market Fund is also subject to the risks common
to mutual funds that invest in municipal debt securities, i.e., tax-exempt
status risk. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
TAX-FREE MONEY MARKET FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Tax-Free Money Market Fund. You
will note in the table that you do not pay fees of any kind when you purchase,
exchange, or redeem shares of the Tax-Free Money Market Fund.
SHAREHOLDER TRANSACTION EXPENSES*
Sales Charge Imposed on Purchases (as a percentage of
the offering price) None
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
14
<PAGE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expense table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Tax-Free Money
Market Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE TAX-FREE MONEY MARKET
FUND. Expenses include management fees as well as the costs of maintaining
accounts, administering the Tax-Free Money Market Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical or projected expenses of the Tax-Free Money Market Fund.
ANNUAL FUND OPERATING EXPENSES (as a percentage of average daily net assets)
Management Fee .35%
Other Expenses(1) .44%
----
Total Fund Operating Expenses(1) .79%
====
(1) Other Expenses includes an estimate of shareholder servicing fees the
Tax-Free Money Market Fund expects to pay. See "Organization and Management
of the Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Tax-Free Money Market
Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
Tax-Free Money Market Fund, assuming: (1) a 5% annual return, and (2) redemption
at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
TAX-FREE MONEY MARKET FUND $8 $25 $44 $98
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
15
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Tax-Free Money Market Fund's returns
and operating expenses over time. This table shows the results of an investment
in one share of the Tax-Free Money Market Fund for each of the periods
indicated.****
The Financial Highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Tax-Free Money Market Fund's
most recent Annual Report to shareholders, which is incorporated by reference
into the SAI. If you would like a copy of the Annual Report, write or call the
Tax-Free Money Market Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing total
return).
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET FUND
YEAR ENDED OCTOBER 31,
---------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- ------- -------
Investment Activities
Net investment income 0.030 0.034 0.021 0.020 0.027 0.043
Distributions
Net investment income (0.030) (0.034) (0.021) (0.020) (0.027) (0.043)
------- ------- ------- ------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= ======= =======
Total Return 3.04% 3.42% 2.17% 2.06% 2.77% 4.44%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (000) $344,796 $307,726 $198,561 $189,351 $151,012 $129,601
Ratio of expenses to average
net assets 0.78% 0.61% 0.60% 0.59% 0.61% 0.62%
Ratio of net investment
income to average
net assets 2.97% 3.36% 2.14% 2.04% 2.70% 4.29%
Ratio of expenses to average
net assets(a) 0.80% 0.62% 0.79% 0.60%
Ratio of net investment
income to average
net assets(a) 2.95% 3.35% 1.95% 2.02%
YEAR ENDED OCTOBER 31,
---------------------
1990 1989
---- ----
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.000 $ 1.000
------- -------
Investment Activities
Net investment income 0.054 0.059
Distributions
Net investment income (0.054) (0.059)
------- -------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000
======= =======
Total Return 5.48% 6.04%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (000) $134,652 $85,556
Ratio of expenses to average
net assets 0.63% 0.58%
Ratio of net investment
income to average
net assets 5.32% 5.88%
Ratio of expenses to average
net assets(a) 0.67%
Ratio of net investment
income to average
net assets(a) 5.79%
</TABLE>
(a) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
16
<PAGE>
U.S. GOVERNMENT OBLIGATIONS FUND
(1)INVESTMENT OBJECTIVE: The U.S. Government Obligations Fund seeks to provide
current income consistent with liquidity and stability of principal.
(1)INVESTMENT POLICIES AND STRATEGY: The U.S. Government Obligations Fund
pursues its investment objective by investing only in short-term U.S. Government
securities backed by the full faith and credit of the U.S. Treasury, and
repurchase agreements collaterilized by these securities.
Under normal market conditions, the U.S. Government Obligations Fund invests
primarily in:
o U.S. Treasury bills, notes, and other obligations issued or guaranteed by
the U.S. Government.
o Repurchase Agreements
o Reverse Repurchase Agreements
Important Characteristics of the U.S. Government Obligations Fund's Investments:
o Quality: Instruments issued by the U.S. Treasury are of the highest
quality, since they are backed by the U.S. Government.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to 397
days.
For more information about other securities in which the U.S. Government
Obligations Fund can invest, see "Other Securities and Investment Practices" and
the SAI.
(2)RISK: The U.S. Government Obligations Fund is subject to credit risk,
interest rate risk, inflation risk, liquidity risk, and market risk. PLEASE READ
"RISK FACTORS" CAREFULLY BEFORE INVESTING.
U.S. GOVERNMENT OBLIGATIONS FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the U.S. Government Obligations Fund.
You will note in the table that you do not pay fees of any kind when you
purchase, exchange, or redeem shares of the U.S. Government Obligations Fund.
INVESTOR SELECT
SHAREHOLDER TRANSACTION EXPENSES* SHARES SHARES
------ ------
Sales Charge Imposed on Purchases None None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None None
Redemption Fees None None
Exchange Fees None None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the U.S. Government
Obligations Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE U.S. GOVERNMENT
OBLIGATIONS FUND. Expenses include management fees as well as the costs of
maintaining accounts, administering the U.S. Government Obligations Fund,
providing
17
<PAGE>
shareholder services, and other activities. The expenses shown are estimated
based on historical or projected expenses of the U.S. Government Obligations
Fund.
INVESTOR SELECT
ANNUAL FUND OPERATING EXPENSES SHARES SHARES
(as a percentage of average daily net assets)
Management Fee .35% .35%
Other Expenses .25% .50%(1)
---- ----
Total Fund Operating Expenses .60% .85%(1)
==== ====
(1) Other Expenses includes an estimate of shareholder servicing fees the U.S.
Government Obligations Fund expects to pay. See "Organization and Management of
the Funds -- Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the U.S. Government
Obligations Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the U.S.
Government Obligations Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
INVESTOR SHARES $6 $19 $33 $75
SELECT SHARES $9 $27 $47 $105
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
18
<PAGE>
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the U.S. Government Obligations Fund's
returns and operating expenses over time. This table shows the results of an
investment in one share of the U.S. Government Obligations Fund for each of the
periods indicated.****
The financial highlights were audited by Coopers & Lybrand L.L.P. There is no
information on Investor Shares, since they were not sold prior to February 1,
1997. This information should be read in conjunction with the U.S. Government
Obligations Fund's most recent Annual Report to shareholders, which is
incorporated by reference into the SAI. If you would like a copy of the Annual
Report, write or call the U.S. Government Obligations Fund at 800-KEY-FUND.
Variability, as shown by year-to-year total return: (Insert chart showing total
return)
<TABLE>
U.S. GOVERNMENT OBLIGATIONS FUND
SELECT SHARES
<CAPTION>
Year Ended October 31,
1996 1995(b) 1994 1993 1992 1991
---- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- --------
Investment Activities
Net investment income 0.049 0.052 0.032 0.026 0.036 0.060
Distributions
Net investment income (0.049) (0.052) (0.032) (0.026) (0.036) (0.060)
------ ------ ------- ------ -------- --------
NET ASSET VALUE, END
OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ========
Total Return 4.96% 5.38% 3.30% 2.62% 3.66% 6.14%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (000) $1,357,817 $964,929 $412,048 $515,734 $579,836 $430,248
Ratio of expenses to
average net assets 0.61% 0.58% 0.63% 0.60% 0.60% 0.60%
Ratio of net investment
income to average
net assets 4.84% 5.28% 3.20% 2.57% 3.50% 5.92%
Ratio of expenses to
average net assets(a) 0.60% 0.80%
Ratio of net investment
income to average
net assets(a) 5.26% 3.03%
Year Ended October 31,
1990(c) 1989(c)
------- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.000 $ 1.000
-------- --------
Investment Activities
Net investment income 0.076 0.081
Distributions
Net investment income (0.076) (0.081)
-------- --------
NET ASSET VALUE, END
OF PERIOD $ 1.000 $ 1.000
======== ========
Total Return 7.83% 8.44%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (000) $376,021 $152,718
Ratio of expenses to
average net assets 0.62% 0.62%
Ratio of net investment
income to average
net assets 7.56% 8.16%
Ratio of expenses to
average net assets(a)
Ratio of net investment
income to average
net assets(a)
</TABLE>
(a) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(b) Effective June 5, 1995, the Victory U.S. Treasury Money Market Portfolio
merged into the U.S. Government Obligations Fund. Financial highlights for
the periods prior to June 5, 1995 represent the U.S. Government Obligations
Fund.
(c) This information is not included in the financial statements audited by
Coopers & Lybrand L.L.P.
19
<PAGE>
(2) RISK FACTORS
This prospectus describes some of the risks that you may assume as an investor
in the Funds. By matching your investment objective with a comfortable level of
risk you can create your own customized investment plan. Some limitations on the
Funds' investments are described in the section that follows. "Other Securities
and Investment Practices" at the end of this prospectus provides additional
information about the securities mentioned in the overview of each of the Funds.
As with any mutual fund, there is no guarantee that a Fund will earn income or
show a positive total return over time. ****It is important to keep in mind one
basic principle of investing: the greater the risk, the greater the potential
reward. The reverse is also generally true: the lower the risk, the lower the
potential reward.**** Over time, money market mutual funds have offered
investors the least amount of principal risk; therefore, the potential return
usually is lower than for other types of investments.
The following risks are common to all MUTUAL FUNDS:
o MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price a
Fund originally paid for it, or less than the security was worth at an
earlier time. Market risk may affect a single issuer, an industry, a sector
of the economy, or the entire market, and is common to all investments.
The following risks are common to all MONEY MARKET MUTUAL FUNDS:
o INTEREST RATE RISK. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a fixed-rate security typically goes down. When interest
rates go down, the value of these securities typically goes up. Generally,
the market values of securities with longer maturities are more sensitive
to changes in interest rates.
o CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although
the Funds generally invest in only high-quality securities, the interest or
principal payments are not insured or guaranteed.
o INFLATION RISK is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities.
The following risk is common to mutual funds that invest in MUNICIPAL DEBT
SECURITIES:
o TAX-EXEMPT STATUS RISK is the risk that a municipal debt security issued as
a tax-exempt security may be declared by the Internal Revenue Service to be
taxable.
The following risk is common to mutual funds that invest in the SECURITIES OF A
SINGLE STATE:
o CONCENTRATION AND DIVERSIFICATION RISK is the risk that only a limited
number of high-quality securities of a particular type may be available.
Concentration and diversification risk is greater for Funds that invest
primarily in the securities of a single state.
INVESTMENT LIMITATIONS
****The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.****
To help reduce risk and maintain its $1.00 per share price, the Funds have
adopted limitations on some investment policies. These limits involve a Fund's
ability to borrow money and the amount it can invest in various types of
securities, including illiquid securities. Certain limitations can be changed
only with
20
<PAGE>
the approval of shareholders. Victory's Board of Trustees can change
other investment limitations without shareholder approval.
See "Other Securities and Investment Practices" and the SAI for more
information.
Each Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations and U.S. banks). Each
Fund limits its borrowing to 33-1/3% of its total assets (a Fund would borrow by
selling a security that it owns and then repurchasing that security later at a
higher price).
Each Fund, except the Ohio Municipal Money Market Fund, is "diversified"
according to certain federal securities provisions regarding the diversification
of its assets. Generally, under those provisions, at least 75% of a Fund's total
assets must be invested so that no more than 5% of the Fund's total assets are
invested in the securities of any one issuer. Each Fund, including the Ohio
Municipal Money Market Fund, intends to comply with certain federal tax
requirements regarding the diversification of its assets. Generally, under those
requirements, at least 50% of a Fund's total assets must be invested so that no
more than 5% of the Fund's total assets are invested in the securities of any
one issuer. Each Fund also intends to comply with certain more stringent federal
securities diversification provisions for money market funds. These
diversification requirements are discussed in the SAI.
INVESTMENT PERFORMANCE
Victory may advertise the performance of a Fund by comparing it to other mutual
funds with similar objectives and policies. Performance information may also
appear in various publications. Any fees charged by Investment Professionals may
not be reflected in these performance calculations. Performance information is
contained in the annual and semi-annual reports. You may obtain a copy free of
charge by calling 800-KEY-FUND. ****Past performance is not a guarantee of
future results. You may obtain the current 7-day yield by calling 800-KEY-FUND.
Our Shareholder Servicing representatives are available from 8:00 a.m. to 7:00
p.m. Eastern Time Monday through Friday.****
The "7-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to have the same yield
throughout that year. To calculate 7-day yield, net investment income per share
for the most recent 7 days is multiplied by 52 (52 weeks/year), then divided by
the NAV ($1.00) to get a percentage, which is the 7-day yield.
o YIELD is a measure of dividend income.
o EFFECTIVE YIELD is similar to yield, except it is assumed that dividends
are reinvested and compounded.
o TAX-EQUIVALENT YIELD shows the yield you would have to earn before taxes to
receive a yield equal to an investment in one of the tax-free funds.
o AVERAGE ANNUAL TOTAL RETURN (OR "ANNUALIZED TOTAL RETURN") is a measure of
past dividend income plus capital appreciation. It is the sum of all parts
of your investment return.
Whenever you see information on a Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.
SHARE PRICE
Each Fund's share price, called its net asset value (NAV), is calculated
each business day (normally at 2:00 p.m. Eastern time). The Ohio Municipal Money
Market Fund's NAV is normally calculated at
21
<PAGE>
12:00 p.m. Eastern time. Shares are purchased at the next share price calculated
after your investment is received and accepted. A business day is a day on which
the New York Stock Exchange and the Federal Reserve Bank of Cleveland are open
for trading or any day in which enough trading has occurred in the securities
held by a Fund to materially affect the NAV. If your account is established with
an Investment Professional or a bank, you may not be able to purchase or sell
shares on other holidays when the Federal Reserve Bank of Cleveland is closed,
even though the New York Stock Exchange is open.
The NAV is calculated by adding up the total value of a Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund.
Total Assets - Liabilities
NAV = -------------------------------------
Number of Shares Outstanding
Since the Fund seeks to maintain a $1.00 NAV, an accounting system called the
"Amortized Cost Method" is used to value individual holdings. This system is
described in the SAI.
Each Fund's performance can be found once a week in The Wall Street Journal and
other newspapers.
****The values of the securities each Fund holds are computed every day.****
DIVIDENDS, DISTRIBUTIONS, AND TAXES
As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of distributions. Dividend distributions are the interest earned on
investments. Money market funds usually don't distribute capital gains; however,
if a Fund does make a distribution, it usually occurs in December. As with any
investment, you should consider the tax consequences of an investment in a Fund.
Ordinarily, income earned on securities owned by the Fund accrues daily and is
paid monthly on or around the first business day of the next month. Shareholders
who receive a dividend check for less than $10.00 will have future dividends
reinvested automatically into their accounts. Distributions can be received in
one of the following ways:
o REINVESTMENT OPTION: You can have distributions automatically reinvested in
additional shares of a Fund. If you do not indicate another choice on your
Account Application, this option will be assigned to you automatically.
o CASH OPTION: A check will be mailed to you no later than 7 days after the
pay date.
o DIRECTED DIVIDENDS OPTION: You can have distributions automatically
reinvested in shares of another fund of the Victory Group. The "Victory
Group" includes other funds of The Victory Portfolios and Key Mutual Funds.
If distributions are reinvested in a different class of another fund, you
may pay a sales charge on the reinvested distributions.
o DIRECTED BANK ACCOUNT OPTION: In most cases, you can have distributions
automatically transferred to your bank checking or savings account. Under
normal circumstances, a dividend will be transferred within 7 days of the
dividend payment date. The bank account must have a registration identical
to that of your Fund account.
****Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you presently use, please
call the Transfer Agent at 800-KEY-FUND.****
22
<PAGE>
IMPORTANT INFORMATION ABOUT TAXES:
Each Fund intends to qualify as a regulated investment company, in which case it
pays no federal income tax on the earnings or capital gains it distributes to
its shareholders.
o Dividends from a Fund's long-term capital gain are taxable as capital gain;
dividends from other sources are generally taxable as ordinary income.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you in December of the previous year.
o When you sell (redeem) or exchange shares of a Fund, you must recognize any
gain or loss. However, as long as the Fund's NAV per share does not deviate
from $1.00, there will be no gain or loss.
o You will receive tax statements from the Fund every January showing the
amounts and tax status of distributions made to you.
o Certain dividends from the Ohio Municipal Money Market Fund will be exempt
from certain Ohio taxes.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
****THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION.
YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN A FUND.****
INVESTING WITH VICTORY
****All you need to do to get started is to fill out an application.****
If you are looking for a convenient way to open an account for yourself or to
add money to an existing account, Victory can help. The following sections will
describe how to access information on your account, how to open an account, and
how to purchase, exchange, and redeem shares of a Fund. We want to make it
simple for you to do business with us. The sections that follow will serve as a
guide to your investments with Victory. If you have questions about any of this
information, please call one of our customer service representatives at
800-KEY-FUND. They will be happy to assist you.
HOW TO PURCHASE SHARES
Shares of the Funds can be purchased in a number of different ways. All you need
to do to get started is to fill out an application. You can send in your payment
by check, wire transfer, exchange from another Victory Fund, or through
arrangements with your Investment Professional. An Investment Professional is a
salesperson, financial planner, investment adviser, or trust officer who
provides you with investment information. Sometimes they will charge you for
these services. Their fee will be in addition to, and unrelated to, the fees and
expenses charged by a Fund. ****When you buy shares of a Fund, your cost will be
$1.00 per share.****
The Financial Reserves Fund is only available to certain institutions or
individuals that meet minimum investment requirements and have trust accounts
set up through KeyCorp or its affiliates. The U.S. Government
23
<PAGE>
Obligations Fund offers Investor Shares and Select Shares. The Investor Shares
are available to certain institutions or individuals that meet minimum
investment requirements, and are not subject to a shareholder servicing fee. The
Select Shares are available to certain institutions who are subject to a
shareholder servicing fee of up to .25% of the net assets of that class.
MAKE YOUR CHECK PAYABLE TO:
The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
REGULAR U.S. MAIL ADDRESS:
Send completed Account Applications with your check, bank draft, or money order
to:
The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
OVERNIGHT MAIL ADDRESS:
Use the following address ONLY for overnight packages:
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
WIRE ADDRESS:
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring funds
to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert account number, name, and
control number assigned by the Transfer Agent)
****TELEPHONE NUMBER:
800-KEY-FUND
800-539-3863****
ACH. After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. The Funds do not currently charge a fee
for ACH transfers; however, the Funds may charge a fee at some future date.
Notification would be sent out prior to implementing a fee.
STATEMENTS AND REPORTS. You will receive a periodic statement reflecting any
transactions that affect the balance or registration of your account. You will
receive a confirmation after any purchase, exchange, or redemption. If your
account has been set up by an Investment Professional, account activity will be
detailed in their statements to you. Share certificates are not issued. Twice a
year, you will receive the financial reports of the Funds. By January 31 of each
year, you will receive an IRS Form
24
<PAGE>
1099-DIV, which will also be filed with the IRS. Form 1099-DIV reports account
activities from the previous year.
SYSTEMATIC INVESTMENT PLAN. To enroll in the Systematic Investment Plan, you
should check this box on the Account Application. We will need your bank
information and the amount and frequency of your investment. You can select
monthly, quarterly, semi-annual, or annual investments. You should attach a
voided personal check so the proper information can be obtained. You must first
meet the minimum investment requirement of $500, then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it into shares of a Fund.
RETIREMENT PLANS. You can use the Funds as part of your retirement portfolio.
Your Investment Professional can set up your new account under one of several
tax sheltered plans. Please contact your Investment Professional for details
regarding an IRA or other retirement plan that works best for your financial
situation.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order, in its sole discretion. If your check is
returned for any reason, you will be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only invest or exchange
into fund shares legally available in your state. If your account falls below
$500, we may ask you to re-establish the minimum investment. If you do not do so
within 60 days, we may close your account and send you the value of your
account.
****If you would like to make additional investments after your account is
already established, use the Investment Stub attached to your confirmation
statement and send it with your check to the address indicated.****
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges. (See the more complete explanation below.) The "Victory Group"
includes funds offered as a part of the Victory Funds and Key Mutual Funds
complex. Key Mutual Funds is affiliated with KeyCorp.
You can exchange shares of a Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of a Fund, you should keep the following
in mind.
o Shares of the fund selected for exchange must be available for sale in your
state of residence.
o The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
o Shares of the Funds may be exchanged at relative net asset value. This
means that if you exchange into a fund with a sales charge, you pay the
percentage-point difference between that fund's sales charge and any sales
charge you have previously paid in connection with the shares you are
exchanging. Since the money market funds do not have a sales charge, if you
were to purchase another fund in the Victory Group that has a 4.75% sales
charge, you would pay the 4.75% sales charge. o You must meet the minimum
purchase requirements for the fund you purchase
by exchange. The registration and tax identification numbers of the two
accounts must be identical.
o You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any business day.
25
<PAGE>
o Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
****You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-FUND.****
HOW TO REDEEM SHARES
****There are a number of convenient ways to redeem shares of a Fund. You can
use the same mailing and wiring addresses listed for purchases. You will earn
dividends up to and including the date your redemption request is processed.****
BY TELEPHONE. The easiest way to redeem shares is by calling 800-KEY-FUND. When
you fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when you are ready to redeem, call us and tell
us which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via the ACH.
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory nor its servicing agents, the Adviser, nor the Transfer Agent
will be responsible for any losses. If these procedures are not followed, the
Transfer Agent may be liable to your for losses resulting from unauthorized
instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
BY MAIL. Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE. If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 2:00 p.m. Eastern time,
your funds will be wired on the same business day.
BY ACH. Normally, your redemption will be processed on the same day or the next
day if received after 2:00 p.m. Eastern Time. It will be transferred by ACH as
long as the transfer is to a domestic bank.
26
<PAGE>
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividends accrued will be included with the redemption proceeds.
CHECK WRITING. Shareholders of the following funds may withdraw funds by writing
a check for $100.00 or more:
Ohio Municipal Money Market Fund
Prime Obligations Fund
Tax-Free Money Market Fund
U.S. Government Obligations - Select Shares
In order to activate the check writing option on your account, you must sign a
signature card. After your completed signature card is received, an initial
supply of checks will be mailed to you. There is no charge for checks; however,
you will be charged for stopping payment of a check or for insufficient funds.
You may not close your account by writing a check. Please call 800-KEY-FUND to
request a signature card.
SYSTEMATIC WITHDRAWAL PLAN. If you check this box on the Account Application, we
will send monthly, quarterly, semi-annual, or annual payments to you or the
person you designate. The minimum withdrawal is $25, and you must have a balance
of $5,000 or more. Once again, we will need a voided personal check to activate
this feature. You should be aware that your account eventually may be depleted.
However, you cannot automatically close your account using the Systematic
Withdrawal Plan. If your balance falls before $500, we may ask you to bring the
account back to the minimum balance. If you decide not to increase your account
to the minimum balance, your account may be closed and the proceeds mailed to
you.
ORGANIZATION AND MANAGEMENT OF THE FUNDS
****We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
service their shareholders. They are paid a fee for their services.****
ABOUT VICTORY:
Each Fund is a member of the Victory Funds, a family of 26 distinct investment
portfolios. Victory has been operating continuously since 1983, and was
organized as a Delaware business trust on February 29, 1996.
The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders
THE INVESTMENT ADVISERS:
One of a Fund's most important contracts is its Advisory Agreement with Key
Asset Management Inc. (KAM or the Adviser), a New York Corporation registered as
an investment adviser with the SEC. KAM is a subsidiary of KeyBank National
Association, a wholly-owned subsidiary of KeyCorp. Effective February 28, 1997,
KAM became the surviving corporation after the reorganization of four indirect
investment adviser subsidiaries of Key Corp. Affiliates of the Adviser manage
approximately $50 billion for a limited number of institutional clients.
The Advisory Agreement allows the Adviser to hire employees of its affiliates as
subadvisers to the Funds. It also allows KAM to choose brokers or dealers to
handle the purchases and sales of a Fund's securities. Prior to February 28,
1997, KeyCorp Mutual Fund Advisers, Inc. was
27
<PAGE>
the adviser and Society Asset Management, Inc. was the sub-adviser to each of
the Funds. During the fiscal year ended October 31, 1996, KeyCorp Mutual Fund
Advisers, Inc. was paid an annual rate based on a percentage of the average
daily net assets of each Fund in advisory fees as follows:
<TABLE>
<CAPTION>
Financial Reserves Ohio Municipal Money Prime Obligations Tax-Free Money Market U.S. Government
Fund Market Fund Fund Fund Obligations Fund
<S> <C> <C> <C> <C> <C>
Advisory Fees .50% .50% .35% .35% .35%
</TABLE>
MANAGEMENT OF THE FUNDS
--------------------------------------------------
| |
| TRUSTEES |
| |
| Supervise each Fund's activities. |
| |
--------------------------------------------------
|
|
--------------------------------------------------
| INVESTMENT ADVISER |
| Key Asset Management Inc. |
| 127 Public Square |
| Cleveland, OH 44114 |
| |
| Manages each Fund's business |
| and investment activities. |
---------------------------------------------------
THE ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT:
BISYS Fund Services is the Administrator and the Distributor. BISYS is paid a
fee of .15% of the Funds average daily net assets on a monthly basis as the
Administrator, but does not charge a fee for its services as Distributor. BISYS
Fund Services Ohio, Inc. receives a fee as the Fund Accountant.
The Distributor may provide cash or other compensation to dealers for selling
Select shares of the Funds. Payments may be in the form of trips, tickets,
and/or merchandise offered through sales contests. It does this at its own
expense, and not at the expense of the Fund or their shareholders.
SHAREHOLDER SERVICING - SELECT SHARES:
Victory has a Shareholder Servicing Plan for the Select Shares class of the U.S.
Government Obligations Fund. The shareholder servicing agent performs a number
of services. It establishes and maintains accounts and records, processes
dividend and distribution payments, arranges for bank wires, assists in
transactions, and changes account information. For these services the U.S.
Government Obligations Fund pays up to .25% of the average daily net assets of
the Select class. The U.S. Government Obligations Fund has agreements with
various shareholder servicing agents, including the Distributor, the Custodian
and its affiliates, other financial institutions, and securities brokers.
Shareholder servicing agents may waive all or a portion of their fee
periodically.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P. serves as independent accountant to the Funds.
28
<PAGE>
LEGAL COUNSEL:
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.
29
<PAGE>
HOW THE FUNDS ARE
ORGANIZED
_______________________
| |
___________________| SHAREHOLDERS |
| | |
| |_____________________|
| |
| |
| |
| |
| ______________________|_______________________
| | FINANCIAL SERVICES FIRMS AND |
| | THEIR INVESTMENT PROFESSIONALS |
| | |
| | Advise current and prospective |
| | shareholders on their fund investments. |
| |_____________________________________________|
| |
| |
| |
| ______________________________________________
| | |
| | TRANSFER AGENT/SERVICING AGENT |
| | State Street Bank and Trust Company |
| | 225 Franklin Street |
| | Boston, MA 02110 |
| | |
| | Boston Financial Data Services |
| | |
|_______| Two Heritage Drive |
| Quincy, MA 02171 |
| |
| Handles services such as record-keeping, |
| statements, processing of buy and |
| sell requests, distribution of dividends, |
| and servicing of shareholder's accounts. |
|_____________________________________________|
|
|
______________________________________ | ____________________________________
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND | | | |
| FUND ACCOUNTANT | | | Key Trust Company of Ohio, N.A. |
| BISYS Fund Services, Inc. and | | | 127 Public Square |
| BISYS Fund Services Ohio, Inc. | | | |
| 3435 Stelzer Road | | | Cleveland, OH 44114 |
| |__|__| |
| Columbus, OH 43219 | | |
| | | |
|Markets the Funds, distributes shares| | Provides for safekeeping of the |
| through investment professionals, | | Funds' investments and cash, and |
| and calculates the value of shares. | |settles trades made by the Funds. |
|_____________________________________| |__________________________________|
30
<PAGE>
ADDITIONAL INFORMATION
****Some additional information you should know about the Funds.****
The Funds offer only the classes of shares described in this prospectus, but at
some future date, the Funds may offer additional classes of shares through a
separate prospectus.
YOUR RIGHTS AS A SHAREHOLDER. All shareholders of each class have equal voting,
liquidation, and other rights. As a shareholder of a Fund, you have rights and
privileges similar to those enjoyed by other corporate shareholders. Delaware
Trust law limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of a Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.
CODE OF ETHICS. Victory and the Adviser have each adopted a Code of Ethics to
which all investment personnel and all other access persons to each Fund must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination.
BANKING LAWS. Banking laws, including the Glass-Steagall Act, prevent a bank
holding company or its affiliates from sponsoring, organizing or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian, or
shareholder servicing agent. They may also purchase shares of such a company for
their customers and pay third parties for performing these functions. Should
these laws change in the future, the Trustees would consider selecting another
qualified firm so that all services would continue.
SHAREHOLDER COMMUNICATIONS. You will receive unaudited Semi-Annual Reports and
audited Annual Reports on a regular basis from each Fund. In addition, you may
also receive updated prospectuses or supplements to this Prospectus. In order to
eliminate duplicate mailings to an address at which two or more shareholders
with the same last name reside, the Funds will send only one copy of the above
communications. ****If you would like to receive additional copies of any
materials, please call the Funds at 800-KEY-FUND.****
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
31
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists some of the types of securities each of the Funds may
choose to purchase. The majority of the portfolio for each of the Funds other
than the tax-exempt Funds is made up of repurchase agreements, short-term debt
obligations, and U.S. Government obligations, while the tax-exempt Funds are
made up of municipal securities. However, the Funds are also permitted to invest
in other securities as shown in the table below. For temporary defensive
purposes, each Fund may hold up to 100% of its total assets in cash or
short-term money market instruments. For more information on ratings and
detailed descriptions of each of the investments below, see the SAI.
% Percent of TOTAL assets
# No limitation of usage; Fund may be using currently
~ Indicates a "derivative security," whose value is linked to or
derived from another security, instrument, or index.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FINANCIAL OHIO MUNICIPAL PRIME TAX-FREE U.S. GOVERNMENT
LIST OF ALLOWABLE INVESTMENTS IN THE FUNDS RESERVES MONEY MARKET OBLIGATIONS MONEY MARKET OBLIGATIONS
FUND FUND FUND FUND FUND
COMMERCIAL PAPER. Short-term obligations # # # # none
issued by banks, corporations, broker
dealers and other entities to finance
their current operations.
REPURCHASE AGREEMENTS. An agreement to # 10% of # 10% of #
purchase a security at a stated price net assets net assets
plus interest that must later be sold
back to the seller at the same price
plus interest. The seller's obligation
is secured by collateral.
CERTIFICATES OF DEPOSIT. A commercial # 10% of # 10% of none
bank's obligations to repay funds net assets net assets
deposited with it, earning specified
rates of interest over given periods.
MASTER DEMAND NOTES. Unsecured # 20% 20% none
obligations that permit the investment
of fluctuating amounts by the Funds
at varying interest rates.
~SHORT-TERM FUNDING AGREEMENTS. Similar 10% of none 10% of none none
to guaranteed investment contracts, or net assets net assets
"GIC's", and issued by insurance
companies. The Fund invest cash for
a specified period and guaranteed
amount of interest as stated in the
contract. (Contracts cannot be sold
and may be considered illiquid.)
U. S. GOVERNMENT SECURITIES. Securities # 20% of # 20% of Only direct
issued or guaranteed by the U.S. net assets net assets Treasury
Government, its agencies, or obligations.
instrumentalities. Some are direct
obligations of the U.S. Treasury; others
are obligations only of the U.S. agency
or instrumentality.
32
<PAGE>
FINANCIAL OHIO MUNICIPAL PRIME TAX-FREE U.S. GOVERNMENT
LIST OF ALLOWABLE INVESTMENTS IN THE FUNDS RESERVES MONEY MARKET OBLIGATIONS MONEY MARKET OBLIGATIONS
FUND FUND FUND FUND FUND
PRIVATE PLACEMENT SECURITIES. Private # # # # none
placement securities are not registered
under the federal securities laws and
are sold under an exemption from
registration.
TIME DEPOSITS. Non-negotiable deposits # 20% # 20% none
in banks that pay a specified rate of
interest over a set period of time.
TAX AND BOND ANTICIPATION NOTES. none # none # none
Issued in expectation of future
revenues.
~VARIABLE AND FLOATING RATE SECURITIES. # # # # none
Investment grade instruments, some
of which may be illiquid, with
interest rates that reset periodically.
TAX-EXEMPT COMMERCIAL PAPER. Short- # # # # none
term obligations that are exempt
from state and federal income tax.
EURODOLLAR OBLIGATIONS. Obligations # # # # none
of foreign branches of U.S. Banks.
Subject to 25% concentration by
industry.
WHEN-ISSUED AND DELAYED-DELIVERY # # # # 33-1/3%
SECURITIES.
A security that is purchased for
delivery at a later time. The
market value may change before
the delivery date.
ZERO COUPON BONDS. These # # # # #
securities are purchased at a
discount from the face value. The
face value is received at maturity,
with no interest payments before
then. These may be subject to
greater risks of price fluctuation
than securities that periodically
pay interest.
~MORTGAGE-BACKED SECURITIES. # # # # #
Instruments secured by a pool of
mortgages.
o U.S. GOVERNMENT. Issued or
guaranteed by the U.S.
Government or its agencies;
i.e., GNMAs, FNMAs, SLMAs.*
o NON-U.S. GOVERNMENT. Secured
by non-government entities.
INVESTMENT COMPANY SECURITIES. none 5% none 5% none
Shares of other mutual funds with 3% 3%
similar investment objectives. The 10% 10%
following limitations apply:
(1) no more than 5% of a Fund's
total assets may be invested in one
mutual fund,(2) a Fund may not own
more than 3% of the securities of
any one mutual fund, and (3) no
more than 10% of a Fund's total
assets in combined mutual fund
holdings.
</TABLE>
*Obligations of entities such as the Government National Mortgage Association
(GNMA) and the Export-Import Bank of the U.S. are backed by the full faith and
credit of the U.S. Treasury. Others, such as the Federal National Mortgage
Association (FNMA) are supported by the right of the issuer to borrow from the
U.S. Treasury. Still others, such as the Student Loan Marketing Association
(SLMA), Federal Farm Credit Bank (FFCB), Federal Home Loan Bank (FHL), and the
Federal Home Loan Mortgage Corporation (FHLMC) are supported only by the credit
of the federal agency.
<PAGE>
THE VICTORY FUNDS
800-KEY-FUND(R)
OR
800-539-3863
THE VICTORY
INSTITUTIONAL MONEY MARKET FUND
PROSPECTUS
MARCH 1, 1997
<PAGE>
TABLE OF CONTENTS PAGE
Introduction 2
An analysis including objectives, policies, strategies, expenses,
and financial highlights
Fund Expenses 4
Financial Highlights 5
Investment Objective, Policies, and Strategies 6
Risk Factors 7
Investment Limitations 7
Investment Performance 8
Share Price 9
Dividends, Distributions, and Taxes 9
INVESTING WITH VICTORY 10
How to Purchase Shares 10
How to Exchange Shares 11
How to Redeem Shares 11
Organization and Management of the Fund 12
Additional Information 15
Other Securities and Investment Practices 16
Key to Fund Information:
(1) Objective and Strategy: The goals and the strategy the Fund plans to use in
pursuing its investment objective.
(2) Risk Factors: The risks that you may assume as an investor in the Fund.
(3) Expenses: The costs that you will pay as an investor in the Fund, including
sales charges and ongoing expenses.
(4) Financial Highlights: A table which shows the historical performance of the
Fund by share class. This table also summarizes previous operating
expenses.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. SHARES OF THE FUND ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYBANK, ANY
o OF ITS AFFILIATES, OR ANY OTHER BANK; SUBJECT TO INVESTMENT RISKS,
o INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
THE VICTORY PORTFOLIOS
INSTITUTIONAL MONEY MARKET FUND
800-KEY-FUND OR 800-539-3863
INTRODUCTION
This prospectus describes the Victory Institutional Money Market Fund (the
Fund). The Fund is a diversified money market mutual fund and is a part of The
Victory Portfolios (Victory), an open-end investment management company. You
should read this prospectus before investing in the Fund and keep it for future
reference. A detailed Statement of Additional Information (the SAI) is also
available for your review. The SAI has been filed with the Securities and
Exchange Commission (the SEC), and is incorporated into this prospectus by
reference. If you would like a free copy of the SAI, please request one by
calling us at 800-KEY-FUND.
INVESTMENT OBJECTIVE:
The investment objective of the INSTITUTIONAL MONEY MARKET FUND is to obtain as
high a level of current income as is consistent with preserving capital and
providing liquidity.
INVESTMENT STRATEGY:
The Fund pursues its investment objective by investing in a diversified
portfolio of high-quality, short-term U.S. dollar-denominated money market
instruments. The Fund seeks to maintain a constant net asset value of $1.00 per
share, and shares are offered at net asset value.
RISKS FACTORS:
The Fund is not insured by the FDIC, and while it attempts to maintain a $1.00
per share price, there is no guarantee that it will be able to do so. In
addition, there are potential credit, interest rate, market, and liquidity
risks. These risks are discussed in the section " Risk Factors."
WHO SHOULD INVEST:
o Investors seeking relative safety and easy access to investments
o Investors with a low risk tolerance
o Investors seeking preservation of capital
o Investors willing to accept lower potential returns in return for
safety
FEES AND EXPENSES:
NO LOAD or sales commission is charged to investors in this Fund. You will,
however, incur expenses for investment advisory, management, administrative, and
shareholder services, all of which are included in the Fund's expense ratio.
This prospectus offers two classes of shares: Investor Shares and Select Shares.
The Investor Shares are available to certain institutions or individuals that
meet minimum investment requirements, and are not subject to a shareholder
servicing fee. The Select Shares are available to certain institutions that
provide additional services to investors. The Select Shares Class pays a
shareholder servicing fee of up to .25% of the net assets of that class. See
"Choosing a Share Class."
PURCHASES:
The minimum initial investment is $1,000,000 and $500 thereafter. The initial
investment must be accompanied by the Fund's Account Application. Fund shares
may be purchased by check, Automated Clearing House, or wire. See "How to
Purchase Shares."
2
<PAGE>
REDEMPTIONS:
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, the Fund will redeem the
shares and credit your bank account or send the proceeds to the address
designated on your account application. See "How to Redeem Shares."
DIVIDENDS/DISTRIBUTIONS:
Income is accrued by the Fund daily and is paid monthly. Any capital gains
realized by the Fund are paid as dividends annually. The Fund can send your
dividends directly to you by mail, credit them to your bank account, reinvest
them in the Fund, or invest them in another fund of the Victory Group. The
"Victory Group" includes other funds of The Victory Portfolios and Key Mutual
Funds. You can make this choice when you fill out an account application. See
"Dividends, Distributions, and Taxes."
OTHER SERVICES:
Victory offers a number of other services to better serve shareholders including
exchange privileges. See "How to Exchange Shares" and "How to Redeem Shares."
Our toll-free fax number is 800-529-2244. You can reach Victory's
Telecommunication Device for the Deaf (TDD) at 800-970-5296.
AN OVERVIEW OF THE FUND:
ESTIMATED ANNUAL
INCEPTION EXPENSES AFTER NEWSPAPER
VICTORY FUND DATE WAIVERS (AS A % ABBREVIATION*
OF NET ASSETS)
Institutional Money Market Fund - 1/20/83 .27% VictoryInst
Investor Shares
Institutional Money Market Fund - 6/5/95 .52% VictoryInstS
Select Shares
*All newspapers do not carry the same abbreviation.
The following pages provide you with an overview of the Fund. Please look at the
objective, strategies, risks, expenses, and financial history to determine if
this Fund will suit your risk tolerance and investment needs. You should also
review the "Other Securities and Investment Practices" section for additional
information about the individual securities in which the Fund can invest and the
risks related to these investments.
3
<PAGE>
INVESTMENT OBJECTIVE, POLICIES, AND STRATEGIES
The next three sections describe how your money is invested and outline the
investments the Fund can make. We also describe some of the risks involved in
investing in the Fund. By matching your investment objective with a comfortable
level of risk, you can create your own customized investment plan.
(1) INVESTMENT OBJECTIVE: The investment objective of the Fund is to obtain as
high a level of current income as is consistent with preserving capital and
providing liquidity.
(1)INVESTMENT POLICIES AND STRATEGY: The Fund pursues its investment objective
by investing primarily in short-term, high-quality debt instruments.
Normally, the Fund invests only in instruments that are rated in the highest
category by two or more NRSROs,* or in the highest category if rated by only one
NRSRO, or if unrated, determined to be of equivalent quality. The Board of
Trustees has established policies to ensure that the Fund invests in high
quality, liquid instruments.
Under normal market conditions, the Fund invests primarily in:
o Negotiable certificates of deposit, time deposits, and bankers' acceptances
of U.S. and foreign banks.
o Short-term corporate obligations, such as commercial paper, notes, and
bonds.
o Repurchase Agreements
o Reverse Repurchase Agreements
o Other debt obligations such as master demand notes, short-term funding
agreements, Eurodollars, variable and floating rate securities, and private
placement investments.
o U.S. Government obligations which may be backed by the creditworthiness of
the issuing agency, such as GNMAs, FNMAs, and SLMAs.
o When-issued or delayed-delivery securities.
Important Characteristics of the Fund's Investments:
o Quality: Instruments rated A or above by S&P, Fitch, Moody's, or another
NRSRO. For more information on ratings, see the Appendix to the SAI.
o Maturity: Weighted average maturity of 90 days or less.
Individual investments may be purchased with maturities ranging
from one day to 397 days.
For more information about other securities in which the Fund can invest, see
"Other Securities and Investment Practices" and the SAI.
*An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poors ("S&P"), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
(2)RISK: The Fund is subject to credit risk, interest rate risk, inflation risk,
liquidity risk, and market risk. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE
INVESTING.
****For more information about other securities in which the Fund can invest,
see "Other Securities and Investment Practices" and the SAI.****
****The Board of Trustees has established policies to ensure that the Fund
invests in high quality, liquid instruments.****
4
<PAGE>
*Obligations of entities such as the Government National Mortgage Association
(GNMA) and the Export-Import Bank of the U.S. are backed by the full faith and
credit of the U.S. Treasury. Others, such as the Federal National Mortgage
Association (FNMA) are supported by the right of the issuer to borrow from the
Treasury. Still others, such as the Student Loan Marketing Association (SLMA),
Federal Farm Credit Banks, Federal Home Loan Bank, and the Federal Home Loan
Mortgage Corporation (FHLMC) are supported only by the credit of the federal
agency.****
INSTITUTIONAL MONEY MARKET FUND
FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Institutional Money Market Fund.
You will note in the table that you do not pay fees of any kind when you buy,
sell, or exchange shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES* INVESTOR SELECT
SHARES SHARES
------ ------
Maximum Sales Charge Imposed on Purchases None None
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None None
Redemption Fees None None
Exchange Fees None None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Fund. THESE
EXPENSES ARE CHARGED DIRECTLY TO THE FUND. Expenses include management fees as
well as the costs of maintaining accounts, administering the Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on historical or projected expenses of the Fund.
ANNUAL FUND OPERATING EXPENSES INVESTOR SELECT
AFTER EXPENSE WAIVERS AND REIMBURSEMENTS SHARES SHARES
(as a percentage of average daily net assets)
Management Fee(1) .10% .10%
Other Expenses .17% .42%(2)
---- ----
Total Fund Operating Expenses(1) .27% .52%
==== ====
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .25%, and the Total Fund Operating Expenses would
be .51% for Investor Shares and .76% for Select Shares.
(2) Other Expenses includes an estimate of shareholder servicing fees the Fund
expects to pay. (See "Organization and Management of the Funds --
Shareholder Servicing Plan.")
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Fund.
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return, and (2) redemption at the end of each time period.
5
<PAGE>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Investor Shares $3 $9 $15 $34
Select Shares $5 $17 $29 $65
This example is only an illustration. Actual expenses and returns will vary.
(4)FINANCIAL HIGHLIGHTS
****The Financial Highlights describe the Fund's returns and operating expenses
over time. This table shows the results of an investment in one share of the
Fund for each of the periods indicated.**** The financial highlights were
audited by Coopers & Lybrand L.L.P. for the 1995 and 1996 periods and by other
auditors for all earlier periods. This information should be read in conjunction
with the Fund's most recent Annual Report to shareholders, which is incorporated
by reference into the SAI. If you would like a copy of the Annual Report, write
or call the Fund at 800-KEY-FUND.
VARIABILITY, AS SHOWN BY YEAR-TO-YEAR TOTAL RETURN:
(INSERT CHART SHOWING TOTAL RETURN)
INSTITUTIONAL MONEY MARKET FUND
<TABLE>
<CAPTION>
Investor Shares Select Shares
---------------------------- ---------------------------
Year June 5, 1995 Year June 5, 1995
Ended to Ended to
October 31, October 31, October 31, October 31, Year Ended April 30,
------------------------------
1996 1995(d) 1996 1995(d) 1995(h) 1994(h)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
of Period
Income from Investment
Activities
Net investment income 0.053 0.290 0.050 0.012 0.500 0.028
Distributions
Net investment income (0.053) (0.290)(b) (0.050) (0.012) (0.500) (0.028)
Net Asset Value, End
of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 5.41% 2.90% 5.16% 1.23%(b) 4.91% 2.80%
Ratios/Supplemental Data:
Net Assets, End of $ 671,575 $ 504,536 $ 373,090 $ 11,479 $ 449,814 $ 541,229
Period (000)
Ratio of expenses to 0.27% 0.26%(c) 0.52% 0.51%(c) 0.27% 0.55%
average net assets
Ratio of net investment 5.27% 5.69%(c) 4.97% 5.33%(c) 4.91% 2.78%
income to average net assets
Ratio of expenses to 0.48% 0.49%(c) 0.73% 1.00%(c) 0.51% 0.55%
average net assets(g)
Ratio of net investment 5.06% 5.46%(c) 4.77% 4.84%(c) 4.67% 2.78%
income to average net assets(g)
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------------------------------------------------------
1993(h) 1992(h) 1991(h) 1990(h) 1989(h) 1988(d)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
of Period
Income from Investment
Activities
Net investment income 0.032 0.051 0.076 0.087 0.082 0.068
Distributions
Net investment income (0.032) (0.051) (0.076) (0.087) (0.082) (0.068)(f)
Net Asset Value, End
of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 3.26% 5.21% 7.83% 8.95% 8.46% 6.98%
Ratios/Supplemental Data:
Net Assets, End of $ 155,097 $ 177,640 $ 248,515 $ 178,208 $ 133,492 $ 172,151
Period (000)
Ratio of expenses to 0.43% 0.30% 0.30% 0.30% 0.29% 0.25%
average net assets
Ratio of net investment 3.19% 5.06% 7.46% 8.63% 8.21% 6.94%(f)
income to average net assets
Ratio of expenses to 0.48% 0.42% 0.44% 0.43% 0.36% 0.25%
average net assets(g)
Ratio of net investment 3.14% 4.94% 7.32%
income to average net assets(g)
</TABLE>
Year Ended April 30,
----------------------------
1987(d) 1986(d)
Net Asset Value, Beginning
of Period $ 1.000 $ 1.000
Income from Investment
Activities
Net investment income
Distributions 0.061 0.075
Net investment income
Net Asset Value, End (0.061)(f) (0.075)
of Period
Total Return $ 1.000 $ 1.000
Ratios/Supplemental Data: 6.21% 7.72%
Net Assets, End of
Period (000) $ 106,961 $ 56,260
Ratio of expenses to
average net assets 0.24% 0.39%
Ratio of net investment
income to average net assets 6.02%(f) 7.58%(f)
Ratio of expenses to
average net assets(g) 0.24% 0.39%
Ratio of net investment
income to average net assets(g)
(a) Period from commencement of operations.
(b) Not Annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Institutional Money Market Portfolio
became the Institutional Money Market Fund, and the Fund commenced offering
separate share classes. (e) Effective March 1, 1996, the Fund designated
Institutional Shares as Investor Shares and Service Shares as Select
Shares.
(f) Through March 13, 1988, distributions were declared from the total of net
investment income, net realized gain/(loss) on investments and unrealized
appreciation (depreciation) of investments. Subsequently, distributions
have been declared solely from net investment income.
(g) During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.
(h) Audited by other auditors.
6
<PAGE>
(2)RISK FACTORS
This prospectus describes some of the risks that you may assume as an investor
in the Fund. As with any mutual fund, there is no guarantee that the Fund will
earn income. ****It is important to keep in mind one basic principle of
investing: the greater the risk , the greater the potential reward. The reverse
is also generally true: the lower the risk, the lower the potential reward.****
Over time, money market mutual funds have offered investors the least amount of
principal risk; therefore, the potential return is usually lower than for other
types of investments.
The following risks are common to all MUTUAL FUNDS:
o MARKET RISK is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price
the Fund originally paid for it, or less than the security was worth at an
earlier time. Market risk may affect a single issuer, an industry, a sector
of the economy, or the entire market, and is common to all investments.
The following risks are common to all MONEY MARKET MUTUAL FUNDS:
o CREDIT (OR DEFAULT) RISK is the possibility that the issuer of a security
will be unable to make timely payments of interest or principal. Although
the Fund generally invests only in high-quality securities, the interest or
principal payments are not insured or guaranteed.
o INFLATION RISK is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by the Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities.
o INTEREST RATE RISK. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a fixed-rate security typically goes down. When interest
rates go down, the value of these securities typically goes up. Generally,
the market values of securities with longer maturities are more sensitive
to changes in interest rates.
INVESTMENT LIMITATIONS
****The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis.****
To help reduce risk and maintain its $1.00 per share price, the Fund has adopted
limitations on some investment policies. These limits involve the Fund's ability
to borrow money and the amount it can invest in various types of securities,
including illiquid securities. Certain limitations can be changed only with the
approval of shareholders. Victory's Board of Trustees can change other
investment limitations without shareholder approval. See "Other Securities and
Investment Practices" and the SAI for more information.
The Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations and U.S. banks). The
Fund limits its borrowing to 33-1/3% of its total assets (the Fund would borrow
by selling a security that it owns and then repurchasing that security later at
a higher price). The Fund does not intend to borrow for leverage purposes.
The Fund is "diversified" according to certain federal securities provisions
regarding the diversification of its assets. Generally, under those provisions,
at least 75% of the Fund's total assets must be invested so that no more than 5%
of the Fund's total assets are invested in the securities of any one issuer. The
Fund also intends to comply with certain federal tax requirements regarding the
diversification of its
7
<PAGE>
assets, which generally are less restrictive than the securities provisions. The
Fund also intends to comply with certain more stringent federal securities
diversification provisions for money market funds. These diversification
provisions and requirements are discussed in the SAI.
INVESTMENT PERFORMANCE
Victory may advertise the performance of the Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information may
also appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Performance information is contained in the annual and semi-annual reports. You
may obtain a copy free of charge by calling 800-KEY-FUND. ****Past performance
is not a guarantee of future results. You may obtain the current 7-day yield by
calling 800-KEY-FUND. Our Shareholder Servicing representatives are available
from 8:00 a.m. to 7:00 p.m. Eastern Time Monday through Friday.****
The "7-day yield" is an "annualized" figure--the amount you would earn if you
stayed in the Fund for a year and we continued to have the same yield throughout
that year. To calculate 7-day yield, net investment income per share for the
most recent 7 days is multiplied by 52 (52 weeks/year), then divided by the NAV
($1.00) to get a percentage, which is the 7-day yield.
o Yield is a measure of dividend income.
o Effective yield is similar to yield, except it is assumed that dividends
are reinvested and compounded.
o Average annual total return (or "annualized total return") is a measure of
past dividend income plus capital appreciation. It is the sum of all parts
of your investment return.
Whenever you see information on the Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future. As
you know, history does not always repeat itself.
SHARE PRICE
The Fund's share price, called its net asset value (NAV), is calculated each
business day (normally at 3:00 p.m. Eastern time). Shares are purchased at the
next share price calculated after your investment is received and accepted. A
business day is a day on which the New York Stock Exchange and the Federal
Reserve Bank of Cleveland is open for trading or any day in which enough trading
has occurred in the securities held by the Fund to materially affect the NAV. If
your account is established with an Investment Professional or a bank, you may
not be able to purchase or sell shares on other holidays when the Federal
Reserve Bank of Cleveland is closed, even though the New York Stock Exchange is
open.
The NAV is calculated by adding up the total value of the Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund.
Total Assets - Liabilities
NAV = -------------------------------------
Number of Shares Outstanding
Since the Fund seeks to maintain a $1.00 NAV, an accounting system called the
"Amortized Cost Method" is used to value individual holdings. You can read about
this system in the SAI.
8
<PAGE>
The Fund's performance can be found once a week in The Wall Street Journal and
other local newspapers.
****The values of the securities the Fund holds are computed every day.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Fund passes its earnings along to investors in
the form of distributions. Dividend distributions are the interest earned on
investments. Money market funds usually don't distribute capital gains; however,
if the Fund does make a distribution, it usually occurs in December. As with any
investment, you should consider the tax consequences of an investment in the
Fund.
Ordinarily, income earned on securities owned by the Fund accrues daily and is
paid monthly on or around the first business day of the next month. Shareholders
who receive a dividend check for less than $10.00 will have future dividends
reinvested automatically into their accounts. Distributions can be received in
one of the following ways:
o REINVESTMENT OPTION: You can have distributions automatically reinvested in
additional shares of the Fund. If you do not indicate another choice on
your Account Application, you will be assigned this option automatically.
o CASH OPTION: You will be mailed a check no later than 7 days after the pay
date.
o DIRECTED DIVIDENDS OPTION: You can have distributions automatically
reinvested in shares of another fund of the Victory Group. The "Victory
Group" includes other funds of The Victory Portfolios and Key Mutual Funds.
If distributions are reinvested in a different class of another fund, you
may pay a sales charge on the reinvested distributions.
o DIRECTED BANK ACCOUNT OPTION: In most cases, you can have distributions
automatically transferred to your bank checking or savings account. Under
normal circumstances, it would be transferred within 7 days of the dividend
payment date. The bank account must have a registration identical to that
of your Fund account.
****Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you presently use, please
call the Transfer Agent at 800-KEY-FUND.****
IMPORTANT INFORMATION ABOUT TAXES:
The Fund intends to qualify as a regulated investment company, in which case it
pays no federal income tax on the earnings or capital gains it distributes to
its shareholders.
o Dividends from the Fund's long-term capital gain are taxable as capital
gain; dividends from other sources are generally taxable as ordinary
income.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you in December of the previous year.
o When you sell (redeem) or exchange shares of the Fund, you must recognize
any gain or loss. However, as long as the Fund's NAV per share does not
deviate from $1.00, there will be no gain or loss.
o You will receive tax statements from the Fund every January showing the
amounts and tax status of distributions made to you.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
9
<PAGE>
****THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION.
YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN THE FUND.****
INVESTING WITH VICTORY
****All you need to do to get started is to fill out an application.****
If you are looking for a convenient way to open an account for yourself or to
add money to an existing account, Victory can help. This section will describe
how to access information on your account, how to open an account, and how to
purchase, exchange, and redeem shares of the Fund. We want to make it simple for
you to do business with us. The sections that follow will serve as a guide to
your investments with Victory. If you have questions about any of this
information, please call one of our customer service representatives at
800-KEY-FUND. They will be happy to assist you.
HOW TO PURCHASE SHARES
Investor and Select Shares can be purchased in a number of different ways. All
you need to do to get started is to fill out an application. You can send in
your payment by check, wire transfer, exchange from another Victory Fund, or
through arrangements with your Investment Professional. An Investment
Professional is a salesperson, financial planner, investment adviser, or trust
officer who provides you with investment information. Sometimes they will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by the Fund. ****When you buy shares of the Fund, your
cost will be $1.00 per share.****
MAKE YOUR CHECK PAYABLE TO:
The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
REGULAR U.S. MAIL ADDRESS:
Send completed Account Applications with your check, bank draft, or money order
to:
The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
OVERNIGHT MAIL ADDRESS:
Use the following address ONLY for overnight packages:
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
10
<PAGE>
WIRE ADDRESS:
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring funds
to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert account number, name, and
control number assigned by the Transfer Agent)
****TELEPHONE NUMBER:
800-KEY-FUND
800-539-3863****
ACH. After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up an ACH account. A fee is not currently being charged for
ACH transfers; however, the Fund may charge a fee at some future date.
Notification would be sent out prior to implementing a fee.
STATEMENTS AND REPORTS. You will receive a periodic statement reflecting any
transactions that affect the balance or registration of your account. You will
receive a confirmation after any purchases, exchanges, or redemptions. If your
account has been set up by an Investment Professional, account activity will be
detailed in their statements to you. Share certificates are not issued. Twice a
year, you will receive the financial reports of the Fund. By January 31 of each
year, you will receive an IRS Form 1099-DIV, which will also be filed with the
IRS. Form 1099-DIV reports account activities from the previous year.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order, in its sole discretion. If your check is
returned for any reason, you will be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only invest or exchange
into fund shares legally available in your state.
****If you would like to make additional investments after your account is
already established, use the Investment Stub attached to your confirmation
statement and send it with your check to the address indicated.****
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges. (See the more complete explanation below.) The "Victory Group"
includes funds offered as a part of the Victory Funds and Key Mutual Funds
complex. Key Mutual Funds is affiliated with KeyCorp.
You can exchange shares of the Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Fund, you should keep the
following in mind.
o Shares of the fund selected for exchange must be available for sale in your
state of residence.
o The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
o Shares of the Fund may be exchanged at relative net asset value. This means
that if you exchange into a fund with a sales charge, you pay the
percentage-point difference between that fund's sales charge and any sales
charge you have previously paid in connection with the shares you are
exchanging. Since the Fund does not have a sales charge, if you were to
purchase another fund in the Victory Group that has a 4.75% sales charge,
you would pay the 4.75% sales charge.
o You must meet the minimum purchase requirements for the fund you purchase
by exchange.
o The registration and tax identification numbers of the two accounts must be
identical.
o You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any business day.
o Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
****You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-FUND.****
HOW TO REDEEM SHARES
****There are a number of convenient ways to redeem shares of the Fund. You can
use the same mailing and wiring addresses listed for purchases. You will earn
dividends up to and including the date your redemption request is processed.****
BY TELEPHONE. The easiest way to redeem shares is by calling 800-KEY-FUND. When
you fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when you are ready to redeem, call us and tell
us which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via the Automated Clearing House (ACH).
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory nor its servicing agents, the Adviser, nor the Transfer Agent
will be responsible for any losses. Should these procedures not be followed, the
Transfer Agent may be liable to your for losses resulting from unauthorized
instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
11
<PAGE>
BY MAIL. Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE. If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 2:00 p.m. Eastern time,
your funds will be wired on the same business day.
BY ACH. Normally, your redemption will be processed on the same day or the next
day if received after 2:00 p.m. Eastern Time. It will be transferred by ACH as
long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividend accrued will be included with the redemption proceeds.
ORGANIZATION AND MANAGEMENT OF THE FUND
****We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Fund to
service the shareholders. They are paid a fee for their services.****
ABOUT VICTORY:
The Fund is a member of the Victory Funds, a family of 26 distinct investment
portfolios. Victory has been operating continuously since 1983, and was
organized as a Delaware business trust on February 29, 1996.
The Board of Trustees of Victory has the overall responsibility for the
management of the Fund. They are elected by the shareholders.
THE INVESTMENT ADVISERS:
One of the Fund's most important contracts is its Advisory Agreement with Key
Asset Management, Inc. (KAM or the Adviser), a New York Corporation registered
as an investment adviser with the SEC. KAM is a subsidiary of KeyBank National
Association, a wholly-owned subsidiary of KeyCorp. Effective February 28, 1997,
KAM became the surviving corporation after the reorganization of four indirect
investment adviser subsidiaries of KeyCorp. Affiliates of the Adviser manage
approximately $50 billion for a limited number of institutional clients.
The Advisory Agreement allows the Adviser hire employees of its affiliates as
sub-advisers to the Fund. It also allows KAM to choose brokers or dealers to
handle the purchases and sales of a Fund's securities. Prior to February 28,
1997, KeyCorp Mutual Fund Advisers, Inc. was the adviser and Society Asset
Management, Inc. (formerly the adviser) was the sub-adviser to the Fund. During
the fiscal year ended October 31, 1996, KeyCorp Mutal Fund Advisers, Inc. was
paid an annual rate based on a percentage of the average daily net assets of the
Fund in advisory fees as follows:
Investor Shares Select Shares
Advisory Fees .25% .25%
12
<PAGE>
MANAGEMENT OF THE FUND
--------------------------------------------------
| |
| TRUSTEES |
| |
| Supervise each Fund's activities. |
| |
--------------------------------------------------
|
|
--------------------------------------------------
| INVESTMENT ADVISER |
| Key Asset Management Inc. |
| 127 Public Square |
| Cleveland, OH 44114 |
| |
| Manages each Fund's business |
| and investment activities. |
---------------------------------------------------
****THE FUND IS SUPERVISED BY THE BOARD OF TRUSTEES WHO MONITORS THE SERVICES
PROVIDED TO INVESTORS.****
THE ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT:
BISYS Fund Services is the Administrator and the Distributor. BISYS is paid a
fee of .15% of the Funds average daily net assets on a monthly basis as the
Administrator, but does not charge a fee for its services as Distributor. BISYS
Fund Services Ohio, Inc. receives a fee as the Fund Accountant.
The Distributor may provide cash or other compensation to dealers for selling
Select shares of the Fund. Payments may be in the form of trips, tickets, and/or
merchandise offered through sales contests. It does this at its own expense, and
not at the expense of the Fund or its shareholders.
SHAREHOLDER SERVICING - SELECT SHARES:
Victory has a Shareholder Servicing Plan for the Select Shares class of the
Fund. The shareholder servicing agent performs a number of services for their
customers who are shareholders of the Fund. It establishes and maintains
accounts and records, processes dividend and distribution payments, arranges for
bank wires, assists in transactions, and changes account information. For these
services the Fund pays up to .25% of the average daily net assets of the Select
class. The Fund has agreements with various shareholder servicing agents,
including the Distributor, the Custodian and its affiliates, other financial
institutions, and securities brokers. Shareholder servicing agents may waive all
or a portion of their fee periodically.
DISTRIBUTION PLAN:
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Fund. The Fund does not currently pay
direct expenses under this plan.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P. serves as independent accountants to the Fund.
LEGAL COUNSEL:
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.
13
<PAGE>
HOW THE FUNDS ARE ORGANIZED
_______________________
| |
___________________| SHAREHOLDERS |
| | |
| |_____________________|
| |
| |
| |
| |
| ______________________|_______________________
| | FINANCIAL SERVICES FIRMS AND |
| | THEIR INVESTMENT PROFESSIONALS |
| | |
| | Advise current and prospective |
| | shareholders on their fund investments. |
| |_____________________________________________|
| |
| |
| |
| ______________________________________________
| | |
| | TRANSFER AGENT/SERVICING AGENT |
| | State Street Bank and Trust Company |
| | 225 Franklin Street |
| | Boston, MA 02110 |
| | |
| | Boston Financial Data Services |
| | |
|_______| Two Heritage Drive |
| Quincy, MA 02171 |
| |
| Handles services such as record-keeping, |
| statements, processing of buy and |
| sell requests, distribution of dividends, |
| and servicing of shareholder's accounts. |
|_____________________________________________|
|
|
______________________________________ | ____________________________________
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND | | | |
| FUND ACCOUNTANT | | | Key Trust Company of Ohio, N.A. |
| BISYS Fund Services, Inc. and | | | 127 Public Square |
| BISYS Fund Services Ohio, Inc. | | | |
| 3435 Stelzer Road | | | Cleveland, OH 44114 |
| |__|__| |
| Columbus, OH 43219 | | |
| | | |
|Markets the Funds, distributes shares| | Provides for safekeeping of the |
| through investment professionals, | | Fund's investments and cash, and |
| and calculates the value of shares. | |settles trades made by the Fund. |
|_____________________________________| |__________________________________|
14
<PAGE>
ADDITIONAL INFORMATION
****Some additional information you should know about the Fund.****
The Fund offers only the classes of shares described in this prospectus, but at
some future date, the Fund may offer additional classes of shares through a
separate prospectus.
YOUR RIGHTS AS A SHAREHOLDER. All shareholders of each class have equal voting,
liquidation, and other rights. As a shareholder of a Fund, you have rights and
privileges similar to those enjoyed by other corporate shareholders. Delaware
Trust law limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of the Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.
CODE OF ETHICS. Victory and the Adviser have each adopted a Code of Ethics to
which all investment personnel and all other access persons to the Fund must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination.
BANKING LAWS. Banking laws, including the Glass-Steagall Act, prevent a bank
holding company or its affiliates from sponsoring, organizing or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian, or
shareholder servicing agent. They may also purchase shares of such a company for
their customers and pay third parties for performing these functions. Should
these laws change in the future, the Trustees would consider selecting another
qualified firm so that all services would continue.
SHAREHOLDER COMMUNICATIONS. You will receive unaudited Semi-Annual Reports and
audited Annual Reports on a regular basis from the Fund. In addition, you may
also receive updated prospectuses or supplements to this prospectus. In order to
eliminate duplicate mailings to an address at which two or more shareholders
with the same last name reside, the Fund will send only one copy of the above
communications. ****If you would like to receive additional copies of any
materials, please call the Fund at 800-KEY-FUND.****
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
15
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists some of the types of securities the Fund may choose to
purchase. The majority of the portfolio for the Fund is made up of repurchase
agreements, short term obligations, and/or U.S. Government obligations. However,
the Fund is also permitted to invest in securities as shown in the table below.
% Percent of TOTAL assets
# No limitation of usage; Fund may be using currently
} Indicates a "derivative security," whose value is linked to or derived from
another security, instrument, or index.
INSTITUTIONAL MONEY
LIST OF ALLOWABLE INVESTMENTS IN THE FUND MARKET
REPURCHASE AGREEMENTS. An agreement to purchase a security at a stated #
price plus interest that must later be sold back to the seller at the
same price plus interest. The seller's obligation is secured by
collateral.
COMMERCIAL PAPER. Short-term obligations issued by banks, #
corporations, broker dealers and other entities to finance their
current operations.
CERTIFICATES OF DEPOSIT. A commercial bank's obligations to repay #
funds deposited with it, earning specified rates of interest over
given periods.
MASTER DEMAND NOTES. Unsecured obligations that permit the investment #
of fluctuating amounts by the Fund at varying interest rates.
SHORT-TERM FUNDING AGREEMENTS. Similar to guaranteed investment 10%
contracts, or "GIC's", and issued by insurance companies. The Fund
invests cash for a specified period and a guaranteed amount of
interest as stated in the contract. (Contracts cannot be sold and may
be considered illiquid.)
U. S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the #
U.S. government, its agencies or instrumentalities. Some are direct
obligations of the U.S. Treasury; others are obligations only of the
U.S. agency.
PRIVATE PLACEMENT SECURITIES. Private placement securities are not #
registered under the federal securities laws and are sold under an
exemption from registration.
TIME DEPOSITS. Non-negotiable deposits in banks that pay a specified #
rate of interest over a set period of time.
EURODOLLAR OBLIGATIONS. Obligations of foreign branches of U.S. Banks. 25%
Subject to 25% concentration by industry.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A security that is #
purchased for delivery at a later time. The market value may change
before the delivery date.
ZERO COUPON BONDS. These securities are purchased at a discount from #
the face value. The face value is received at maturity, with no
interest payments before then. These may be subject to greater risks
of price fluctuation.
MORTGAGE-BACKED SECURITIES. Securities backed by a pool of mortgages. #
o U.S. GOVERNMENT . Issued or guaranteed by the U.S. Government or
its agencies; i.e., GNMAs, FNMAs, SLMAs.
o NON-U.S. GOVERNMENT. Backed by non-government entities.
The Fund also may hold cash for temporary defensive purposes. For more
information on ratings and detailed descriptions of each of the above
investment vehicles, see the SAI.
<PAGE>
THE VICTORY FUNDS
800-KEY-FUND(R)
OR
800-539-3863
THE VICTORY
LAKEFRONT FUND
PROSPECTUS
MARCH 1, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Introduction 3
AN OVERVIEW OF THE FUND 4
An analysis including objectives, policies, strategies, and expenses
Investment Objective, Policies, and Strategies 7
Risk Factors 7
Investment Limitations 8
Investment Performance 8
Share Price 9
Dividends, Distributions, and Taxes 9
INVESTING WITH VICTORY 11
How to Purchase Shares 12
How to Exchange Shares 13
How to Redeem Shares 14
Organization and Management of the Fund 15
Additional Information 19
Other Securities and Investment Practices 20
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Key to Fund Information:
(1) Objective and Strategy: The goals and the strategy that the Fund plans to
use in pursuing its investment.
(2) Risk Factors: The risks that you may assume as an investor in the Fund.
(3) Expenses: The costs that you will pay as an investor in the Fund, including
sales charges and ongoing expenses.
SHARES OF THE FUND ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYBANK, ANY OF
ITS AFFILIATES, OR ANY OTHER BANK;
o SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<PAGE>
THE VICTORY PORTFOLIOS
THE LAKEFRONT FUND
800-KEY-FUND OR 800-539-3863
INTRODUCTION
This prospectus describes the Lakefront Fund (the Fund). The Fund is a
diversified mutual fund and is a part of The Victory Portfolios (Victory), an
open-end investment management company. This prospectus explains the objectives,
policies, risks, and strategies of the Fund. You should read this prospectus
before investing in the Fund and keep it for future reference. A detailed
Statement of Additional Information (the SAI) describing the Fund is also
available for your review. The SAI has been filed with the Securities and
Exchange Commission (the SEC), and is incorporated into this prospectus by
reference. If you would like a free copy of the SAI, please request one by
calling us at 800-KEY-FUND.
(1) INVESTMENT OBJECTIVE:
The FUND seeks to provide long-term growth of capital and income.
(1) INVESTMENT STRATEGY:
The Fund pursues its investment objective by investing primarily in a
diversified group of equity securities with an emphasis on high-quality,
financially strong companies whose stocks are undervalued. The Advisers also
consider a company's demonstrated commitment to diversity among its employees
and suppliers. Please review "Investment Objective, Policies, and Strategies"
and "Other Securities and Investment Practices" for an overview of the Fund.
(2) RISK FACTORS:
The Fund is not insured by the FDIC. Since equity securities fluctuate in value,
the Fund's shares also will fluctuate in value. In addition, there are other
potential risks, which are discussed in the section "Risk Factors."
WHO SHOULD INVEST:
o Investors willing to accept higher short-term risk along with higher
potential long-term returns o Investors seeking capital appreciation over
the long term
o Investors seeking funds for the growth portion of a diversified portfolio
o Investors who are investing for goals that are many years in the future
o Investors seeking to support diversity through their participation in the
Fund
(3) FEES AND EXPENSES:
You may pay a sales charge of up to 4.75% of the offering price, depending on
the amount you invest. You also will incur expenses for investment advisory,
management, administrative, and shareholder services, all of which are included
in the Fund's expense ratio.
PURCHASES:
The minimum initial investment is $500 for most accounts ($250 for Individual
Retirement Accounts) and $25 thereafter. The initial investment must be
accompanied by the Fund's Account Application. Fund shares may be purchased by
check, Automated Clearing House, or wire. See "How to Purchase Shares."
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<PAGE>
REDEMPTIONS:
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, the Fund will redeem the
shares and credit your bank account or send the proceeds to the address
designated on your account application. See "How to Redeem Shares."
DIVIDENDS/DISTRIBUTIONS:
Ordinarily, the Fund declares and pays dividends from its net investment income
quarterly. Any net capital gains realized by the Fund are paid as dividends
annually. The Fund can send your dividends directly to you by mail, credit them
to your bank account, reinvest them in the Fund, or invest them in another fund
of the Victory Group. The "Victory Group" includes other funds of The Victory
Portfolios and Key Mutual Funds. You can make this choice when you fill out an
account application. See "Dividends, Distributions, and Taxes."
OTHER SERVICES:
Victory offers a number of other services to better serve shareholders including
exchange privileges and automated investment and withdrawal plans. See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.
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AN OVERVIEW OF THE FUND:
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Inception Estimated Annual Maximum Newspaper
VICTORY FUND Date Expenses After Sales Abbreviation
Waivers (as a % of Charge *
net assets)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Lakefront Fund 3/1/97 1.40% 4.75%
==========================================================================================
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*All newspapers do not use the same abbreviation.
The following pages provide you with an overview of the Fund. Please look at the
objective, policies, strategies, risks, expenses, and financial history to
determine whether the Fund will suit your risk tolerance and investment needs.
You should also review "Other Securities and Investment Practices" for
additional information about the individual securities in which the Fund can
invest and the risks related to these investments.
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<PAGE>
THE LAKEFRONT FUND
(1) INVESTMENT OBJECTIVE: The Fund seeks to provide long-term growth of capital
and income.
(1) INVESTMENT POLICIES AND STRATEGY: The Fund pursues its objective by
investing primarily in a diversified group of equity securities of established
companies, emphasizing companies with above average total return potential. The
Fund's portfolio securities usually are listed on a nationally recognized
exchange. The Advisers seek equity securities that they consider undervalued in
relation to historical and projected earnings and the value of the issuer's
underlying assets. In evaluating potential investments as part of its investment
analysis, the Advisers will also consider a company's demonstrated commitment to
diversity among its employees and suppliers. The Advisers will invest in
securities issued by these companies only if their securities meet the Fund's
investment criteria.
Under normal market conditions, the Fund:
o Will invest at least 80% of its total assets in equity securities and
securities convertible into common stock
o May invest up to 20% of its total assets in:
o Preferred stocks
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
(2) RISK: The Fund is designed for long-term investors. The Fund is subject to
the risks common to all mutual funds and the risks common to mutual funds that
invest in equity securities. By itself, the Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment. PLEASE READ
"RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Nathaniel E. Carter is the Portfolio Manager of the Fund,
a position he has held since the Fund's inception in March 1997. He is the
President of Lakefront Capital Investors, Inc., and has been in the investment
business since 1991.
Lakefront Capital Investors, Inc. (Lakefront) will serve as Sub-Adviser to the
Fund. Lakefront is a registered investment advisory firm that has been providing
equity investment services to public and corporate pension funds since its
founding in 1991. Lakefront is the largest African-American owned institutional
investment advisory firm in the state of Ohio.
(3) LAKEFRONT FUND
FUND EXPENSES
This section will help you understand the costs and expenses you will pay,
directly or indirectly, if you invest in the Fund.
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES
--------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75%
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
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<PAGE>
The Annual Fund Operating Expenses table, below, illustrates the estimated
operating expenses that you will incur as a shareholder of the Fund. THESE
EXPENSES ARE CHARGED DIRECTLY TO THE FUND. Expenses include management fees as
well as the costs of maintaining accounts, administering the Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on historical or projected expenses of the Fund.
ANNUAL FUND OPERATING EXPENSES (After Expense Waivers and Reimbursements)
(as a percentage of average daily net assets)
CLASS A SHARES
--------------
Management Fee 0%
Other Expenses(1) 0%
Total Fund Operating Expenses(2) 0%
(1) Other Expenses includes an estimate of shareholder servicing fees the
Lakefront Fund expects to pay. See "Organization and Management of the Fund
-- Shareholder Servicing Plan."
(2) All fees and expenses are being voluntarily waived or reimbursed. Without
the waiver and reimbursement, the annual Management Fee of the Fund's
average daily net assets would be 1.00% and the Fund's total operating
expenses would be 1.40% of Fund's average daily net assets.
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
Fund, assuming: (1) a 5% annual return, and (2) redemption at the end of each
time period.
1 YEAR 3 Years
------ -------
CLASS A SHARES $0 $0
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
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INVESTMENT POLICIES AND STRATEGIES
The next section describes some of the risks involved in investing in the Fund.
By matching your long-term investment objective with a comfortable level of
risk, you can create your own customized investment plan. Some limitations on
the Fund's investments are described in the section that follows.
"Other Securities and Investment Practices" at the end of this Prospectus
provides additional information on the securities mentioned in the overview of
the Fund. You may want to reference "Risk Factors" when you review the various
types of investments permitted by the Fund.
(2) RISK FACTORS
This prospectus describes some of the risks that you may assume as an investor
in the Fund. As with any mutual fund, there is no guarantee that the Fund will
earn income or show a positive total return over time. The Fund's price, yield,
and total return will fluctuate. You may lose money if a Fund's investments do
not perform well. ****It is important to keep in mind one basic principle of
investing: the greater the risk, the greater the potential reward. The reverse
is also generally true: the lower the risk, the lower the potential reward.****
The following risks are common to all MUTUAL FUNDS:
o MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth less than the price the Fund
originally paid for it, or less than the security was worth at an earlier
time. Market risk may affect a single issuer, an industry, a sector of the
economy, or the entire market, and is common to all investments.
o MANAGER RISK is the risk that the Fund's Portfolio Manager may use a
strategy that does not produce the intended result.
The following risks are common to mutual funds that invest in EQUITY SECURITIES:
o EQUITY RISK is the risk that the value of the security will fluctuate
in response to changes in earnings or other conditions affecting the
issuer's profitability. Unlike debt securities, which have preference
to a company's earnings and cash flow, equity securities are entitled
to the residual value after the company meets its other obligations.
For example, holders of debt securities have priority over holders of
equity securities to a company's assets in the event of bankruptcy.
- 6 -
<PAGE>
The following risks are common to mutual funds that invest in DEBT SECURITIES:
o INTEREST RATE RISK. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a fixed-rate security typically goes down. When interest
rates go down, the value of these securities typically goes up. Generally,
the market values of securities with longer maturities are more sensitive
to changes in interest rates.
o INFLATION RISK is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by the Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities.
o REINVESTMENT RISK is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested at a
lower interest rate. Generally, interest rate risk and reinvestment risk
have offsetting effects.
o CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although
the Fund generally invests in only high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities.
Credit risk is measured by NRSROs such as Moody's, Fitch, or S&P.
o CONCENTRATION AND DIVERSIFICATION RISK is the risk that only a limited
number of high-quality securities of a particular type may be available.
Concentration and diversification risk is greater for funds that invest
primarily in the securities of a single state.
INVESTMENT LIMITATIONS
****The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis.****
To help reduce risk, the Fund has adopted limitations on some investment
policies. These limits involve the Fund's ability to borrow money and the amount
it can invest in various types of securities, including illiquid securities.
Certain limitations can be changed only with the approval of shareholders.
Victory's Board of Trustees can change other investment limitations without
shareholder approval. See "Other Securities and Investment Practices" and the
SAI for more information.
The Fund limits to 25% of total assets the amount it may invest in any single
industry (other than U.S. Government obligations). The Fund limits its borrowing
to 33-1/3% of its total assets (a Fund would borrow by selling a security that
its aims and then repurchasing that security later at a higher price). The Fund
will not borrow for leverage purposes.
The Fund is "diversified" according to certain federal securities provisions
regarding diversification of its assets. Generally, under these provisions, at
least 75% of the Fund's total assets must be invested so that no more than 5% of
the Fund's total assets are invested in the securities of any one issuer. These
diversification provisions and requirements are discussed in the SAI.
INVESTMENT PERFORMANCE
****Past performance does not guarantee future results. You may obtain the
current 30-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 7:00 p.m. Eastern Time Monday
through Friday.****
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<PAGE>
Victory may advertise the performance of the Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information may
also appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Performance information is contained in the annual and semi-annual reports. You
may obtain a copy of the annual and semi-annual reports free of charge.
The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to have the same yield
throughout that year. To calculate 30-day yield, the Fund's net investment
income per share for the most recent 30 days is divided by the maximum offering
price per share.
To calculate "total return," the Fund starts with the total number of shares
that you can buy for $1,000 at the beginning of the period. Then all the
additional shares that you would have purchased within the period are added with
reinvested dividends and distributions (this takes into account the Fund's
income, if any). The number of these shares is multiplied by the net asset value
on the last day of the period and the result is divided by the initial $1,000
investment to determine the percentage gain or loss. For periods of more than
one year, the cumulative total return is adjusted to get an average annual total
return.
o YIELD is a measure of dividend income.
o AVERAGE ANNUAL TOTAL RETURN (OR "ANNUALIZED TOTAL RETURN") is a measure of
past dividend income plus capital appreciation. It is the sum of all parts
of your investment return.
Whenever you see information on the Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.
SHARE PRICE
The Fund's share price, called its net asset value (NAV) is calculated each
business day (normally at 4:00 p.m. Eastern time). Shares are purchased at the
next share price calculated after your investment is received and accepted. A
business day is a day on which the New York Stock Exchange is open for trading
or any day in which enough trading has occurred in the securities held by the
Fund to materially affect the NAV. If your account is established with an
Investment Professional or a bank, you may not be able to purchase or sell
shares on other holidays when the Federal Reserve Bank of Cleveland is closed.
The NAV is calculated by adding up the total value of the Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund.
Total Assets - Liabilities
NAV = -------------------------------------
Number of Shares Outstanding
****The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own, gives you the dollar amount and value of
your investment.****
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<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Fund passes its earnings along to investors in
the form of distributions. Dividend distributions are the net dividends or
interest earned on investments. If the Fund makes a capital gain distribution,
it usually occurs in December. As with any investment, you should consider the
tax consequences of an investment in the Fund.
Ordinarily, the Fund declares and pays dividends from its net investment income
quarterly. The Fund pays any realized net capital gains as dividends at least
annually. Shareholders who receive a dividend check for less than $10.00 will
have future dividends reinvested automatically into their accounts.
Distributions can be received in one of the following ways:
o REINVESTMENT OPTION: You can have distributions automatically reinvested in
additional shares of the Fund. If you do not indicate another choice on
your Account Application, this option will be assigned to you
automatically.
o CASH OPTION: A check will be mailed to you no later than 7 days after the
pay date.
o INCOME EARNED OPTION: Dividends can be reinvested automatically in the Fund
and your capital gains can be paid in cash, or capital gains can be
reinvested and dividends paid in cash.
o DIRECTED DIVIDENDS OPTION: You can have distributions automatically
reinvested in shares of another fund of the Victory Group. The "Victory
Group" includes other funds of the Victory Portfolios and Key Mutual Funds.
If distributions are reinvested in shares of another fund, you will not pay
a sales charge on the reinvested distributions.
o DIRECTED BANK ACCOUNT OPTION: In most cases, you can have distributions
automatically transferred to your bank checking or savings account. Under
normal circumstances, a dividend will be transferred within 7 days of the
dividend payment date. The bank account must have a registration identical
to that of your Fund account.
****Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you presently use, please
call the Transfer Agent at 800-KEY-FUND.****
BUYING A DIVIDEND: You should check the Fund's distribution schedule before you
invest. If you buy shares of the Fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.
IMPORTANT INFORMATION ABOUT TAXES: The Fund intends to qualify as a regulated
investment company, in which case it pays no federal income tax on the earnings
or capital gains it distributes to its shareholders.
o The Fund's long-term capital gains are taxable as capital gain.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
o Dividends from the Fund that are attributable to interest on certain U.S.
Government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to U.S.
Government obligations will be shown on the tax statements you receive from
the Fund.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
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<PAGE>
o You will receive tax statements from the Fund every January showing the
amounts and tax status of distributions made to you.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
****THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION.
YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN THE FUND.****
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<PAGE>
INVESTING WITH VICTORY
****All you need to do to get started is to fill out an application.****
If you are looking for a convenient way to open an account for yourself or a
minor child, or to add money to an existing account, Victory can help. The
sections that follow will serve as a guide to your investments with Victory. The
following sections will describe how to access information on your account, how
to open an account, and how to purchase, exchange, and redeem shares of the
Fund. We want to make it simple for you to do business with us. If you have
questions about any of this information, please call one of our customer service
representatives at 800-KEY-FUND. They will be happy to assist you.
CALCULATION OF SALES CHARGES. Shares are sold at their public offering price,
which includes the initial sales charge. The sales charge as a percentage of
your investment decreases as your investment amount increases. The current sales
charge rates and commissions paid to Investment Professionals are as follows:
<TABLE>
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Sales Charge Sales Charge Dealer Reallowance
YOUR INVESTMENT As a % of As a % of Your As a % of the
Offering Price Investment Offering Price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 4.75% 4.99% 4.00%
- ---------------------------------------------------------------------------------------
$50,000 up to $100,000 4.50% 4.71% 4.00%
- ---------------------------------------------------------------------------------------
$100,000 up to $250,000 3.50% 3.63% 3.00%
- ---------------------------------------------------------------------------------------
$250,000 up to $500,000 2.25% 2.30% 2.00%
- ---------------------------------------------------------------------------------------
$500,000 up to $1,000,000 1.75% 1.78% 1.50%
- ---------------------------------------------------------------------------------------
$1,000,000 and above 0.00% 0.00% *
- ---------------------------------------------------------------------------------------
</TABLE>
*There is no initial sales charge on purchases of $1 million or more.
However, a CDSC of up up 1.00% of the purchase price will be charged if
shares are redeemed in the first year after purchase, or at .50% within two
years of purchase. This charge will be based on either the cost of the
shares or current net asset value, whichever is lower. There will be no
CDSC on reinvested distributions. Investment Professionals may be
compensated at the rate of up to 1.00% of the purchase. Investment
Professionals may be paid at a rate of up to 1.00% of the purchase price.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under federal
securities laws.
****There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.****
SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for reduced sales charges
in the following cases:
1. A Letter of Intent lets you purchase Class A shares of the Fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at one time. You must start with a minimum initial investment of
5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A shares of multiple Victory Funds (except Money
Market Funds) for purposes of calculating the sales charge. The combination
privilege also allows you to combine the total investments from the
accounts of members of your immediate family (spouse and children under the
age of 21) for a reduced sales charge at the time of purchase.
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<PAGE>
4. Waivers for certain investors:
a) Current and retired Fund Trustees, employees, directors, trustees and
family members of KeyCorp or "Affiliated Providers"* and dealers who
have an agreement with the Distributor and any trade organization to
which the Advisers or the Administrator belong.
b) Investors who purchase shares for non-discretionary trust or other
advisory accounts established with KeyCorp or its affiliates.
c) Investors who reinvest a distribution from a deferred compensation
plan, agency, trust, or custody account that was maintained by the
Victory Group or invested in a fund of the Victory Group.
d) Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales
charge for those shares.
e) Investment Professionals utilizing fund shares in fee-based investment
products under agreement with the Victory Group, and selling brokers
and their sales representatives.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organizations that provide services to Victory and Key Mutual Funds (the
Victory Group).
HOW TO PURCHASE SHARES
Shares can be purchased in a number of different ways. ****All you need to do to
get started is to fill out an application.**** You can send in your payment by
check, wire transfer, exchange from another Victory Fund, or through
arrangements with your Investment Professional. An Investment Professional is a
salesperson, financial planner, investment adviser, or trust officer who
provides you with investment information. Sometimes they will charge you for
these services. Their fee will be in addition to, and unrelated to, the fees and
expenses charged by the Fund.
MAKE YOUR CHECK PAYABLE TO:
The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
o REGULAR U.S. MAIL ADDRESS:
Send completed Account Applications with your check, bank draft, or money order
to:
The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
o OVERNIGHT MAIL ADDRESS:
Use the following address ONLY for overnight packages:
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
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<PAGE>
o WIRE ADDRESS:
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring funds
to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert account number, name, and control
number assigned by the Transfer Agent)
TELEPHONE NUMBER:
800-KEY-FUND
800-539-3863
ACH. After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic members banks may be used. It
takes about 15 days to set up an ACH account. A fee is not currently being
charged for ACH transfers; however, the Fund may charge a fee at some future
date. Notification would be sent out prior to implementing a fee.
STATEMENTS AND REPORTS. You will receive a periodic statement reflecting any
transactions that affect the balance or registration of your account. You will
receive a confirmation after any purchase, exchange, or redemption. If your
account has been set up by an Investment Professional, account activity will be
detailed in their statements to you. Share certificates are not issued. Twice a
year, you will receive the financial reports of the Fund. By January 31 of each
year, you will receive an IRS Form 1099-DIV, which will also be filed with the
IRS. Form 1099-DIV reports account activity from the previous year.
SYSTEMATIC INVESTMENT PLAN. To enroll in the Systematic Investment Plan, you
should check this box on the Account Application. We will need your bank
information and the amount and frequency of your investment. You can select
monthly, quarterly, semi-annual, or annual investments. You should attach a
voided personal check so the proper information can be obtained. You must first
meet the minimum investment requirement of $500, then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it into shares of the Fund.
RETIREMENT PLANS. You can use the Fund as part of your retirement portfolio.
Your Investment Professional can set up your new account under one of several
tax sheltered plans. Please contact your Investment Professional for details
regarding an IRA or other retirement plan that works best for your financial
situation.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. ****If you
would like to make additional investments after your account is already
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.**** The Transfer Agent may
reject any purchase order, in its sole discretion. If your check is returned for
any reason, you will be charged for any resulting fees and/or losses. Third
party checks will not be accepted. You may only invest or exchange into fund
shares legally available in your state. If your account falls below $500, we may
ask you to re-establish the minimum investment. If you do not do so within 60
days, we may close your account and send you the value of your account.
- 13 -
<PAGE>
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges. The "Victory Group" includes funds offered as a part of the
Victory Funds and Key Mutual Funds complex. Key Mutual Funds is affiliated with
KeyCorp.
You can exchange shares of the Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Fund, you should keep the
following in mind:
o Shares of the fund selected for exchange must be available for sale in your
state of residence.
o The prospectus of the Fund and the fund whose shares you want to buy must
offer the exchange privilege.
o Shares of the Fund may be exchanged at relative net asset value. Shares can
only be exchanged for Class A shares of another fund.
o You must meet the minimum purchase requirements for the fund you purchase
by exchange.
o The registration and tax identification numbers of the two accounts must be
identical.
o You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any business day.
o Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
****You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-
FUND.****
HOW TO REDEEM SHARES
****There are a number of convenient ways to redeem shares of the Fund. You can
use the same mailing and wiring addresses listed for purchases. You will earn
dividends up to and including the date your redemption request is processed.****
o BY TELEPHONE. The easiest way to redeem shares is by calling 800-KEY-FUND.
When you fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when you are ready to redeem, call us and tell
us which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via the Automated Clearing House (ACH).
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory nor its servicing agents, the Adviser, the Sub-Adviser, nor the
Transfer Agent will be responsible for any losses. If these procedures are not
followed, the Transfer Agent may be liable to you for losses resulting from
unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
- 14 -
<PAGE>
o BY MAIL. Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
o BY WIRE. If you want to redeem funds by wire, you must establish a Fund
account which will accommodate wire transactions. If you call by 4:00 p.m.
Eastern time, your funds will be wired on the next business day.
o BY ACH. Normally, your redemption will be processed on the same day or the
next day if received after 4:00 p.m. Eastern Time. It will be transferred by ACH
as long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividends accrued will be included with the redemption proceeds.
SYSTEMATIC WITHDRAWAL PLAN. If you check this box on the Account Application, we
will send monthly, quarterly, semi-annual, or annual payments to the person you
designate. The minimum withdrawal is $25, and you must have a balance of $5,000
or more. Once again, we will need a voided personal check to activate this
feature. You should be aware that your account eventually may be depleted.
However, you cannot automatically close your account using the Systematic
Withdrawal Plan. If your balance falls below $500, we may ask you to bring the
account back to the minimum balance. If you decide not to increase your account
to the minimum balance, your account may be closed and the proceeds mailed to
you.
ORGANIZATION AND MANAGEMENT OF THE FUND
****We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Fund to
service its shareholders. They are paid a fee for their services.****
ABOUT VICTORY:
The Fund is a member of the Victory Funds, a family of 26 distinct investment
portfolios. Victory has been operating continuously since 1983, and was
organized as a Delaware business trust on February 29, 1996.
The Board of Trustees of Victory has the overall responsibility for the
management of the Fund.
THE INVESTMENT ADVISERS: One of the Fund's most important contracts is its
Advisory Agreement with Key Asset Management Inc. (KAM or the Adviser), a New
York Corporation registered as an investment adviser with the SEC. KAM is a
subsidiary of KeyBank National Association, a wholly-owned subsidiary of
KeyCorp. Effective February 28, 1997, KAM became the surviving corporation after
the reorganization of four indirect investment adviser subsidiaries of KeyCorp.
Affiliates of the Adviser manage approximately $50 billion for a limited number
of institutional clients.
- 15 -
<PAGE>
The Adviser has hired a sub-adviser, Lakefront Capital Investors, Inc. (the
"Sub-Adviser", and together with KAM, the "Advisers") to help manage the Fund.
In this way, investors have access to a range of investment styles and
strategies. The advisory and sub-advisory agreements authorize the Advisers to
choose brokers or dealers to handle the purchases and sales of a Fund's
securities. KAM will be paid a monthly fee of 1.00% of the average annual daily
net assets of the Fund. KAM will pay the Sub-Adviser a monthly fee of .50% of
the Fund's average annual daily net assets from its advisory fee. KAM has
obtained an option to purchase 19.9% of the capital stock of Lakefront Capital
Investors, Inc.
- 16 -
<PAGE>
MANAGEMENT OF THE FUND
--------------------------------------------------
| |
| TRUSTEES |
| |
| Supervise the Fund's activities. |
| |
--------------------------------------------------
|
|
--------------------------------------------------
| INVESTMENT ADVISER |
| Key Asset Management Inc. |
| 127 Public Square |
| Cleveland, OH 44114 |
| |
| Manages the Fund's business
|
| and investment activities. |
---------------------------------------------------
|
|
--------------------------------------------------
| |
| INVESTMENT SUB-ADVISER |
| Lakefront Capital |
| Investors, Inc. |
| Suite 840, The Hanna Building |
| 1422 Euclid Avenue |
| Cleveland, OH 44115 |
| |
| Provides portfolio management |
| services to the Fund. |
--------------------------------------------------
THE ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT:
BISYS Fund Services is the Administrator and Distributor. BISYS is paid a fee of
.15% of the Fund's average daily net assets on a monthly basis as the
Administrator, but does not charge a fee for its services as Distributor. BISYS
Fund Services Ohio, Inc. receives a fee as the Fund Accountant.
The Distributor may provide cash or other compensation to dealers for selling
shares of the Fund. Payments may be in the form of trips, tickets, and/or
merchandise offered through sales contests. It does this at its own expense, and
not at the expense of the Fund or its shareholders.
BISYS Fund Services has retained Lakefront Capital Investors, Inc. as a
consultant and from time to time may pay Lakefront a fee for its services.
- 17 -
<PAGE>
SHAREHOLDER SERVICING PLAN:
The Fund has adopted a Shareholder Servicing Plan. The shareholder servicing
agent performs a number of services for its customers who are shareholders of
the Fund. It establishes and maintains accounts and records, processes dividend
and distribution payments, arranges for bank wires, assists in transactions, and
changes account information. For these services the Fund pays up to .25% of the
average daily net assets of the shares of the class. The Fund has agreements
with various shareholder servicing agents, including the Distributor, the
Custodian and its affiliates, other financial institutions, and securities
brokers. Shareholder servicing agents may waive all or a portion of their fee
periodically.
DISTRIBUTION PLAN:
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Fund. The Fund does not currently pay
direct expenses under this plan.
BROKERAGE:
The Fund may buy and sell securities through an affiliate of KAM. The Board of
Trustees has adopted procedures to ensure that these transactions are fair and
in the best interest of the Fund.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P. serves as independent accountants to the Fund.
LEGAL COUNSEL:
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.
- 18 -
<PAGE>
HOW THE FUND IS ORGANIZED
_______________________
| |
___________________| SHAREHOLDERS |
| | |
| |_____________________|
| |
| |
| |
| |
| ______________________|_______________________
| | FINANCIAL SERVICES FIRMS AND |
| | THEIR INVESTMENT PROFESSIONALS |
| | |
| | Advise current and prospective |
| | shareholders on their fund investments. |
| |_____________________________________________|
| |
| |
| |
| ______________________________________________
| | |
| | TRANSFER AGENT/SERVICING AGENT |
| | State Street Bank and Trust Company |
| | 225 Franklin Street |
| | Boston, MA 02110 |
| | |
| | Boston Financial Data Services |
| | |
|_______| Two Heritage Drive |
| Quincy, MA 02171 |
| |
| Handles services such as record-keeping, |
| statements, processing of buy and |
| sell requests, distribution of dividends, |
| and servicing of shareholder's accounts. |
|_____________________________________________|
|
|
______________________________________ | ____________________________________
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND | | | |
| FUND ACCOUNTANT | | | Key Trust Company of Ohio, N.A. |
| BISYS Fund Services, Inc. and | | | 127 Public Square |
| BISYS Fund Services Ohio, Inc. | | | |
| 3435 Stelzer Road | | | Cleveland, OH 44114 |
| |__|__| |
| Columbus, OH 43219 | | |
| | | |
| Markets the Fund, distributes shares| | Provides for safekeeping of the |
| through investment professionals, | | Fund's investments and cash, and |
| and calculates the value of shares. | |settles trades made by the Fund. |
|_____________________________________| |__________________________________|
- 19 -
<PAGE>
ADDITIONAL INFORMATION
****Some additional information you should know about the Fund.****
The Fund offers only the classes of shares described in this prospectus, but at
some future date, the Fund may offer additional classes of shares through a
separate prospectus.
YOUR RIGHTS AS A SHAREHOLDER. All shareholders have equal voting, liquidation,
and other rights. As a shareholder of the Fund, you have rights and privileges
similar to those enjoyed by other corporate shareholders. Delaware Trust law
limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of Trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of the Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.
CODE OF ETHICS. Victory and the Advisers have each adopted a Code of Ethics to
which all investment personnel and all other access persons to the Fund must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination.
BANKING LAWS. Banking laws, including the Glass-Steagall Act, prevent a bank
holding company or its affiliates from sponsoring, organizing, or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian or
shareholder servicing agent. They may also purchase shares of such a company for
their customers and pay third parties for performing these functions. Should
these laws ever change in the future, the Trustees would consider selecting
another qualified firm so that all services would continue.
SHAREHOLDER COMMUNICATIONS. You will receive unaudited Semi-Annual Reports and
audited Annual Reports on a regular basis from the Fund. In addition, you may
also receive updated prospectuses or supplements to this prospectus. In order to
eliminate duplicate mailings to an address at which two or more shareholders
with the same last name reside, the Fund will send only one copy of the above
communications. ****If you would like to receive additional copies of any
materials, please call the Fund at 800-KEY- FUND.****
The securities described in this prospectus and the SAI are not offered in any
state in which they may not be sold lawfully. No salesman, dealer, or other
person is authorized to give any information or make any representation other
than those contained in this prospectus and the SAI.
- 20 -
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists the types of securities the Fund may choose to
purchase. The majority of the portfolio for the Fund is made up of equity
securities. However, the Fund is also permitted to invest in the securities
listed in the table below and the SAI.
% Percent of TOTAL assets
# No limitation of usage; Fund may be using currently.
~ Indicates a "derivative security," whose value is linked to, or derived from
another security, instrument or index.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
INVESTMENT PRACTICES AND LIMITATIONS THE LAKEFRONT FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C>
BORROWING; REVERSE REPURCHASE AGREEMENTS. The borrowing of money 33-1/3%
from banks or through reverse repurchase agreements. The Fund will not use
borrowing to create leverage.
- ------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES. Illiquid securities are securities that are not readily 15%
marketable or cannot be disposed of within seven days and in the usual course
of business at approximately the price at which the Fund has valued them.
- ------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING. Selling a security soon after purchasing it. Short-term #
trading increases turnover and transaction costs.
- ------------------------------------------------------------------------------------------------------------
LIST OF ALLOWABLE INVESTMENTS THE LAKEFRONT FUND
- ------------------------------------------------------------------------------------------------------------
Equity Securities. Can include common stock preferred stock and 80-100%
ssecurities convertible preferred stock.
- ------------------------------------------------------------------------------------------------------------
CORPORATE DEBT OBLIGATIONS. Debt instruments issued by private 20%
corporations which are traded on major exchanges. They may be secured or
unsecured by property.
- ------------------------------------------------------------------------------------------------------------
~ FUTURES CONTRACTS AND OPTIONS. Contracts involving the right or 5%
obligation to deliver or receive assets or money depending on the performance 33-1/3%
of one or more assets or a securities index. To reduce the effects of leverage,
liquid assets equal to the contract commitment are set aside to cover the
commitment. 5% or less in margins or premiums; and 33-1/3% or less of total
assets subject to futures and options. The Fund will use futures and options in
an effort to hedge against market risk.
</TABLE>
- 1 -
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<S> <C>
~ WARRANTS. The right to purchase an equity security at a stated price for a 33-1/3%
limited period of time.
- --------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A security that is purchased 33-1/3%
for delivery at a later time. The market value may change before the delivery
date.
- --------------------------------------------------------------------------------------------------------------
ZERO COUPON BONDS. These securities are purchased at a discount from the 20%
face value. The face value is received at maturity, with no interest payments
before then. These may be subject to greater risks of price fluctuation.
- --------------------------------------------------------------------------------------------------------------
~VARIABLE & FLOATING RATE SECURITIES. Investment grade instruments, some 20%
of which may be illiquid, with interest rates that reset periodically.
- --------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT OBLIGATIONS. Including bankers' acceptances, certificates of 20%
deposit, prime quality commercial paper, cash and cash equivalents.
- --------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S. 20%
Government, its agencies or instrumentalities. Some are direct obligations of
the U.S. Treasury; others are obligations only of the U.S. agency.
- --------------------------------------------------------------------------------------------------------------
~RECEIPTS. Separately traded interest or principal components of U.S. 20%
Government securities.
- --------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. An agreement to purchase a security that must 33-1/3%
later be sold back to the seller at the same price plus interest. The seller's
obligation is secured with collateral.
- --------------------------------------------------------------------------------------------------------------
OTHER INVESTMENT COMPANIES. Shares of other mutual funds with similar 5%
investment objectives. The following limitations apply: (1) No more than 5% 3%
of the Fund's total assets may be invested in one mutual fund, (2) No more 10%
than 3% of the outstanding voting securities of any one mutual fund, and (3)
No more than 10% of the Fund's total assets in combined mutual fund holdings.
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER. Short-term obligations issued by corporations and financial #
institutions. The Fund only uses prime quality commercial paper.
- --------------------------------------------------------------------------------------------------------------
For temporary defensive purposes, the Fund may invest up to 100% of its total
assets in U.S. Government securities or short-term debt obligations. For more
information on ratings and detailed descriptions of each of the above investment
vehicles, see the SAI.
</TABLE>
- 2 -
<PAGE>
THE VICTORY FUNDS
800-KEY-FUND(R)
OR
800-539-3863
THE VICTORY
REAL ESTATE INVESTMENT FUND
PROSPECTUS
MARCH 1, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Introduction 2
AN OVERVIEW OF THE FUND 3
An analysis which includes objectives, policies, strategies, and expenses,
Investment Objective, Policies, and Strategies 19
Risk Factors 19
Investment Limitations 20
Investment Performance 20
Share Price 21
Dividends, Distributions, and Taxes 21
INVESTING WITH VICTORY 23
How to Purchase Shares 24
How to Exchange Shares 25
How to Redeem Shares 26
Organization and Management of the Fund 27
Additional Information 30
Other Securities and Investment Practices 32
</TABLE>
Key to Fund Information:
(1) Objective and Strategy: The goals and the strategy that the Fund plans to
use in pursuing its investment objective.
(2) Risk Factors: The risks that you may assume as an investor in the Fund.
(3) Expenses: The costs that you will pay as an investor in the Fund, including
sales charges and ongoing expenses.
SHARES OF THE FUND ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYBANK, ANY OF
ITS AFFILIATES, OR ANY OTHER BANK;
o SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
<PAGE>
THE VICTORY PORTFOLIOS
REAL ESTATE INVESTMENT FUND
800-KEY-FUND OR 800-539-3863
INTRODUCTION
This prospectus describes the Real Estate Investment Fund (the Fund). The Fund
is a diversified mutual fund and is a part of The Victory Portfolios (Victory),
an open-end investment management company. This prospectus explains the
objectives, policies, risks, and strategies of the Fund. You should read this
prospectus before investing in the Fund and keep it for future reference. A
detailed Statement of Additional Information (the SAI) describing the Fund is
also available for your review. The SAI has been filed with the Securities and
Exchange Commission (the SEC), and is incorporated into this prospectus by
reference. If you would like a free copy of the SAI, please request one by
calling us at 800-KEY-FUND.
(1) INVESTMENT OBJECTIVE:
The REAL ESTATE INVESTMENT FUND seeks to provide total return through
investments in real estate-related securities.
(1) INVESTMENT STRATEGY:
The Fund pursues its investment objective by investing primarily in common
stocks, including real estate investment trusts (REITs), rights to purchase
these securities, convertible securities and preferred stocks. Please review
"Investment Objective, Policies, and Strategies" and "Other Securities and
Investment Practices" for an overview of the Fund.
(2) RISK FACTORS:
The Fund is not insured by the FDIC. Since equity securities fluctuate in value,
the Fund's shares also will fluctuate in value. Because the Fund invests in
REITs, the Fund is subject to risks similar to those associated with direct
investments in real estate. In addition, there are other potential risks which
are discussed in the section "Risk Factors."
WHO SHOULD INVEST:
o Investors willing to accept higher short-term risk along with higher
potential long-term returns
o Investors seeking total return over the long term with some current income
o Investors who are investing for goals that are many years in the future
o Investors seeking to participate in the real estate market through indirect
investment in real estate securities and who can bear the risks associated
with this investment.
(3) FEES AND EXPENSES:
You may pay a sales charge of up to 4.75% of the offering price, depending on
the amount you invest. You also will incur expenses for investment advisory,
management, administrative, and shareholder services, all of which are included
in the Fund's expense ratio.
PURCHASES:
The minimum initial investment is $500 for most accounts ($250 for Individual
Retirement Accounts) and $25 thereafter. The initial investment must be
accompanied by the Fund's Account Application. Fund shares may be purchased by
check, Automated Clearing House, or wire. See "How to Purchase Shares."
2
<PAGE>
REDEMPTIONS:
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, the Fund will redeem the
shares and credit your bank account or send the proceeds to the address
designated on your account application. See "How to Redeem Shares."
DIVIDENDS/DISTRIBUTIONS:
Ordinarily, the Fund declares and pays dividends from its net investment income
quarterly. Any net capital gains realized by the Fund are paid as dividends
annually. The Fund can send your dividends directly to you by mail, credit them
to your bank account, reinvest them in the Fund, or invest them in another fund
of the Victory Group. The "Victory Group" includes other funds of The Victory
Portfolios and Key Mutual Funds. You can make this choice when you fill out an
account application. See "Dividends, Distributions, and Taxes."
OTHER SERVICES:
Victory offers a number of other services to better serve shareholders including
exchange privileges and automated investment and withdrawal plans. See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.
AN OVERVIEW OF THE FUND:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Inception Estimated Annual Maximum Newspaper
VICTORY FUND Date Expenses After Sales Abbreviation*
Waivers (as a % of Charge
net assets)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Victory Real Estate 3/1/97 1.40% 4.75%
Investment
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*All newspapers do not use the same abbreviation.
The following pages provide you with an overview of the Fund. Please look at the
objective, policies, strategies, risks, expenses, and financial history to
determine whether the Fund will suit your risk tolerance and investment needs.
You should also review "Other Securities and Investment Practices" section for
additional information about the individual securities in which the Fund can
invest and the risks related to these investments.
3
<PAGE>
THE REAL ESTATE INVESTMENT FUND
(1) INVESTMENT OBJECTIVE: The Real Estate Investment Fund seeks to provide total
return through investment in real estate-related securities.
(1) INVESTMENT POLICIES AND STRATEGY: The Real Estate Investment Fund pursues
its investment objective by investing in real estate-related securities.
Under normal market conditions, the Fund will invest substantially all of its
assets in:
o Common stocks (including REITs)
o Rights or warrants to purchase common stocks
o Securities convertible into common stocks when the Fund's investment
adviser thinks that the conversion will be profitable
o Preferred stocks
The Real Estate Investment Fund may also invest up to 20% of its total assets in
securities of foreign real estate companies.
For more information about other securities in which the Fund can invest, see
"Other Securities and Investment Practices" and the SAI.
(2) RISK: The Real Estate Investment Fund is designed for long-term
investors. The Fund is subject to the risks common to all mutual funds and the
risks common to mutual funds that invest in equity securities. In addition, the
Real Estate Investment Fund is subject to the risks related to direct investment
in real estate. By itself, the Real Estate Investment Fund does not constitute a
complete investment plan and should be considered a long-term investment for
investors who can afford to weather changes in the value of their investment.
PLEASE READ "RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT: Patrice Derrington and Richard E. Salomon are the
Portfolio Managers of the Fund, positions they have held since the Fund's
inception in March 1997. Patrice Derrington is a Vice President and Portfolio
Manager of Key Asset Management, Inc. (KAM or the Adviser), and has been in the
real estate, investment, and finance business since 1991. Richard E. Salomon is
the President and Managing Director of KAM, and has been in the
investment advisory business since 1982.
(3) FUND EXPENSES
This section will help you understand the costs and expenses you will pay,
directly or indirectly, if you invest in the Real Estate Investment Fund.
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge Imposed on Purchases 4.75%
(as a percentage of the offering price)
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
4
<PAGE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
These examples illustrate the estimated operating expenses that you will incur
as a shareholder of the Fund. THESE EXPENSES ARE CHARGED DIRECTLY TO THE FUND.
Expenses include management fees as well as the costs of maintaining accounts,
administering the Fund, providing shareholder services, and other activities.
The expenses shown are estimated based on projected expenses of the Fund.
ANNUAL FUND OPERATING EXPENSES (AFTER EXPENSE WAIVERS AND REIMBURSEMENTS) (as a
percentage of average daily net assets)
Management Fees 1.00%
Rule 12b-1 Distribution Fees None
Other Expenses(1) .40%
Total Fund Operating Expenses 1.40%
(1) "Other Expenses" includes an estimate of shareholder servicing fees the
Fund expects to pay. (See "Organization and Management of the Funds --
Shareholder Servicing Plan.")
These examples are designed to help you understand the various costs you will
bear, directly or indirectly, as an investor in the Real Estate Investment Fund.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
Real Estate 1 YEAR 3 Years
Investment Fund $61 $90
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
5
<PAGE>
RISK FACTORS
This prospectus describes some of the risks that you may assume as an investor
in the Fund. Some limitations on the Fund's investments are described in the
section that follows. By matching your investment objective with a comfortable
level of risk, you can create your own customized investment plan. "Other
Securities and Investment Practices" at the end of this Prospectus provides
additional information on the securities mentioned in the overview of the Fund.
As with any mutual fund, there is no guarantee that the Fund will earn income or
show a positive total return over time. The Fund's price, yield, and total
return will fluctuate. You may lose money if the Fund's investments do not
perform well. ****It is important to keep in mind one basic principle of
investing: the greater the risk, the greater the potential reward. The reverse
is also generally true: the lower the risk, the lower the potential reward.****
The following risks are common to ALL MUTUAL FUNDS:
o MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth less than the price the Fund
originally paid for it, or less than the security was worth at an earlier
time.
o MARKET RISK may affect a single issuer, an industry, a sector of the
economy, or the entire market, and is common to all investments.
o MANAGER RISK is the risk that the Fund's Portfolio Manager may use a
strategy that does not produce the intended result.
The following risks are common to mutual funds that invest in EQUITY SECURITIES:
o EQUITY RISK is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
earnings and cash flow, equity securities are entitled to the residual
value after the company meets its other obligations. For example, holders
of debt securities have priority over holders of equity securities to a
company's assets in the event of bankruptcy.
6
<PAGE>
The following risks are common to mutual funds that invest in REAL ESTATE
SECURITIES:
o REAL ESTATE RISK is the risk that the value of a security will fluctuate
because of changes in property values, vacancies of rental properties,
overbuilding, changes in local laws, increased property taxes and operating
expenses, and other risks associated with real estate. While the Fund will
not invest directly in real estate, it may be subject to the risks
associated with direct ownership. Equity REITs may be affected by changes
in property value, while mortgage REITs may be affected by credit quality.
o REGULATORY RISK. Certain REITs may fail to qualify for pass-through of
income under federal tax law, or to maintain their exemption from the
registration requirements under federal securities laws.
o FOREIGN ISSUER AND CURRENCY RISK. Foreign real estate securities involve
additional risks. Foreign issuers may not be subject to uniform accounting,
auditing and financial reporting standards and practices used by domestic
issuers. In addition, foreign securities markets may be less liquid, more
volatile, and less subject to governmental supervision than in the U.S.
Investments in foreign countries could be affected by factors not present
in the U.S., including expropriation, confiscation of property, and
difficulties in enforcing contracts. Currency risk is the risk that
fluctuations in the exchange rates between the U.S. dollar and foreign
currencies may negatively affect an investment. Adverse changes in rates
may erode or reverse gains produced by investments denominated in foreign
currencies.
**** EQUITY REITs, which own property, generate income from rental and lease
payments and offer the potential for growth from property appreciation and
periodic capital gains from the sale of property. Mortgage REITs earn
interest income and are subject to credit risks, like the chance that a
developer may fail to repay a loan.****
INVESTMENT LIMITATIONS
**** The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis.****
To help reduce risk, the Fund has adopted limitations on some investment
policies. These limits involve the Fund's ability to borrow money and the
amount it can invest in various types of securities, including liquid
securities. Certain limitations can be changed only with the approval of
shareholders. Victory's Board of Trustees can change other investment
limitations without shareholder approval. See "Other Securities and
Investment Practices" and the SAI for more information.
The Fund limits to 25% of total assets the amount it may invest in any
single issuer (other than U.S. Government obligations). The Fund limits its
borrowing to 33-1/3% of its total assets (the Fund would borrow by selling
a security that it owns and then repurchasing that security later at a
higher price). The Fund will not borrow for leverage purposes.
The Fund is not "diversified" according to certain federal securities
provisions regarding diversification of its assets. However, the Fund
intends to comply with certain federal tax requirements regarding the
diversification of its assets. Generally, under those requirements, at
least 50% of the Fund's total assets must be invested so that no more than
5% of its Fund's total assets are invested in the securities of any one
issuer. These diversification provisions and requirements are discussed in
the SAI.
INVESTMENT PERFORMANCE
**** Past performance does not guarantee future results. You may obtain the
current 30-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 7:00 p.m. Eastern Time Monday
through Friday.****
7
<PAGE>
Victory may advertise the performance of the Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information may
also appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Performance information is contained in the annual and semi-annual reports. You
may obtain a copy of the annual and semi-annual reports free of charge, which
include performance information.
The "30-day yield" is an "annualized" figure--the amount you would earn if you
stayed in a Fund for a year and the Fund continued to have the same yield
throughout that year. To calculate 30-day yield, the Fund's net investment
income per share for the most recent 30 days is divided by the maximum offering
price per share.
To calculate "total returns," the Fund starts with the total number of shares
that you can buy for $1,000 at the beginning of the period. Then all the
additional shares that you would have purchased within the period are added with
reinvested dividends and distributions (this takes into account the Fund's
income, if any). The number of these shares is multiplied by the net asset value
on the last day of the period and the result is divided by the initial $1,000
investment to determine the percentage gain or loss. For periods of more than
one year, the cumulative total return is adjusted to get an average annual total
return.
o YIELD is a measure of dividend income.
o AVERAGE ANNUAL TOTAL RETURN (OR "ANNUALIZED TOTAL RETURN") is a
measure of past dividend income plus capital appreciation. It is the
sum of all parts of your investment return.
Whenever you see information on a Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.
SHARE PRICE
The Fund's share price, called its net asset value (NAV), is calculated each
business day (normally at 4:00 p.m. Eastern time). Shares are purchased at the
next share price calculated after your investment is received and accepted. A
business day is a day on which the New York Stock Exchange is open for trading
or any day in which enough trading has occurred in the securities held by the
Fund to materially affect the NAV. If your account is established with an
Investment Professional or a bank, you may not be able to purchase or sell
shares on other holidays when the Federal Reserve Bank of Cleveland is closed.
The NAV is calculated by adding up the total value of the Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund:
Total Assets - Liabilities
NAV = -----------------------------
Number of Shares Outstanding
****The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own, gives you the dollar amount and value of
your investment.****
The Fund's net asset value can be found daily in The Wall Street Journal and
other newspapers.
8
<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Fund passes its earnings along to investors in
the form of distributions. Dividend distributions are the net dividends or
interest earned on investments. If the Fund makes a capital gain distribution,
it usually occurs in December. As with any investment, you should consider the
tax consequences of an investment in the Fund.
Ordinarily, the Fund declares and pays dividends from its net investment income
quarterly. The Fund pays any realized capital gains as dividends at least
annually. Shareholders who receive a dividend check for less than $10.00 will
have future dividends reinvested automatically into their accounts.
Distributions can be received in one of the following ways:
o REINVESTMENT OPTION: You can have distributions automatically reinvested in
additional shares of the Fund. If you do not indicate another choice on
your Account Application, this option will be assigned to you
automatically.
o CASH OPTION: A check will be mailed to you no later than 7 days after the
pay date.
o INCOME EARNED OPTION: Dividends can be reinvested automatically in the Fund
and your capital gains can be paid in cash, or capital gains can be
reinvested and dividends paid in cash.
o DIRECTED DIVIDENDS OPTION: You can have distributions automatically
reinvested in shares of another fund of the Victory Group. The "Victory
Group" includes other funds of the Victory Portfolios and Key Mutual Funds.
If distributions are reinvested in shares of another fund, you will not pay
a sales charge on the reinvested distributions.
o DIRECTED BANK ACCOUNT OPTION: In most cases, you can have distributions
automatically transferred to your bank checking or savings account. Under
normal circumstances, a dividend will be transferred within 7 days of the
dividend payment date. The bank account must have a registration identical
to that of your Fund account.
****Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you presently use, please
call the Transfer Agent at 800-KEY-FUND.****
BUYING A DIVIDEND: You should check the Fund's distribution schedule before you
invest. If you buy shares of the Fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.
IMPORTANT INFORMATION ABOUT TAXES: The Fund intends to qualify as a regulated
investment company, in which case it pays no federal income tax on the earnings
or capital gains it distributes to its shareholders.
o Ordinary dividends from the Fund are taxable as ordinary income; dividends
from the Fund's long-term capital gains are taxable as capital gain.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
o Dividends from the Fund that are attributable to interest on certain U.S.
Government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to U.S.
Government obligations will be shown on the tax statements you receive from
the Fund.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
o You will receive tax statements from the Fund every January showing the
amounts and tax status of distributions made to you.
9
<PAGE>
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
****THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION.
YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN THE FUND.****
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account for yourself or a
minor child, or to add money to an existing account, Victory can help. The
following sections will describe how to access information on your account, how
to open an account, and how to purchase, exchange and redeem shares of the Fund.
We want to make it simple for you to do business with us. The sections that
follow will serve as a guide to your investments with Victory. If you have
questions about any of this information, please call one of our customer service
representatives at 800-KEY-FUND. They will be happy to assist you.
CALCULATION OF SALES CHARGES. Shares are sold at their public offering price,
which includes the initial sales charge. The sales charge as a percentage of
your investment decreases as your investment amount increases. The current sales
charge rates and commissions paid to Investment Professionals are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Sales Charge Sales Charge Dealer Reallowance
YOUR INVESTMENT As a % of Offering As a % of Your As a % of the
Price Investment Offering Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 4.75% 4.99% 4.00%
- ----------------------------------------------------------------------------------------------
$50,000 up to $100,000 4.59% 4.71% 4.00%
- ----------------------------------------------------------------------------------------------
$100,000 up to $250,000 3.50% 3.63% 3.00%
- ----------------------------------------------------------------------------------------------
$250,000 up to $500,000 2.25% 2.30% 2.00%
- ----------------------------------------------------------------------------------------------
$500,000 up to $1,000,000 1.75% 1.78% 1.50%
- ----------------------------------------------------------------------------------------------
$1,000,000 and above 0.00% 0.00% *
- ----------------------------------------------------------------------------------------------
</TABLE>
*There is no initial sales charge on purchases of $1 million or more. However, a
CDSC of up to 1.00% of the purchase price will be charged if shares are redeemed
in the first year after purchase, or at .50% within two years of the purchase.
This charge will be based on either the cost of the shares or current net asset
value, whichever is lower. There will be no CDSC on reinvested distributions.
Investment Professionals may be paid at a rate of up to 1.00% of the purchase
price.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under federal
securities laws.
****There are several ways you can combine multiple purchases in The Victory
Portfolios and take advantage of reduced sales charges.****
SALES CHARGE REDUCTIONS AND WAIVERS. You may qualify for reduced sales charges
in the following cases:
1. A Letter of Intent lets you purchase shares over a 13-month period and
receive the same sales charge as if all shares had been purchased at one
time. You must start with a minimum initial investment of 5% of the total
amount.
10
<PAGE>
2. Rights of Accumulation allow you to add the value of any shares you already
own to the amount of your next investment for purposes of calculating the
sales charge at the time of purchase.
3. You can combine shares of multiple Victory Funds (excluding Money Market
Funds) for purposes of calculating the sales charge. The combination
privilege also allows you to combine the total investments from the
accounts of members of your immediate family for a reduced sales charge at
the time of purchase.
4. Waivers for certain investors:
a) The prospectus of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
b) Shares of the Fund may be exchanged at relative net asset value.
Shares can only be exchanged for Class A shares of another fund.
c) You must meet the minimum purchase requirements for the fund you
purchase by exchange.
d) The registration and tax identification numbers of the two accounts
must be identical.
e) You must hold the shares you buy when you establish your account for
at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares on any business day.
f) Before exchanging, read the prospectus of the fund you wish to
purchase by exchange.
****You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY- FUND.****
HOW TO REDEEM SHARES
****There are a number of convenient ways to redeem shares of the Fund. You can
use the same mailing and wiring addresses listed for purchases. You will earn
dividends up to and including the date your redemption request is processed.****
BY TELEPHONE. The easiest way to redeem shares is by calling 800-KEY-FUND. When
you fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when you are ready to redeem, call us and tell
us which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via the Automated Clearing House (ACH).
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory, the Adviser, nor the Transfer Agent will be responsible for any
losses. If these procedures are not followed, the Transfer Agent may be liable
to you for losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
BY MAIL. Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests: o Redemptions over $10,000;
11
<PAGE>
o Your account registration has changed within the last 15 days; o The check
is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE. If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 4:00 p.m. Eastern time,
your funds will be wired on the next business day.
BY ACH. Normally, your redemption will be processed on the same day or the next
day if received after 4:00 p.m. Eastern Time. It will be transferred by ACH as
long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividends accrued will be included with the redemption proceeds.
Statements and Reports. You will receive a periodic statement reflecting any
transactions that affect the balance or registration of your account. You will
receive a confirmation after any purchase, exchange, or redemption. If your
account has been set up by an Investment Professional, account activity will be
detailed in their statements to you. Share certificates are not issued. Twice a
year, you will receive the financial reports of the Fund. By January 31 of each
year, you will receive an IRS Form 1099-DUIV, which will also be filed with the
IRS. Form 1099-DIV reports account activity from the previous year.
SYSTEMATIC WITHDRAWAL PLAN. If you check this box on the Account Application, we
will send monthly, quarterly, semi-annual, or annual payments to the person you
designate. The minimum withdrawal is $25, and you must have a balance of $5,000
or more. Once again, we will need a voided personal check to activate this
feature. You should be aware that your account eventually may be depleted.
However, you cannot automatically close your account using the Systematic
Withdrawal Plan. If your balance falls below $500, we may ask you to bring the
account back to the minimum balance. If you decide not to increase your account
to the minimum balance, your account may be closed and the proceeds mailed to
you.
Retirement Plans. You can use the Fund as part of your retirement portfolio.
Your Investment Professional can set up your new account under one of several
tax sheltered plans. Please contact your Investment Professional for details
regarding an IRA or other retirement plan that works best for your financial
situtation.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. ****If you
would like to make additional investments after your account is already
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.**** The Transfer Agent may
reject any purchase order, in its sole discretion. If your check is returned for
any reason, you will be charged for any resulting fees and/or losses. Third
party checks will not be accepted. You may only invest or exchange into fund
shares legally available in your state. If your account falls below $500, we may
ask you to reestablish the minimum investment. If you do not do so within 60
days, we may close your account and send you the value of your account.
ORGANIZATION AND MANAGEMENT OF THE FUND
****We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Fund to
service its shareholders. They are paid a fee for their services.****
ABOUT VICTORY:
The Fund is a member of the Victory Funds, a family of 26 distinct investment
portfolios. Victory has been operating continuously since 1983, and was
organized as a Delaware business trust on February 29, 1996.
The Board of Trustees of Victory has the overall responsibility for the
management of the Fund.
THE INVESTMENT ADVISERS: One of the Fund's most important contracts is its
Advisory Agreement with is a subsidiary of KeyCorp. Affiliates of KAM manage
approximately $50 billion for a limited number of institutional clients.
12
<PAGE>
MANAGEMENT OF THE FUNDS
--------------------------------------------------
| |
| TRUSTEES |
| |
| Supervise each Fund's activities. |
| |
--------------------------------------------------
|
|
--------------------------------------------------
| INVESTMENT ADVISER |
| Key Asset Management Inc. |
| 127 Public Square |
| Cleveland, OH 44114 |
| |
| Manages each Fund's business |
| and investment activities. |
---------------------------------------------------
THE ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT:
BISYS Fund Services is the Administrator and Distributor. BISYS is paid a fee of
.15% of the Fund's average daily net assets on a monthly basis as the
Administrator, but does not charge a fee for its services as Distributor.
KAM serves as Fund Accountant and receives a fee for those accounting services.
The Distributor may provide cash or other compensation to dealers for selling
shares of the Fund. Payments may be in the form of trips, tickets, and/or
merchandise offered through sales contests. It does this at its own expense, and
not at the expense of the Fund or its shareholders.
SHAREHOLDER SERVICING PLAN: The Fund has adopted a Shareholder Servicing Plan.
The shareholder servicing agent performs a number of services. It establishes
and maintains accounts and records, processes dividend and distribution
payments, arranges for bank wires, assists in transactions, and changes account
information. For these services the Fund pays up to .25% of its average daily
net assets of the share of the class. The Fund has agreements with various
shareholder servicing agents, including the Distributor, the Custodian and its
affiliates, other financial institutions, and securities brokers. Shareholder
servicing agents may waive all or a portion of their fee periodically.
DISTRIBUTION PLAN:
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Fund. The Fund does not currently pay
direct expenses under this plan.
13
<PAGE>
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P. serves as independent accountants to the Fund.
LEGAL COUNSEL:
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.
14
<PAGE>
HOW THE FUNDS ARE
ORGANIZED
_______________________
| |
___________________| SHAREHOLDERS |
| | |
| |_____________________|
| |
| |
| |
| |
| ______________________|_______________________
| | FINANCIAL SERVICES FIRMS AND |
| | THEIR INVESTMENT PROFESSIONALS |
| | |
| | Advise current and prospective |
| | shareholders on their fund investments. |
| |_____________________________________________|
| |
| |
| |
| ______________________________________________
| | |
| | TRANSFER AGENT/SERVICING AGENT |
| | State Street Bank and Trust Company |
| | 225 Franklin Street |
| | Boston, MA 02110 |
| | |
| | Boston Financial Data Services |
| | |
|_______| Two Heritage Drive |
| Quincy, MA 02171 |
| |
| Handles services such as record-keeping, |
| statements, processing of buy and |
| sell requests, distribution of dividends, |
| and servicing of shareholder's accounts. |
|_____________________________________________|
|
|
______________________________________ | ____________________________________
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND | | | |
| FUND ACCOUNTANT | | | Key Trust Company of Ohio, N.A. |
| BISYS Fund Services, Inc. and | | | 127 Public Square |
| BISYS Fund Services Ohio, Inc. | | | |
| 3435 Stelzer Road | | | Cleveland, OH 44114 |
| |__|__| |
| Columbus, OH 43219 | | | |
| | | | |
|Markets the Funds, distributes shares| | | Provides for safekeeping of the |
| through investment professionals, | | | Funds' investments and cash, and |
| and calculates the value of shares. | | |settles trades made by the Funds. |
|_____________________________________| | |__________________________________|
|
|
_____________________|_____________________
| Fund Accountant |
| |
| Key Asset Management, Inc. |
| 45 Rockefeller Plaza |
| New York, NY 10111 |
| |
| Calculates the value of shares. |
|__________________________________________|
15
<PAGE>
ADDITIONAL INFORMATION
****Some additional information you should know about the Fund.****
The Fund offers only the classes of shares described in this prospectus, but at
some future date, the Fund may offer additional classes of shares through a
separate prospectus.
YOUR RIGHTS AS A SHAREHOLDER. All shareholders have equal voting, liquidation,
and other rights. As a shareholder of the Fund, you have rights and privileges
similar to those enjoyed by other corporate shareholders.
Delaware Trust law limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of the Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.
CODE OF ETHICS. Victory and the Adviser have each adopted a Code of Ethics to
which all investment personnel and all other access persons to the Fund must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination.
BANKING LAWS. Banking laws, including the Glass-Steagall Act, prevent a bank
holding company or its affiliates from sponsoring, organizing, or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian or
shareholder servicing agent. They may also purchase shares of such a company for
their customers and pay third parties for performing these functions. The Funds
may process trades through an affiliate subject to procedures approved by the
Board. Should these laws ever change in the future, the Trustees would consider
selecting another qualified firm so that all services would continue.
SHAREHOLDER COMMUNICATIONS. You will receive unaudited Semi-Annual Reports and
audited Annual Reports on a regular basis from the Fund. In addition, you may
also receive updated prospectuses or supplements to this prospectus. In order to
eliminate duplicate mailings to an address at which two or more shareholders
with the same last name reside, the Fund will send only one copy of the above
communications. ****If you would like to receive additional copies of any
materials, please call the Fund at 800-KEY-FUND.****
16
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists some of the types of securities the Fund may choose to
purchase. The majority of the portfolio for the Fund is made up of equity
securities. However, the Fund is also permitted to invest in the securities as
shown in the table, below and in the SAI..
For temporary defensive purposes, the Fund may hold up to 100% of its total
assets in cash or short-term money-market instruments. % Percent of TOTAL assets
# No limitation of usage; Fund may be using currently.
- -> Indicates a "derivative security," whose value is linked to, or derived from
another security, instrument or index.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
List of Allowable Investments Real Estate Investment Fund
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Real Estate Investment Trusts. Shares of ownership in real estate or
mortgages on real estate.
- ------------------------------------------------------------------------------------------------------------
Equity Securities. Can include common stock, preferred stock and convertible #
preferred stock.
- ------------------------------------------------------------------------------------------------------------
~ WARRANTS. The right to purchase an equity security at a stated price for a 10%
limited period of time.
- ------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A security that is purchased 33-1/3%
for delivery at a later time. The market value may change before the delivery
date.
- ------------------------------------------------------------------------------------------------------------
~ VARIABLE & FLOATING RATE SECURITIES. Investment grade instruments, some 20%
of which may be illiquid, with interest rates that reset periodically.
- ------------------------------------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS. Including bankers' acceptances, certificates of #
deposit, prime quality, commercial paper, cash, and cash.
- ------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S. 20%
government, its agencies or instrumentalities. Some are direct obligations of
the U.S. Treasury; others are obligations only of the U.S. agency.
- ------------------------------------------------------------------------------------------------------------
~RECEIPTS. Separately traded interest or principal components of U.S. 20%
Government securities.
- ------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The purchase of a security that must later be sold 33-1/3%
back to the seller at the same price plus interest. The seller's obligation is
secured with government securities.
- ------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER. Short-term obligations issued by corporations or financial #
institutions. The Funds only use prime quality commercial paper.
- ------------------------------------------------------------------------------------------------------------
For temporary defensive purposes, the Fund may invest up to 100% of its total
assets in U.S. Government obligations or short-term debt obligations.
</TABLE>
<PAGE>
MANAGED BY KEYCORP
THE VICTORY GOVERNMENT BOND FUND
MARCH 1, 1997
<PAGE>
The
VICTORY
Portfolios
GOVERNMENT BOND FUND
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1997 call 800-KEY-FUND(R) or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the GOVERNMENT BOND FUND (the "Fund"), a diversified
portfolio. Key Asset Management Inc., Cleveland, Ohio, an indirect subsidiary of
KeyCorp, is the investment adviser to the Fund ("KAM" or the "Adviser"). BISYS
Fund Services ("BISYS") is the Fund's administrator (the "Administrator") and
distributor (the "Distributor").
ON FEBRUARY 19, 1997 THE VICTORY PORTFOLIOS, ON BEHALF OF THE FUND, HAS ENTERED
INTO A PLAN OF LIQUIDATION AND REORGANIZATION (THE "PLAN"), SUBJECT TO APPROVAL
BY THE FUND'S SHAREHOLDERS. THE PLAN PROVIDES FOR THE TRANSFER OF SUBSTANTIALLY
ALL THE FUND'S ASSETS AND STATED LIABILITIES TO THE VICTORY INVESTMENT QUALITY
BOND FUND. IN EXCHANGE, THE FUND WILL RECEIVE SHARES OF THE VICTORY INVESTMENT
QUALITY BOND FUND. THE FUND WILL DISTRIBUTE THOSE SHARES TO ITS SHAREHOLDERS PRO
RATA. THE FUND WILL THEN LIQUIDATE. IT IS CONTEMPLATED THAT THE REORGANIZATION
WILL BE TAX FREE.
The Fund seeks to provide as high a level of current income as is consistent
with preservation of capital by investing in U.S. Government securities. The
Fund's dollar-weighted average maturity will not exceed ten years.
The Fund offers two classes of shares: (1) Class A shares, which are offered at
net asset value plus the applicable sales charge (maximum of 4.75% of public
offering price) and (2) Class B shares, which are offered at net asset value
with a maximum contingent deferred sales charge ("CDSC") of 5.0% imposed on
certain redemptions. At the end of the sixth year after a purchase, the CDSC
will no longer apply to redemptions. Class B shares have higher ongoing expenses
than Class A shares, but automatically convert to Class A shares eight years
after purchase.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1997) for the Fund and an audited annual report for the Fund's fiscal
period ended October 31, 1996 have been filed with the Securities and Exchange
Commission ("Commission") and are incorporated herein by reference. The
Statement of Additional Information is available without charge upon request by
writing to The Victory Funds, P.O. Box 8527, Boston, MA 02266-8527, or by
calling 800-KEY-FUND.
SHARES OF THE FUND ARE:
O NOT INSURED BY THE FDIC;
O NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP BANK,
ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
O SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- 2 -
<PAGE>
TABLE OF CONTENTS PAGE
Fund Expenses............................................................ 4
Financial Highlights..................................................... 5
Investment Objective..................................................... 6
Investment Policies and Risk Factors..................................... 6
How to Invest, Exchange and Redeem....................................... 9
Dividends, Distributions and Taxes....................................... 18
Performance.............................................................. 20
Fund Organization and Fees............................................... 21
Additional Information................................................... 23
- 3 -
<PAGE>
FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help an investor make
investment decisions. You should consider this expense information along with
other important information in this Prospectus, including the Fund's investment
objective, policies and risk factors.
SHAREHOLDER TRANSACTION EXPENSES(1)
CLASS A CLASS B
------- -------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75% none
Maximum Sales Charge Imposed on Reinvested
Dividends none none
Deferred Sales Charge none 5% in the first
year, declining to
1% in the sixth year
and eliminated
thereafter
Redemption Fees none none
Exchange Fee none none
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (as a
percentage of average daily net assets)
CLASS A CLASS B
------- -------
Management Fees(2) 0.40% 0.40%
Rule 12b-1 Distribution Fees 0.00% 0.75%
Other Expenses(3) 0.63% 1.20%
---- ----
Total Fund Operating Expenses(2)(3) 1.03% 2.35%
==== ====
(1) Investors may be charged a fee if they effect transactions in Fund shares
through a broker or agent, including affiliated banks and non-bank
affiliates of the Adviser and KeyCorp. (See "How to Invest, Exchange and
Redeem.")
(2) The Adviser has agreed to reduce the 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
be .55% and "Total Fund Operating Expenses" as a percentage of average
daily net assets would be 1.18% for Class A Shares and 2.85% for Class B
Shares.
(3) These amounts include an estimate of the shareholder servicing fees the
Fund expects to pay. (See "Fund Organization and Fees -- Shareholder
Servicing Plan.")
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Government Bond Fund -- Class A Shares $58 $ 79 $102 $167
Government Bond Fund -- Class B Shares $74 $103 $146 $236
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. The foregoing example is based upon
expenses for the fiscal year ended October 31, 1996 and expenses that the Fund
is expected to incur during the current fiscal year. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect to the
financial highlights for the periods indicated. The information below has been
derived from financial statements audited by Coopers & Lybrand L.L.P. for the
fiscal year ended 1996 and the fiscal period ended 1995 (and by other auditors
for all earlier periods) whose reports thereon, together with the financial
statements of the Fund and the Victory Government Bond Portfolio (the
"Predecessor Fund"), are incorporated by reference into the Statement of
Additional Information. No Class B shares were publicly issued prior to
September 26, 1994, and therefore no information on Class B shares is reflected
in the table below for periods prior to September 26, 1994.
The information set forth below is for a share of the Fund outstanding for each
period indicated.
THE VICTORY GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
Class B Class A
--------------------------------------------------------------------------------
SIX MONTHS SEPTEMBER 26,
YEAR ENDED ENDED 1994 TO YEAR ENDED
OCTOBER 31, OCTOBER 31, APRIL 30, OCTOBER 31,
1996 1995(d) 1995(e) 1996
---- ------- ------------- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.85 $ 9.43 $ 9.25 $ 9.87
------- ------- ------- -------
Investment Activities
Net investment income 0.46 0.25 0.31 0.55
Net realized and
unrealized gains (losses)
from investments
(0.20) 0.45 0.17 (0.22)
Total from Invest-ment
Activities 0.26 0.70 0.48 0.33
------- ---- ---- -------
Distributions
Net investment income (0.46) (0.22) (0.30) (0.55)
In excess of net
invest- (0.01) (0.06) -- --
ment income
Net realized gains -- -- -- --
Total Distributions (0.47) (0.28) (0.30) (0.55 )
-------- -------- -------- ---------
NET ASSET VALUE, END
OF PERIOD $ 9.64 $ 9.85 $ 9.43 $ 9.65
======= ======= ======= =======
Total Return (excludes
sales charges) 2.77% $ 7.47%(b) 5.26%(b) 3.52%
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, End of Period
(000) $ 1,498 $ 909 $ 155 $24,632
Ratio of expenses to
average net assets 1.84% 1.82%(c) 1.43%(c) 0.98%
Ratio of net investment
income to average net
assets 4.78% 4.98%(c) 5.03%(c) 5.64%
Ratio of expenses to
average net assets(g) 2.06% 2.12%(c) 1.60%(c) 1.22%
Ratio of net investment
income to average net
assets(g) 4.56% 4.68%(c) 4.86%(c) 5.40%
Portfolio turnover(f) 378% 69% 127% 378%
5
<PAGE>
Class A
-----------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED MAY 3, 1993 TO
OCTOBER 31, APRIL 30, APRIL 30,
1995(d) 1995(c) 1994(a)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING ------- ---------- ----------
OF PERIOD $ 9.44 $ 9.45 $ 10.00
Investment Activities ------- ------- --------
Net investment income
Net realized and
unrealized gains (losses) 0.33 0.55 0.45
from investments
Total from Invest-ment
Activities (0.40) (0.02) (0.54)
0.73 0.53 (0.09)
Distributions ------- ------- ---------
Net investment income
In excess of net
invest- (0.29) (0.54) (0.45)
ment income
Net realized gains (0.01) -- --
Total Distributions
-- -- (0.01)
(0.30) (0.54) (0.46)
NET ASSET VALUE, END -------- -------- ---------
OF PERIOD
$ 9.87 $ 9.44 $ 9.45
Total Return (excludes ======= ======= ========
sales charges)
RATIOS/SUPPLEMENTAL 7.86%(b) 5.87% (1.06%)
DATA:
Net Assets, End of Period
(000)
Ratio of expenses to
average net assets $27,856 $84,567 $120,636
Ratio of net investment
0.92%(c) 0.63% 0.38%(c)
income to average net
assets
Ratio of expenses to
average net assets(h) 6.04%(c) 5.97% 4.61%(c)
Ratio of net investment
1.06%(c) 0.98% 0.96%(c)
income to average net
assets(h)
Portfolio turnover(g)
5.90%(c) 5.62% 4.03%(c)
69% 127% 121%
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Government Bond Portfolio was
reorganized as the Victory Government Bond Fund.
(e) Effective September 26, 1994, the Fund designated the existing shares as
Class A Shares and commenced offering Class B Shares.
(f) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(g) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
6
<PAGE>
INVESTMENT OBJECTIVE
The Fund seeks to provide as high a level of current income as is consistent
with preservation of capital by investing in U.S. Government securities. The
investment objective of the Fund is fundamental and therefore may not be changed
without a vote of the holders of a majority of the outstanding voting securities
(as defined in the Statement of Additional Information). There can be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES AND RISK FACTORS
SUMMARY OF PRINCIPAL INVESTMENT POLICIES
The Fund pursues its objective by investing in a portfolio of U.S. government
securities. As a fundamental policy, the Fund normally invests 100% of its total
assets in U.S. government securities such as U.S. Treasury bonds, notes and
bills and mortgage-backed securities issued by the Government National Mortgage
Association ("GNMA"), and in repurchase agreements secured by those securities
in such a manner that the Fund's dollar-weighted average maturity does not
exceed ten years. However, the Fund normally holds some U.S. government
securities with remaining maturities of 18 months or less. When the Adviser
believes market conditions warrant a temporary defensive position, the Fund may
invest up to 100% of its assets in short-term securities such as bankers'
acceptances, certificates of deposit and other bank obligations, repurchase
agreements, short-term government or government agency obligations, and
commercial paper and other short-term corporate obligations, having remaining
maturities of one year or less.
The value of the Fund's securities will fluctuate in response to market
conditions and the value of a share in the Fund may vary. Investors should
review the investment objective and policies of the Fund and carefully consider
the ability to assume any risk involved in purchasing shares of the Fund,
including the risk of possible loss of principal.
Generally, bond funds offer higher yields than money market funds although
unlike money market funds, the share price of bond funds fluctuates in response
to changes in prevailing interest rates and may be affected by other market and
credit factors. Fixed-income securities (except securities with floating or
variable interest rates) are generally considered to be interest rate sensitive,
which means that their value (and a Fund's share price) will tend to decrease
when interest rates rise and increase when interest rates fall. Securities with
shorter maturities, while offering lower yields, generally provide greater price
stability than longer-term securities and are less affected by changes in
interest rates. The share prices and yields of the Fund are not insured or
guaranteed by the U.S. Government.
ADDITIONAL INFORMATION REGARDING THE FUND'S INVESTMENTS
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest in accordance with its investment
objective, policies and limitations, including certain transactions it may make
and strategies it may adopt. The following also contains a brief description of
certain risk factors. The Fund may, following notice to its shareholders, take
advantage of other investment practices which are not at present contemplated
for use by the Fund or which currently are not available but which may be
developed, to the extent such investment practices are both consistent with the
Fund's investment objective and are legally permissible for the Fund. Such
investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
o MONEY MARKET INSTRUMENTS. The Fund may invest in money market instruments,
which are short-term, high-quality debt securities, including U.S. Government
obligations, commercial paper, certificates of deposit, bankers' acceptances,
time deposits and short-term corporate obligations. Money market instruments may
carry fixed rates of return or have variable or floating interest rates. The
Fund may only invest in U.S. Government securities and money market instruments.
o COMMERCIAL PAPER. The Fund may invest in commercial paper, which consists of
short-term obligations issued by banks, broker-dealers, corporations and other
entities for purposes such as financing their current operations.
o CERTIFICATES OF DEPOSIT. The Fund may invest in certificates of deposit, which
are negotiable certificates representing a commercial bank's obligations to
repay funds deposited with it, earning specified rates of interest over given
periods.
7
<PAGE>
o BANKERS' ACCEPTANCES. The Fund may invest in bankers' acceptances, which are
negotiable obligations of a bank to pay a draft which has been drawn on it by a
customer. These obligations are backed by large banks and usually backed by
goods in international trade.
o TIME DEPOSITS. The Fund may invest in time deposits, which are non-negotiable
deposits in a banking institution earning a specified interest rate over a given
period of time.
o WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. When
the Fund agrees to purchase securities on a when-issued basis, the Fund's
custodian must set aside cash or liquid portfolio securities equal to the amount
of that commitment in a separate account, and may be required to subsequently
place additional assets in the separate account to reflect any increase in the
Fund's commitment. Prior to delivery of when-issued securities, their value is
subject to fluctuation and no income accrues until their receipt. The Fund
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies, and not for investment leverage. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction; its
failure to do so may cause the Fund to miss a price or yield considered to be
advantageous.
o REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund would suffer a loss to the extent that
the proceeds from a sale of the underlying portfolio securities were less than
the repurchase price, or to the extent that the disposition of such securities
by the Fund was delayed pending court action.
o ZERO COUPON BONDS. The Fund is permitted to purchase both zero coupon U.S.
government securities and zero coupon corporate securities ("Zero Coupon
Bonds"). Zero Coupon Bonds are purchased at a discount from the face amount
because the buyer receives only the right to a fixed payment on a certain date
in the future and does not receive any periodic interest payments. The effect of
owning instruments which do not make current interest payments is that a fixed
yield is earned not only on the original investment but also, in effect, on
accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yields on the Zero Coupon Bond,
but at the same time eliminates the holder's ability to reinvest at higher
rates. For this reason, Zero Coupon Bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest periodically. The amount of price
fluctuation tends to increase as maturity of the security increases.
o RECEIPTS. In addition to bills, notes and bonds issued by the U.S. Treasury,
the Fund may also purchase separately traded interest and principal component
parts of such obligations that are transferable through the Federal book entry
system, known as Separately Traded Registered Interest and Principal Securities
("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These instruments
are issued by banks and brokerage firms and are created by depositing Treasury
notes and Treasury bonds into a special account at a custodian bank; the
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities
("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity date without interim cash payments of interest or principal. This
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
fluctuations in value due to changes in interest rates than interest-paying U.S.
Treasury obligations.
o MORTGAGE-BACKED SECURITIES. Mortgage-backed securities purchased by the Fund
are securities issued or guaranteed by agencies or instrumentalities of the U.S.
Government and non-government entities such as banks, mortgage lenders, or other
financial institutions. A mortgage-backed security may be an obligation of the
issuer backed by a mortgage or pool of mortgages or a direct interest in an
underlying pool of mortgages. Some mortgage-backed securities make payments of
both principal and interest at a variety of intervals; others make semiannual
interest payments at a predetermined rate and repay
8
<PAGE>
principal at maturity (like a typical bond). Mortgage-backed securities are
based on different types of mortgages including those on commercial real estate
or residential properties. Other types of mortgage-backed securities will likely
be developed in the future, and the Fund may invest in them if the Adviser
determines they are consistent with the Fund's investment objective and
policies. The Fund will not acquire "residual" interests in real estate mortgage
investment conduits (REMICs) under current tax law in order to avoid certain
potential adverse tax consequences.
The value of mortgage-backed securities may change due to shifts in the market's
perception of issuers. In addition, regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Non-government,
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
o EXTENDIBLE DEBT SECURITIES. The Fund may purchase extendible debt securities,
which can be retired at the option of the Fund at various dates prior to
maturity.
o INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company that follows the Fund's
investment policy, but may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets in the securities
of other investment companies. Pursuant to an exemptive order received by The
Victory Portfolios from the Commission, the Fund may invest in the money market
funds of The Victory Portfolios. The Adviser will waive its fee attributable to
the Fund's assets invested in a fund of The Victory Portfolios and, to the
extent required by the laws of any state in which shares of the Fund are sold,
the Adviser will waive its investment advisory fee as to all assets invested in
other investment companies. Because such other investment companies employ an
investment adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees, to the extent such fees are not
waived by the Adviser. The Fund will invest only in the securities of money
market funds which invest only in securities of equal or higher short-term
ratings as the securities in which the Fund may invest.
o PORTFOLIO TRANSACTIONS. The Fund may engage in the technique of short-term
trading. Such trading involves the selling of securities held for a short time,
ranging from several months to less than a day. The object of such short-term
trading is to take advantage of what the Adviser believes are changes in market,
industry or individual company conditions or outlook. Any such trading would
increase the Fund's turnover rate and its transaction costs. High turnover will
generally result in higher brokerage costs and possible tax consequences for the
Fund. In the fiscal period ended October 31, 1995, the portfolio turnover rate
was 68.82% compared to 127.00% in the fiscal year ended April 30, 1995.
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which the Adviser or its affiliates have a lending relationship.
NOTE: The Statement of Additional Information contains additional information
about the investment practices of the Fund and risk factors. The investment
policies and limitations of the Fund may be changed by the Trustees without any
vote of shareholders unless (1) a policy is expressly deemed to be a fundamental
policy of the Fund or (2) a policy is expressly deemed to be changeable only by
such majority vote.
INVESTMENT LIMITATIONS
The following summarizes some of the Fund's principal investment limitations.
The Statement of Additional Information contains a complete listing of the
Fund's investment limitations and provides additional information about
investment restrictions designed to reduce the risk of an investment in the
Fund.
1. The Fund may not invest more than 5% of its total assets in the securities
of any issuer (except U.S. Government securities, except that up to 25% of
the Fund's total assets may be invested without regard to this limitation).
2. The Fund may not borrow money except that the Fund may borrow money from
banks for temporary or emergency purposes (not for leveraging or
investment), and engage in reverse repurchase agreements in an amount not
exceeding 33=% of its total assets, including the amount borrowed less
liabilities other than borrowings (any borrowings exceeding this amount
will be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33=% limitation), provided that
9
<PAGE>
any such borrowings representing more than 5% of the Fund's total assets
must be repaid before the Fund may make additional investments.
3. The Fund will not purchase a security if, as a result, more than 15% of its
net assets would be invested in illiquid securities. Illiquid securities
are investments that cannot be readily sold within seven days in the usual
course of business at approximately the price at which the Fund has valued
them. Under the supervision of the Trustees, the Adviser determines the
liquidity of the Fund's investments. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments may involve time-consuming negotiation
and legal expenses, and it may be difficult or impossible for the Fund to
sell them promptly at an acceptable price.
Each of the investment limitations indicated above in this subsection are
fundamental, except for the limitation pertaining to illiquid securities.
Non-fundamental limitations may be changed without shareholder approval.
Whenever an investment policy or limitation states a maximum percentage of the
Fund's assets that may be invested, such percentage limitation will be
determined immediately after and as a result of the investment and any
subsequent change in values, assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations, except in the case of borrowing (or other
activities that may be deemed to result in the issuance of a "senior security"
under the 1940 Act). If the value of the Fund's illiquid securities at any time
exceeds the percentage limitation applicable at the time of acquisition due to
subsequent fluctuations in value or for other reasons, the Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
This prospectus offers investors two different classes of shares. The different
classes of shares represent investments in the same portfolio of securities but
are subject to different expenses and will likely have different share prices.
o CLASS A SHARES AND CLASS B SHARES. If Class A shares are purchased, there is
an initial sales charge (on investments up to $1 million). If Class B shares are
purchased, there is no sales charge at the time of purchase, but if the shares
are redeemed within six years, you will normally pay a contingent deferred sales
charge ("CDSC") that varies depending on how long you own your shares.
o WHICH CLASS OF SHARES SHOULD YOU CHOOSE? Once you decide that the Fund is an
appropriate investment for you, the decision as to which class of shares is
better suited to your needs depends on a number of factors which you should
discuss with your financial adviser:
1. AMOUNT OF INVESTMENT. If you plan to invest a substantial amount, the
reduced sales charges available for larger purchases of Class A shares may
be more beneficial to you. Any order for $1 million or more will only be
accepted as Class A shares for that reason.
2. INVESTMENT HORIZON. While future financial needs cannot be predicted with
certainty, investors who prefer not to pay an initial sales charge and who
plan to hold their shares for more than six years might consider Class B
shares. Investors who plan to redeem shares within eight years might prefer
Class A shares.
3. DIFFERENCES IN ACCOUNT FEATURES. The dividends payable to Class B
shareholders will be reduced by the additional expenses borne solely by
that class, such as the asset-based sales charge to which Class B shares
are subject, as described below and in the Statement of Additional
Information.
A salesperson, financial planner, investment adviser or trust officer who
provides you with information regarding the investment of your assets (an
"Investment Professional") or other person who is entitled to receive
compensation for selling Fund shares may receive different compensation for
selling one class than for selling another class. Both the CDSC (an asset-based
sales charge) for Class B shares and the front-end sales charge on sales of
Class A shares are used primarily to compensate such persons.
o HOW ARE SHARES PURCHASED? Shares may be purchased directly or through an
Investment Professional of a securities broker or other financial institution
that has entered into a selling agreement with the Fund or the Distributor.
Shares are also available to clients of bank trust departments. The minimum
investment is $500 ($250 for Individual Retirement Accounts) for the initial
purchase and $25 thereafter. Accounts set up through a bank
10
<PAGE>
trust department or an Investment Professional may be subject to different
minimums. When you buy shares, be sure to specify Class A or Class B shares. If
you do not make a selection, your investment will be made in Class A shares.
O INVESTING THROUGH YOUR INVESTMENT PROFESSIONAL. Your Investment Professional
will place your order with the Transfer Agent (see "Fund Organization and Fees
- -- Transfer Agent") on your behalf. You may be required to establish a brokerage
or agency account. Your Investment Professional will inform you if whether
subsequent trades should be directed to the Investment Professional or directly
to the Fund's Transfer Agent. Accounts established with Investment Professionals
may have different features, requirements and fees. In addition, Investment
Professionals may charge for their services. Information regarding these
features, requirements and fees will be provided by the Investment Professional.
If you are purchasing shares of any Fund through a program of services offered
or administered by your Investment Professional, you should read the program
materials in conjunction with this Prospectus. You may initiate any transaction
by telephone through your Investment Professional. Subsequent investments by
telephone may be made directly. See "Special Investor Services" for more
information about telephone transactions.
o INVESTING THROUGH YOUR BANK TRUST DEPARTMENT. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed Account Application for the Fund in which an investment
is made. Additional documents may be required from corporations, associations,
and certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including Key Trust Company of
Ohio, N.A. and other affiliates of the Adviser are not duplicative of any of the
services for which KAM as the investment adviser is compensated for advising the
Fund. The charges paid by clients of bank trust departments, or their
affiliates, should also be considered by the investor in addition to the net
yield and return on the investment in the Fund, although such charges do not
affect the Fund's dividends or distributions.
o INVESTING THROUGH THE SYSTEMATIC INVESTMENT PLAN. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please refer
to "The Systematic Investment Plan" for more details.
INVESTING DIRECTLY
o BY MAIL. You may purchase shares by completing and signing an Account
Application (initial purchase only payable to the Victory Funds) and mailing it,
together with a check (or other negotiable bank draft or money order) payable in
the amount of at least the minimum investment requirement to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
o By Wire.YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. Federal funds
should be wired to:
State Street Bank and Trust Company
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert your account
number, name, and control number assigned by the
Transfer Agent).
The Fund does not impose a fee for wire transactions, although your bank may
charge you a fee for this service.
o BY ACH . The purchase amount will be transferred between the bank account
designated and your fund account via Automated Clearing House ("ACH"). Only a
bank account maintained in a domestic financial institution which is an ACH
member may be so designated. The Fund may modify or terminate the telephone
and/or ACH privilege at any time or charge a service fee upon notice to
shareholders. No such fee is currently contemplated by the Fund; however, your
bank may charge you a fee for this service. If the designated bank account does
not contain sufficient assets at the time your order is processed, the order may
be cancelled, and you could be liable for resulting fees and/or losses. NOTE
THAT THIS SERVICE REQUIRES APPROXIMATELY 15 DAYS TO ESTABLISH. THEREFORE, IT MAY
NOT BE APPLICABLE TO REQUEST YOUR INITIAL PURCHASE UTILIZING THIS METHOD.
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Class A shares are sold at the public offering price based on the net asset
value that is next determined after the Transfer Agent receives the purchase
order. Class B shares are sold at net asset value per share, but may be subject
to a CDSC (see "Class B Shares"). In most cases, to receive that day's offering
price, the Transfer Agent must receive your order as of the close of regular
trading of the New York Stock Exchange ("NYSE") which is normally 4:00 p.m.
Eastern time (the "Valuation Time") on each Business Day (as defined in
"Shareholder Account Rules and Policies -- Share Price") . If you buy shares
through an Investment Professional, the Investment Professional must receive
your order in a timely fashion on a regular Business Day . It is the
responsibility of your Investment Professional to transmit your order to
purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Transfer Agent may reject any purchase order
for the Fund's shares, in its sole discretion.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars and made payable to the Victory
Funds, or in the case of a retirement account, the custodian or trustee. Third
party checks will not be accepted. Checks must be drawn on U.S. banks. No cash
will be accepted. If you make a purchase with more than one check, each check
must have a value of at least $25, and the minimum investment requirement still
applies. The Fund reserves the right to limit the number of checks processed at
one time. If your check does not clear, your purchase will be canceled and you
could be liable for any losses or fees incurred. Payment for the purchase is
expected at the time of the order. If payment is not received within three
business days of the date of the order, the order may be canceled, and you could
be held liable for resulting fees and/or losses. When purchases are made by
check or periodic account investment, redemptions will not be allowed until the
investment being redeemed has been in the account for 15 calendar days.
CLASS A SHARES. Class A shares are sold at their offering price, which is
normally net asset value plus an initial sales charge. However, in some cases,
described below, where purchases are not subject to an initial sales charge, the
offering price may be net asset value. In some cases, reduced sales charges may
be available, as described below. When you invest, the Fund receives the net
asset value for your account. The sales charge varies depending on the amount of
your purchase and a portion may be retained by the Distributor and allocated to
your Investment Professional. The Victory Portfolios has a reinstatement policy
which allows an investor who redeems shares originally purchased with a sales
charge to reinvest within 90 days without incurring an additional sales charge.
The current sales charge rates and commissions paid to Investment Professionals
are as follows:
CLASS A SALES CHARGE DEALER
---------------------------- REALLOWANCE
AS A % OF AS A % OF AS A % OF
OFFERING NET AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTMENT PRICE
- ------------------ -------- ---------- ------------
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% (1)
(1) There is no initial sales charge on purchases of $1 million or more.
However, a CDSC of up to 1.00% of the purchase price will be charged if shares
are redeemed in the first year after purchase, or at .50% within two years of
the purchase. This charge will be based on either the cost of the shares or
current net asset value, whichever is lower. There will be no CDSC on reinvested
distributions. Investment Professionals may be paid up to 1.00% of the purchase
price.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for maintaining and servicing
accounts of customers invested in the Fund, First Albany Corporation ("First
Albany") and PFIC Securities Corporation ("PFIC") may receive payments from the
Distributor equal to two-thirds of the Dealer Retention (as defined below) on
any shares of the Fund (and other funds of The Victory Portfolios) sold by First
Albany or PFIC and their broker-dealer affiliates. "Dealer Retention" is an
amount equal to the difference between the applicable sales charge and such part
of the sales charge which is reallowed to broker-dealers.
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o REDUCED SALES CHARGES FOR CLASS A SHARES. You may be eligible to buy Class A
shares at reduced sales charge rates in one or more of the following ways:
o LETTER OF INTENT FOR CLASS A SHARES. An investor may obtain a reduced sales
charge by means of a written Letter of Intent which expresses the investor's
intention to purchase shares of the Fund at a specified total public offering
price within a 13-month period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of the total amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of the investor)
to secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for redemption, exchange or other disposal by the investor
until all purchases pursuant to the Letter of Intent have been made or the
higher sales charge has been paid. When the full amount indicated has been
purchased, the escrow will be released. A Letter of Intent may include purchases
of shares made not more than 90 days prior to the date the investor signs a
Letter of Intent; however, the 13-month period during which the Letter of Intent
is in effect will begin on the date of the earliest purchase to be included. An
investor may combine purchases that are made in an individual capacity with (1)
purchases that are made by members of the investor's immediate family and (2)
purchases made by businesses that the investor owns as sole proprietorships, for
purposes of obtaining reduced sales charges by means of a written Letter of
Intent. In order to accomplish this, however, investors must designate on the
Account Application the accounts that are to be combined for this purpose.
Investors can only designate accounts that are open at the time the Letter of
Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800- KEY-FUND. This program, however, may be
modified or eliminated at any time without notice.
o RIGHTS OF ACCUMULATION AND CONCURRENT PURCHASES. A shareholder may qualify for
a reduced sales charge on purchases of Class A Shares of the Fund, and other
funds of The Victory Portfolios, by combining a current purchase with purchases
of another fund(s), or with certain prior purchases of shares of The Victory
Portfolios. The applicable sales charge is based on the sum of (1) the
purchaser's current purchase plus (2) the current public offering price of the
purchaser's previous purchases of (a) all shares held by the purchaser in the
Fund and (b) all shares held by the purchaser in any other fund of The Victory
Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor. See "Combined Purchases" and "Rights of Accumulation" in the
Statement of Additional Information.
o WAIVERS OF CLASS A SALES CHARGES. No sales charge is imposed on sales of Class
A shares to the following categories of persons (which categories may be changed
or eliminated at any time):
(1) Current or retired Trustees of The Victory Portfolio and Victory Shares,
employees, directors, trustees, and their family members of KeyCorp or an
"Affiliated Provider" ("Affiliated Providers" refer to affiliates and
subsidiaries of KeyCorp and service providers to The Victory Portfolios and
the Victory Shares (collectively, the "Victory Group")), dealers having an
agreement with the Distributor and any trade organization to which the
Adviser or the Administrator belongs;
(2) Investors who purchase shares for trust, investment management or certain
other advisory accounts established with KeyCorp or any of its affiliates;
(3) Investors who reinvest assets received in a distribution from a qualified,
non-qualified or deferred compensation plan, agency, trust or custody
account that
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was either (a) maintained by KeyCorp or an Affiliated Provider, or (b)
invested in a fund of the Victory Group;
(4) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon redemption of
shares;
(5) Shareholders of the former Investors Preference Fund For Income, Inc. and
the Investors Preference New York Tax-Free Fund, Inc. who have continuously
maintained accounts with a fund or funds of the Victory Group with a
balance of $250,000 or more (investors with less than $250,000 will pay any
applicable sales charges); and
(6) Investment advisers or financial planners who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; and clients of such investment
advisers or financial planners who place trades for their own accounts if
the accounts are linked to the master account of such investment adviser or
financial planner on the books and records of the broker or agent. Such
accounts include retirement and deferred compensation plans and trusts used
to fund those plans, including, but not limited to, those defined in
sections 401(a), 403(b), or 457 of the Internal Revenue Code and "rabbi
trusts."
CLASS B SHARES. Class B shares are sold at net asset value per share without an
initial sales charge. However, if Class B shares are redeemed within six years
of their purchase, a CDSC will be deducted from the redemption proceeds. That
sales charge will not apply to shares purchased by the reinvestment of dividends
or capital gains distributions. The charge will be assessed on the lesser of the
net asset value of the shares at the time of redemption or the original purchase
price. The CDSC is not imposed on the amount of your account value represented
by the increase in net asset value over the initial purchase price (including
increases due to the reinvestment of dividends and capital gains distributions).
The Class B CDSC is paid to the Distributor to reimburse its expenses of
providing distribution-related services to the Fund in connection with the sale
of Class B shares.
To determine whether the CDSC applies to a redemption, The Victory Portfolios
redeems shares in the following order: (1) shares acquired by reinvestment of
dividends and capital gains distributions, (2) shares held for over six years,
and (3) shares held the longest during the 6-year period. The amount of the CDSC
will depend on the number of years since you invested and the dollar amount
being redeemed, according to the following schedule:
CONTINGENT DEFERRED SALES CHARGE
YEARS SINCE PURCHASE ON REDEMPTIONS IN THAT YEAR
PAYMENT WAS MADE (AS % OF AMOUNT SUBJECT TO CHARGE)
-------------------- ----------------------------------
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
6 and following none
In the table, a "year" is a 12-month period. All purchases are considered to
have been made on the first regular business day of the month in which the
purchase was made.
o WAIVERS OF CLASS B CDSC. The Class B CDSC will be waived if the shareholder
requests it for any of the following redemptions: (1) distributions to
participants or beneficiaries from Retirement Plans, if the distributions are
made (a) under an Automatic Withdrawal Plan after the participant reaches age 59
1/2, as long as the payments are no more than 12% of the account value annually
(measured from the date the Transfer Agent receives the request), or (b)
following the death or disability (as defined in the Internal Revenue Code) of
the participant or beneficial owner; (2) redemptions from accounts other than
Retirement Plans following the death or disability of the shareholder (as
evidenced by a determination of disability by the Social Security
Administration); (3) returns of excess contributions to Retirement Plans; and
(4) distributions of not more than 12% of the account value annually.
The CDSC is also waived on Class B shares in the following cases: (1) shares
sold to the Adviser or its affiliates; (2) shares issued in plans of
reorganization to which The Victory Portfolios is a party; and (3) shares
redeemed in involuntary redemptions as described above.
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<PAGE>
o AUTOMATIC CONVERSION OF CLASS B SHARES. Eight years after Class B shares are
purchased, those shares will automatically convert to Class A shares. This
conversion feature relieves Class B shareholders of the asset-based sales charge
that applies to Class B shares under the Class B Distribution Plan, described
below. The conversion is based on the relative net asset value of the two
classes, and no sales charge or other charge is imposed. When Class B shares
convert, any other Class B shares that were acquired by the reinvestment of
dividends and distributions on the converted shares will also convert to Class A
shares. The conversion feature is subject to the continued availability of a tax
ruling described in "Alternative Sales Arrangements -- Class B Conversion
Feature" in the Statement of Additional Information.
o DISTRIBUTION PLAN FOR CLASS B SHARES. The Victory Portfolios has adopted a
Distribution Plan (the "Plan") under Rule 12b-1 of the 1940 Act for Class B
shares to compensate the Distributor for its services and costs in distributing
Class B shares and servicing accounts. Under the Plan, The Victory Portfolios
pays the Distributor an annual "asset-based sales charge" of 0.75% per year on
Class B shares. This fee is computed on the average daily net assets of Class B
shares and paid monthly. The asset-based sales charge allows investors to buy
Class B shares without a front-end sales charge while allowing the Distributor
to compensate dealers that sell Class B shares. The asset-based sales charge
increases Class B expenses by up to 0.75% of average net assets per year.
The Distributor pays sales commissions of 4.00% of the purchase price to dealers
from its own resources at the time of sale. For maintaining and servicing
accounts of customers invested in the Fund, First Albany and PFIC Securities
Corporation may receive payments from the Distributor equal to two-thirds of the
excess of the scheduled CDSC over any commission paid to the selling broker. The
Distributor retains the asset-based sales charge to recoup the sales commissions
it pays and its financing costs. If the Plan is terminated by The Victory
Portfolios, it provides that the Trustees may elect to continue payments for
certain expenses already incurred. The payments under the Plan increase the
annual expenses of Class B shares. For more details, please refer to "Advisory
and Other Contracts -- Class B Shares Distribution Plan" in the Statement of
Additional Information.
SPECIAL INVESTOR SERVICES
o THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
with the Systematic Investment Plan by completing the appropriate section of the
Account Application and attaching a voided personal check with your bank's
magnetic ink coding number across the front. If your bank account is jointly
owned, be sure that all owners sign. You must first meet the Fund's initial
investment requirement of $500, then investments may be made monthly, quarterly,
semi-annually, or annually by automatically deducting $25 or more from your bank
account. For officers, trustees, directors and employees, including retired
directors and employees, of the Victory Group, KeyCorp and its affiliates, and
the Administrator and its affiliates (and family members of each of the
foregoing) who participate in the Systematic Investment Plan, there is no
minimum initial investment required. You may change the amount of your monthly
purchase at any time. Your bank checking account will be debited on the date
indicated on your Account Application. Shares will be purchased at the offering
price next determined following receipt of the order by the Transfer Agent. You
may cancel the Systematic Investment Plan at any time without payment of a
cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
o THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account with the Systematic Withdrawal Plan by completing the appropriate
section of the Account Application. If you own shares in a fund worth $5,000 or
more, you can have monthly, quarterly, semi-annual or annual checks sent from
your account directly to you, to a person named by you, or to your bank checking
account. The minimum withdrawal is $25. If you are having checks sent to your
bank checking account, attach a voided personal check with your bank's magnetic
ink coding number across the front. If your account is jointly owned, be sure
that all owners sign. You may obtain information about the Systematic Withdrawal
Plan by contacting the Transfer Agent. Your Systematic Withdrawal Plan payments
are drawn from share redemptions. If Systematic Withdrawal Plan redemptions
exceed income dividends and capital gain dividend distributions earned on your
Fund shares, your account eventually may be exhausted. If any applicable sales
charges are applied to new purchases of shares of the Fund, it is to your
disadvantage to buy shares of the Fund while also making systematic redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the net asset value per share (the
"NAV") as determined on the debit date indicated on your Account Application.
You may cancel the Systematic Withdrawal Plan
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<PAGE>
at any time without payment of a cancellation fee. Each Systematic Withdrawal
Plan transaction will appear as a debit entry on your monthly account statement.
o TELEPHONE TRANSACTIONS. You can initiate most transactions by telephone. You
may call the Transfer Agent toll-free at 800- KEY-FUND or call your Investment
Professional or bank trust department. Telephone transaction privileges for
purchases, exchanges or redemptions may be modified, suspended or terminated by
the Fund at any time. If an account has more than one owner, the Fund and the
Transfer Agent may rely on the instructions of any one owner. Telephone
privileges apply to each owner of the account and the dealer representative of
record for the account unless and until the Transfer Agent receives cancellation
instructions from an owner of the account.
Generally, neither the Fund, the bank trust department nor the Transfer Agent
will be responsible for any claims, losses or expenses for acting on telephone
instructions that they reasonably believe to be genuine. The Transfer Agent and
the Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if they do not employ reasonable
procedures they may be liable for any losses due to unauthorized or fraudulent
instructions. The identification procedures may include, but are not limited to,
the following: account number, registration and address, personalized security
codes, taxpayer identification number and other information particular to the
account. Your Investment Professional, bank trust department or the Transfer
Agent may also record calls, and you should verify the accuracy of your
confirmation statements immediately after you receive them.
o RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO EXCHANGE
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
(1) Shares of the fund selected for exchange must be available for sale in your
state of residence.
(2) The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
(3) You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any Business Day.
(4) You must meet the minimum purchase requirements for the fund you purchase
by exchange.
(5) The registration and tax identification numbers of the two accounts must be
identical.
(6) BEFORE EXCHANGING, OBTAIN AND READ THE PROSPECTUS FOR THE FUND YOU WISH TO
PURCHASE BY EXCHANGE.
SHARES OF A PARTICULAR CLASS MAY BE EXCHANGED ONLY FOR SHARES OF THE SAME CLASS
IN THE OTHER FUNDS OF THE VICTORY GROUP. For example, you can exchange Class A
shares of this Fund only for Class A shares of another fund. At present, not all
of the funds offer the same two classes of shares. If a fund has only one class
of shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800- KEY-FUND. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800- KEY-FUND prior to Valuation Time on
any Business Day (see "Shareholder Account Rules and Policies -- Share Price").
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800- KEY-FUND. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other fund of the Victory
Group.
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There are certain exchange policies you should be aware of:
o Shares are normally redeemed from one fund and issued by the other fund in the
exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (normally 4:00 p.m. Eastern time)
that is in proper form, but either fund may delay the issuance of shares of the
fund into which you are exchanging if it determines it would be disadvantaged by
a same-day transfer of the proceeds to buy shares. For example, the receipt of
multiple exchange requests from a dealer in a "market-timing" strategy might
create excessive turnover in the Fund's portfolio and associated expenses
disadvantageous to the Fund.
o Because excessive trading can hurt fund performance and harm shareholders, The
Victory Portfolios reserves the right to refuse any exchange request that will
impede the Fund's ability to invest effectively or otherwise have the potential
to disadvantage the Fund or to refuse multiple exchange requests submitted by a
shareholder or dealer.
o The Victory Portfolios may amend, suspend or terminate the exchange privilege
at any time upon 60 days' written notice to shareholders.
o If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
o Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales charge upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of The Victory Portfolios.
Key Mutual Funds, which is managed by KAM, is part of the Victory Group.
Exchange privileges applicable to the Victory Group will also apply to Key
Mutual Funds.
HOW TO REDEEM
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see the definition of "Business Day" under "Shareholder Account
Rules and Policies -- Share Price"). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL. Send a written request to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the Account Application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund and its agents from fraud. The Transfer Agent reserves the
right to reject any signature guarantee if (1) it has reason to believe that the
signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
o BY WIRE. You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (normally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Victory Funds P.O. Box 8527,
Boston, MA 02266-8527.
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<PAGE>
o BY TELEPHONE. To redeem by telephone, you may call the Transfer Agent toll
free at 800- KEY-FUND or call your Investment Professional or bank trust
department. See "Special Investor Services" for more information about telephone
transactions.
o ADDITIONAL REDEMPTION REQUIREMENTS. The Fund may delay payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in the
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of The Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing) participating in the Systematic Investment
Plan, to whom no minimum balance requirement applies). If you do not increase
your balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed at the last calculated NAV on the day
the account is closed.
SHAREHOLDER ACCOUNT RULES AND POLICIES
SHARE PRICE. The term "net asset value per share," or "NAV", means the value of
one share. The NAV of each class of shares is calculated by adding the value all
the Fund's investments, plus cash and other assets, deducting liabilities of the
Fund and of the class, and then dividing the result by the number of shares of
the class outstanding. The NAV of the Fund is determined and its shares are
priced as of the close of regular trading of the NYSE, which is normally 4:00
p.m. Eastern time (the "Valuation Time") on each Business Day of the Fund. A
"Business Day" is a day on which the NYSE is open for trading, the Federal
Reserve Bank of Cleveland is open, and any other day (other than a day on which
no shares of the Fund are tendered for redemption and no order to purchase any
shares is received) during which there is sufficient trading in its portfolio
instruments that the Fund's net asset value per share might be materially
affected. The NYSE or the Federal Reserve Bank of Cleveland will not be open in
observance of the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving and Christmas.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service based primarily upon
information concerning market transactions and dealers quotations for comparable
securities.
o The offering of shares may be suspended during any period in which the
determination of NAV is suspended, and the offering may be suspended by the
Trustees at any time the Trustees believe it is in the Fund's best interest to
do so.
o Redemption or transfer requests will not be honored until the Transfer Agent
receives all required documents in proper form. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
o Dealers that can perform account transactions for their client by
participating in NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of The
Victory Portfolios if the dealer performs any transaction erroneously.
o The redemption price for shares will vary from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
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o Payment for redeemed shares is ordinarily made in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Securities and Exchange Commission delaying or suspending such payments. The
Transfer Agent may delay forwarding a check for recently purchased shares, but
only until the purchase payment has cleared. That delay may be as much as 15
days from the date the shares were purchased. That delay may be avoided if you
arrange with your bank to provide telephone or written assurance to the Transfer
Agent that your purchase payment has cleared.
o If your account value has fallen below $500 you may be given 60 days' notice
to reestablish the minimum balance. If you do not increase your minimum balance,
your account may be closed and the proceeds mailed to you at the record address.
In some cases involuntary redemptions may be made to repay the Distributor for
losses from the cancellation of share purchase orders. Under unusual
circumstances, shares of the Fund may be redeemed "in kind," which means that
the redemption proceeds will be paid with securities from the Fund. Please refer
to the Statement of Additional Information for more details.
o "Backup Withholding" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish The Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your Account Application, or if you
violate Internal Revenue Service regulations on tax reporting of dividends.
o The Victory Portfolios does not charge a redemption fee, but if your
Investment Professional handles your redemption, the Investment Professional may
charge a separate service fee. Under the circumstances described in "How to
Invest," you may be subject to a CDSC when redeeming Class B shares.
o The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation if prohibited by the laws of any state or any
self-regulatory organization, such as the National Association of Securities
Dealers, Inc. None of the aforementioned compensation is paid for by the Fund or
its shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS
The Fund ordinarily declares and pays dividends separately for Class A and Class
B shares from its net investment income monthly. The Fund may make distributions
at least annually out of any net realized capital gains, and the Fund may make
supplemental distributions of dividends and capital gains following the end of
its fiscal year.
DISTRIBUTION OPTIONS
When you fill out your Account Application, you can specify how you want to
receive your dividend distributions.
Currently, there are five available options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any, will
be automatically reinvested in additional shares of the Fund. Income and
capital gain dividends will be reinvested at the net asset value of the
Fund as of the day after the record date. If you do not indicate a choice
on your Account Application, you will be assigned this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7 days
after the dividend payment date which may be more than 7 days after the
dividend record date.
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3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund at the NAV as
of the day after the record date and have your income dividends paid in
cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain dividends,
or only capital gain dividends, automatically reinvested in shares of
another fund of the Victory Group. Shares will be purchased at the NAV as
of the day after the record date. If you are reinvesting dividends of a
fund sold without a sales charge in shares of a fund sold with a sales
charge, the shares will be purchased at the public offering price. If you
are reinvesting dividends of a fund sold with a sales charge in shares of a
fund sold with or without a sales charge, the shares will be purchased at
the net asset value of the fund. Dividend distributions can be directed
only to an existing account with a registration that is identical to that
of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital gain
dividends, or only your income dividends, automatically transferred to your bank
checking or savings account. The amount will be determined on the dividend
record date and will normally be transferred to your account within 7 days of
the dividend record date. Dividend distributions can be directed only to an
existing account with a registration that is identical to that of your Fund
account. Please call or write the Transfer Agent to learn more about this
dividend distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to the Victory Funds , P.O. Box 8527,
Boston, MA 02266-8527, or by calling the Transfer Agent at 800- KEY-FUND, and
will become effective with respect to dividends having record dates after
receipt of the Account Application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
o STATEMENTS AND REPORTS. You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
with federal tax information will be mailed to you by January 31 of each tax
year and also will be filed with the IRS. At least twice a year, you will
receive the Fund's financial reports.
o REDEMPTION OR EXCHANGES. Investors may realize a gain or loss when redeeming
(selling) or exchanging shares. For most types of accounts, the Fund reports the
proceeds to the IRS annually. Because the shareholders' tax treatment also
depends on their purchase price and personal tax positions, shareholders should
keep their regular account statements to use in determining their tax. See
"Buying a Dividend."
o COMPLETE REDEMPTIONS. If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
o BUYING A DIVIDEND. On the record date for a distribution of ordinary income or
capital gains dividend, the net asset value of the Fund is reduced by the amount
of the distribution. An investor who buys shares just before the record date
("buying a dividend") will pay the full price for the shares and then receive a
portion of the purchase price back as a taxable distribution.
FEDERAL TAXES
The Fund intends to qualify as a regulated investment company by satisfying the
requirements under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "IRS Code"). The Fund contemplates the distribution of all of its net
investment income and capital gains, if any, in accordance with the timing
requirements imposed by the IRS Code, so that it will not be subject to federal
income taxes or the 4% excise tax on undistributed income.
Distributions by the Fund of its net investment income and the excess, if any,
of its net short-term capital gain over its net long-term capital loss are
taxable to shareholders as ordinary income. These distributions are treated as
dividends for federal income tax
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purposes, but only a portion thereof may qualify for the 70% dividends received
deduction for corporate shareholders (which portion may not exceed the aggregate
amount of qualifying dividends from domestic corporations received by the Fund
and must be designated by the Fund as so qualifying). Distributions by the Fund
of the excess, if any, of its net long-term capital gain over its net short-term
capital loss are designated as capital gain dividends and are taxable to
shareholders as long-term capital gain, regardless of the length of time
shareholders have held their shares. Such distributions are not eligible for the
dividends-received deduction . If a shareholder disposes of shares in the Fund
at a loss before holding such shares for more than six months, the loss will be
treated as a long-term capital loss to the extent that the shareholder has
received a capital gain dividend on those shares.
Distributions to shareholders of the Fund will be treated in the same manner for
federal income tax purposes whether received in cash or in additional shares and
may also be subject to state and local taxes. Distributions received by
shareholders of the Fund in January of a given year will be treated as received
on December 31 of the preceding year
provided that they were declared to shareholders of record on a date in October,
November or December of such preceding year. The Fund sends tax statements to
its shareholders (with copies to the Internal Revenue Service (the "IRS")) by
January 31 showing the amounts and tax status of distributions made (or deemed
made) during the preceding calendar year.
Income from securities of foreign issuers may be subject to foreign withholding
taxes. Credit for such foreign taxes, if any, will not pass through to the
shareholders.
o OTHER TAX INFORMATION. The information above is only a summary of some of the
federal income tax consequences generally affecting the Fund and its U.S.
shareholders, and no attempt has been made to discuss individual tax
consequences. A prospective investor should also review the more detailed
discussion of federal income tax considerations in the Statement of Additional
Information. In addition to the federal income tax, a shareholder may be subject
to state or local taxes on his or her investment in the Fund, depending on the
laws of the shareholder's jurisdiction. INVESTORS CONSIDERING AN INVESTMENT IN
THE FUND SHOULD CONSULT THEIR TAX ADVISERS TO DETERMINE WHETHER THE FUND IS
SUITABLE TO THEIR PARTICULAR TAX SITUATION.
When investors sign their Account Application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS
requires the Fund to withhold 31% of amounts distributed to them by the Fund as
dividends or in redemption of their shares.
PERFORMANCE
From time to time, performance information for each class of shares of the Fund
showing total return of each class of shares may be presented in advertisements,
sales literature and in reports to shareholders. Such performance figures are
based on historical earnings and are not intended to indicate future
performance.
Average annual total return will be calculated over a stated period of more than
one year. Average annual total return is measured by comparing the value of an
investment in a class at the beginning of the relevant period (as adjusted for
sales charges, if any) to the redemption value of the investment at the end of
the period (assuming immediate reinvestment of any dividends or capital gains
distributions) and annualizing that figure. Cumulative total return is
calculated similarly to average annual total return, except that the resulting
difference is not annualized.
Yield will be computed by dividing the Fund's net investment income per share
earned during a recent thirty-day period by the Fund's maximum offering price
per share (reduced by any undeclared earned income expected to be paid shortly
as a dividend) on the last day of the period and annualizing the result.
Investors may also judge, and The Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC's Money Fund Reports, Value Line Mutual Fund Survey,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may
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also be quoted or reproduced in advertisements, sales literature or in reports
to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
performance will fluctuate and is not necessarily representative of future
results. Any fees charged by service providers with respect to customer accounts
for investing in shares of the Fund will not be reflected in performance
calculations.
Additional information regarding the performance of each fund of The Victory
Portfolios is included in The Victory Portfolios' annual and semi-annual reports
which are available without charge upon request by calling 800- KEY-FUND.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty- six series
portfolios. The Victory Portfolios has been operating continuously since 1986,
when it was created under Massachusetts law as a Massachusetts business trust
although certain of its funds have a prior operating history from their
predecessor funds. On February 29, 1996, The Victory Portfolios converted from a
Massachusetts business trust to a Delaware business trust. The Victory
Portfolios' offices are located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Overall responsibility for management of The Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of The Victory
Portfolios.
INVESTMENT ADVISER
One of the Fund's most important contracts is with its investment adviser, Key
Asset Management Inc. ("KAM" or the "Adviser"), a New York corporation
registered as an investment adviser with the Securities and Exchange Commission.
KAM is a wholly owned subsidiary of KeyBank National Association ("KeyBank"), a
wholly-owned subsidiary of KeyCorp. Effective February 28, 1997, KAM became the
surviving corporation of the reorganization of four indirect investment adviser
subsidiaries of KeyCorp--KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers"),
Society Asset Management, Inc. ("SAM"), Spears, Benzak, Salomon & Farrell, Inc.
("SBSF") and Applied Technologies, Inc. ("ATI"), each registered with the
Securities and Exchange Commission as an investment adviser. Key Advisers, SAM
and ATI were merged with and into SBSF, a New York corporation organized on
February 22, 1972. Pursuant to the terms of the reorganization SBSF changed its
name to Key Asset Management Inc. SAM, SBSF and ATI will continue to operate
under their existing names as separate divisions of KAM.
An advisory agreement allows the Adviser to hire employees of affiliates as
sub-advisers to the Funds. It also allows KAM to choose brokers or dealers to
handle the purchases and sales of a Fund's securities. Prior to February 28,
1997, KeyCorp Mutual Fund Advisers, Inc. was the adviser and Society Asset
Management, Inc. (formerly the adviser) was the sub-adviser to each of the
Funds. During the fiscal year ended October 31, 1996, KeyCorp Mutual Fund
Advisers, Inc. earned investment advisory fees aggregating .31% of the average
daily net assets of the Fund.
For the services provided and expenses incurred pursuant to the investment
advisory agreement between The Victory Portfolios respecting the Fund, the
Adviser is entitled to receive a fee, computed daily and paid monthly, at an
annual rate of fifty-five one hundredths of one percent (.55%) of the average
daily net assets of the Fund. The advisory fees for the Fund have been
determined to be fair and reasonable in light of the services provided to the
Fund. The Adviser may periodically waive all or a portion of their advisory fee
with respect to the Fund. Prior to January, 1996, Society Asset Management, Inc.
served as investment adviser to the Fund. During the Fund's fiscal period ended
October 31, 1995, Society Asset Management, Inc. earned investment advisory fees
aggregating .42% of the average daily net assets of the Fund.
Under the investment advisory agreement between The Victory Portfolios, on
behalf of the Fund, and the Adviser (the "Investment Advisory Agreement"), the
Adviser may delegate a portion of its responsibilities to a sub-adviser.
The person primarily responsible for the investment management of the Fund as
well as his previous experience is as follows:
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MANAGING FUND
PORTFOLIO MANAGER SINCE PREVIOUS EXPERIENCE
- ------------------ ------------- -------------------
Robert H. Fernald March, 1994 Senior Portfolio Manager and Director,
Key Asset Management, Inc.; Portfolio
Manager with Key Asset Management Inc.
since 1993, and with Society National Bank
since 1992; Portfolio Manager,Ameritrust
Company National Association 1991-1992.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
from acting as investment adviser, transfer agent, custodian or shareholder
servicing agent to such an investment company or from purchasing shares of such
a company as agent for and upon the order of their customers, nor should they
prevent the Adviser or the Fund from compensating third parties for performing
such functions. The Adviser and its affiliates are subject to such banking laws
and regulations.
The Adviser believes that it may perform the investment advisory services for
the Fund contemplated by the Investment Advisory Agreement without violating the
Glass-Steagall Act or other applicable banking laws or regulations and that they
or their affiliates can perform the other services indicated above. Changes in
either federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present or future
statutes and regulations could prevent the Adviser and its affiliates from
continuing to perform all or a part of the above services for their customers
and/or the Fund. In such event, changes in the operation of the Fund may occur,
including the possible alteration or termination of any service then being
provided by the Adviser and its affiliates, and the Trustees would consider
alternate investment advisers and other means of continuing available services.
It is not expected that the Fund's shareholders would suffer any adverse
financial consequences (if other service providers are retained) as a result of
any of these occurrences.
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services is the administrator , principal underwriter and Distributor
for the Fund.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with The Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund.
BISYS sells shares of the Fund as agent on behalf of The Victory Portfolios at
no cost to the Fund. The Adviser does not participate in nor is it responsible
for the underwriting of Fund shares.
TRANSFER AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110-3875
("State Street" or the "Transfer Agent") serve as the Transfer Agent for the
Fund, and receives a fee for such services based on various criteria, including
assets, transactions and number of accounts. Boston Financial Data Services,
Inc., Two Heritage Drive, Quincy, MA 02171 ("BFDS") is the dividend disbursing
agent and shareholder servicing agent for the Fund.
SHAREHOLDER SERVICING PLAN
The Victory Portfolios has adopted a Shareholder Servicing Plan for each class
of shares of the Fund. In accordance with the Shareholder Servicing Plan, the
Fund may enter into Shareholder Service Agreements under which the Fund pays
fees of up to .25% of the average daily net assets of each class for fees
incurred in connection with the personal service and maintenance of accounts
holding the shares of such class. Such agreements are entered into between The
Victory Portfolios and various shareholder servicing agents, including the
Distributor, Key Trust Company of Ohio, N.A. and its affiliates, and other
financial institutions and securities brokers (each, a "Shareholder Servicing
Agent"). Each Shareholder Servicing Agent generally will provide support
services to shareholders by establishing and maintaining accounts and records,
processing dividend and distribution payments, providing account information,
arranging for bank wires, responding to routine
23
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inquires, forwarding shareholder communication, assisting in the processing of
purchase, exchange and redemption requests, and assisting shareholders in
changing dividend options, account designations and addresses. Shareholder
Servicing Agents may periodically waive all or a portion of their respective
shareholder servicing fees with respect to the Fund.
FUND ACCOUNTANT
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, OH 43219, provides
certain accounting services for the Fund pursuant to a Fund Accounting Agreement
and receives a fee for such services.
CUSTODIAN
Key Trust Company of Ohio, N.A., an affiliate of the Adviser serves as custodian
for the Fund and receives fees for the services it performs as custodian.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as independent accountant to the Fund.
FUND COUNSEL
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.
EXPENSES
For the fiscal year ended October 31, 1996, the Fund's total operating expenses
for Class A and Class B shares were 1.22% and 2.06%, respectively, of the Fund's
average daily net assets, excluding certain voluntary fee reductions or
reimbursements.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by The Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts, the trustee will vote the shares at meetings of the Fund's
shareholders in accordance with the shareholder's instructions or will vote in
the same percentage as shares that are not so held in trust. The trustee will
forward to these shareholders all communications received by the trustee,
including proxy statements and financial reports. The Victory Portfolios and the
Fund are not required to hold annual meetings of shareholders and in ordinary
circumstances do not intend to hold such meetings. The Trustees may call special
meetings of shareholders for action by shareholder vote as may be required by
the 1940 Act or the Declaration of Trust. Under certain circumstances, the
Trustees may be removed by action of the Trustees or by the shareholders.
Shareholders holding 10% or more of The Victory Portfolios' outstanding shares
may call a special meeting of shareholders for the purpose of voting upon the
question of removal of Trustees.
The Board of Trustees may authorize The Victory Portfolios to offer other funds
which may differ in the types of securities in which their assets may be
invested.
The Adviser and The Victory Portfolios have each adopted a Code of Ethics (the
"Codes") which require investment personnel (a) to pre-clear all personal
securities transactions, (b) to file reports regarding such transactions, and
(c) to refrain from personally engaging in (i) short-term trading of a security,
(ii) transactions involving a security within seven days of a Fund transaction
involving the same security, and (iii) transactions involving securities being
considered for investment by a Victory fund. The Codes also prohibit investment
personnel from purchasing securities in an initial public offering. Personal
trading reports are review periodically by the Adviser and the Board of Trustees
reviews their Codes and any substantial violations of the Codes. Violations of
the Codes may result in censure, monetary penalties, suspension or termination
of employment.
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<PAGE>
DELAWARE LAW
On February 29, 1996, The Victory Portfolios converted to a Delaware business
trust. The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations and the Trust Instrument
provides that shareholders will not be personally liable for liabilities of The
Victory Portfolios. In light of Delaware law, the nature of Victory Portfolios'
business, and the nature of its assets, management of Victory Portfolios
believes that the risk of personal liability to a Fund shareholder would be
extremely remote.
In the unlikely event a shareholder is held personally liable for The Victory
Portfolios' obligations, The Victory Portfolios will be required to use its
property to protect or compensate the shareholder. On request, The Victory
Portfolios will defend any claim made and pay any judgment against a shareholder
for any act or obligation of
The Victory Portfolios. Therefore, financial loss resulting from liability as a
shareholder will occur only if The Victory Portfolios itself cannot meet its
obligations to indemnify shareholders and pay judgments against them.
Delaware law authorizes electronic or telephone communications between
shareholders and The Victory Portfolios. Under Delaware law, The Victory
Portfolios have the flexibility to respond to future business contingencies. For
example, the Trustees have the power to incorporate The Victory Portfolios, to
merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolio's domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
As of the date of this Prospectus, the Fund offers only the classes of shares
that are offered by this Prospectus. Subsequent to the date of this Prospectus,
the Fund may offer additional classes of shares through a separate prospectus.
Any such additional classes may have different sales charges and other expenses,
which would affect investment performance. Further information may be obtained
by contacting your Investment Professional or by calling 800- KEY-FUND.
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants ("Reports"),
describing the investment operations of the Fund. Each of these Reports, when
available for a particular fiscal year end or the end of a semi-annual period,
is incorporated herein by reference. The Victory Portfolios may include
information in their Reports to shareholders that (a) describes general economic
trends, (b) describes general trends within the financial services industry or
the mutual fund industry, (c) describes past or anticipated portfolio holdings
for the Fund or (d) describes investment management strategies for The Victory
Portfolios. Such information is provided to inform shareholders of the
activities of The Victory Portfolios for the most recent fiscal year or
semi-annual period and to provide the views of the Adviser`s and/or The Victory
Portfolios' officers regarding expected trends and strategies.
The Fund intends to eliminate duplicate mailings of Reports to an address at
which more than one shareholder of record with the same last name has indicated
that mail is to be delivered. Shareholders may receive additional copies of any
Reports at no cost by writing to the Fund at the address below.
Inquiries regarding The Victory Portfolios or the Fund may be directed in
writing to The Victory Portfolios at the Victory Funds , P.O. Box 8527, Boston,
MA 02266-8527, or by telephone, toll-free, at 800- KEY-FUND.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
25
THE VICTORY PORTFOLIOS
PART B
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
The Victory Balanced Fund
The Victory Diversified Stock Fund
The Victory Financial Reserves Fund
The Victory Fund For Income
The Victory Government Mortgage Fund
The Victory Growth Fund
The Victory Institutional Money Market Fund
The Victory Intermediate Income Fund
The Victory International Growth Fund
The Victory Investment Quality Bond Fund
The Victory Lakefront Fund
The Victory Limited Term Income Fund
The Victory National Municipal Bond Fund
The Victory New York Tax-Free Fund
The Victory Ohio Municipal Bond Fund
The Victory Ohio Municipal Money Market Fund
The Victory Ohio Regional Stock Fund
The Victory Prime Obligations Fund
The Victory Real Estate Investment Fund
The Victory Special Growth Fund
The Victory Special Value Fund
The Victory Stock Index Fund
The Victory Tax-Free Money Market Fund
The Victory U.S. Government Obligations Fund
The Victory Value Fund
March 1, 1997
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with each prospectus of The Victory Portfolios (individually, a
"Prospectus," and collectively, the "Prospectuses"), each of which is dated the
same date as the date
<PAGE>
hereof. This Statement of Additional Information is incorporated by reference in
its entirety into the Prospectuses. Copies of the Prospectuses may be obtained
by writing The Victory Portfolios at P.O Box 8527, Boston, MA 02266-8527, or by
calling toll free 800-KEY FUND(R) or 800-539-3863.
INVESTMENT ADVISER
Key Asset Management Inc.
ADMINISTRATOR
BISYS Fund Services
DISTRIBUTOR
BISYS Fund Services
TRANSFER AGENT
State Street Bank and Trust Company
DIVIDEND DISBURSING AGENT AND SHAREHOLDER SERVICING AGENT Boston Financial and
Data Services, Inc.
CUSTODIAN
Key Trust Company of Ohio, N.A.
INDEPENDENT CERTIFIED ACCOUNTANTS
Coopers & Lybrand
COUNSEL
Kramer, Levin, Naftalis & Frankel
- 2 -
<PAGE>
Table of Contents
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND
LIMITATIONS................................................................. 10
THE VICTORY BALANCED FUND................................................... 11
Investment Objective............................................... 11
Investment Policies and Limitations................................ 11
THE VICTORY DIVERSIFIED STOCK FUND.......................................... 12
Investment Objective............................................... 12
Investment Policies and Limitations................................ 12
THE VICTORY FINANCIAL RESERVES FUND......................................... 13
Investment Objective............................................... 13
Investment Policies and Limitations................................ 13
THE VICTORY FUND FOR INCOME................................................. 14
Investment Objective............................................... 14
Investment Policies and Limitations................................ 14
THE VICTORY GOVERNMENT MORTGAGE FUND........................................ 15
Investment Objective............................................... 15
Investment Policies and Limitations................................ 15
THE VICTORY GROWTH FUND..................................................... 17
Investment Objective............................................... 17
Investment Policies and Limitations................................ 17
THE VICTORY INSTITUTIONAL MONEY MARKET FUND................................. 17
Investment Objective............................................... 17
Investment Policies and Limitations................................ 17
THE VICTORY INTERMEDIATE INCOME FUND........................................ 18
Investment Objective............................................... 18
Investment Policies and Limitations................................ 19
THE VICTORY INTERNATIONAL GROWTH FUND....................................... 20
Investment Objective............................................... 20
Investment Policies and Limitations................................ 20
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<PAGE>
THE VICTORY INVESTMENT QUALITY BOND FUND................................... 21
Investment Objective.............................................. 21
Investment Policies and Limitations............................... 21
THE VICTORY LIMITED TERM INCOME FUND....................................... 23
Investment Objective.............................................. 23
Investment Policies and Limitations............................... 23
THE VICTORY NATIONAL MUNICIPAL BOND FUND................................... 25
Investment Objective.............................................. 25
Investment Policies and Limitations............................... 25
THE VICTORY NEW YORK TAX-FREE FUND......................................... 26
Investment Objective.............................................. 26
Investment Policies and Limitations............................... 27
THE VICTORY OHIO MUNICIPAL BOND FUND....................................... 28
Investment Objective.............................................. 28
Investment Policies and Limitations............................... 28
THE VICTORY OHIO MUNICIPAL MONEY MARKET FUND............................... 31
Investment Objective.............................................. 31
Investment Policies and Limitations............................... 31
THE VICTORY OHIO REGIONAL STOCK FUND....................................... 32
Investment Objective.............................................. 32
Investment Policies and Limitations............................... 32
THE VICTORY PRIME OBLIGATIONS FUND......................................... 32
Investment Objective.............................................. 32
Investment Policies and Limitations............................... 32
THE VICTORY SPECIAL GROWTH FUND............................................ 33
Investment Objective.............................................. 33
Investment Policies and Limitations............................... 33
THE VICTORY SPECIAL VALUE FUND............................................. 34
Investment Objective.............................................. 34
Investment Policies and Limitations............................... 34
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<PAGE>
THE VICTORY STOCK INDEX FUND............................................... 35
Investment Objective.............................................. 35
Investment Policies and Limitations............................... 35
THE VICTORY TAX-FREE MONEY MARKET FUND..................................... 35
Investment Objective.............................................. 35
Investment Policies and Limitations............................... 35
THE VICTORY U.S. GOVERNMENT OBLIGATIONS FUND............................... 36
Investment Objective.............................................. 36
Investment Policies and Limitations............................... 36
THE VICTORY VALUE FUND..................................................... 37
Investment Objective.............................................. 37
Investment Policies and Limitations............................... 37
FUNDAMENTAL RESTRICTIONS OF THE FUNDS...................................... 38
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS.................................. 46
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST.................................. 56
Eligible Securities............................................... 56
U.S. Corporate Debt Obligations................................... 57
Bankers' Acceptances.............................................. 57
Certificates of Deposit........................................... 57
Eurodollar Certificates of Deposit................................ 58
Yankee Certificates of Deposit.................................... 58
Eurodollar Time Deposits.......................................... 58
Canadian Time Deposits............................................ 58
Commercial Paper.................................................. 58
International Bonds............................................... 58
Foreign Debt Securities........................................... 59
Repurchase Agreements............................................. 59
Reverse Repurchase Agreements..................................... 59
Short-Term Funding Agreements..................................... 60
Variable Amount Master Demand Notes............................... 60
Variable Rate Demand Notes........................................ 61
Variable and Floating Rate Notes.................................. 61
Extendible Debt Securities........................................ 62
Receipts.......................................................... 62
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<PAGE>
Zero-Coupon Bonds................................................. 62
High-Yield Debt Securities........................................ 63
Loans and Other Direct Debt Instruments........................... 64
Securities of Other Investment Companies.......................... 64
U.S. Government Obligations....................................... 64
Municipal Securities.............................................. 65
Ohio Tax-Exempt Obligations....................................... 69
Municipal Lease Obligations....................................... 71
Lower-Rated Municipal Securities.................................. 72
Federally Taxable Obligations..................................... 72
Refunded Municipal Bonds.......................................... 72
When-Issued Securities............................................ 72
Delayed-Delivery Transactions..................................... 73
Mortgage-Backed Securities........................................ 73
In General............................................... 73
U.S. Government Mortgage-Backed Securities............... 74
GNMA Certificates........................................ 74
FHLMC Securities......................................... 75
FNMA Securities.......................................... 75
Collateralized Mortgage Obligations...................... 75
Non-Governmental Mortgage-Backed Securities.............. 76
Asset-Backed Securities........................................... 77
Futures and Options............................................... 77
Futures Contracts........................................ 77
Restrictions on the Use of Futures Contracts............. 79
Risk Factors in Futures Transactions..................... 80
Options.................................................. 81
Puts..................................................... 82
Illiquid Investments.............................................. 82
Restricted Securities............................................. 83
Securities Lending Transactions................................... 84
High-Quality Investments.......................................... 84
Participation Interests........................................... 86
Warrants.......................................................... 86
Refunding Contracts............................................... 86
Standby Commitments............................................... 86
Foreign Investment................................................ 87
Miscellaneous Securities.......................................... 88
Additional Information Concerning Ohio Issuers.................... 88
Additional Information Concerning New York Issuers................ 93
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<PAGE>
DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS.....................130
VALUATION OF PORTFOLIOS SECURITIES FOR THE MONEY MARKET FUNDS..............132
VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS AND THE
TAX-FREE BOND FUNDS........................................................133
PERFORMANCE OF THE MONEY MARKET FUNDS......................................133
PERFORMANCE OF THE NON-MONEY MARKET FUNDS..................................137
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION..................150
DIVIDENDS AND DISTRIBUTIONS................................................154
TAXES......................................................................155
TRUSTEES AND OFFICERS......................................................169
ADVISORY AND OTHER CONTRACTS...............................................175
ADDITIONAL INFORMATION.....................................................191
APPENDIX...................................................................202
- 7 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end management
investment company. The Victory Portfolios consists of 26 series (each a "Fund,"
and collectively, the "Funds") of units of beneficial interest ("shares"). The
outstanding shares represent interests in the 26 separate investment portfolios.
This Statement of Additional Information (the "SAI") relates to the shares of 25
of the 26 Funds and their respective classes, and are listed below. Much of the
information contained in this Statement of Additional Information expands on
subjects discussed in the Prospectuses. Capitalized terms not defined herein are
used as defined in the Prospectuses. No investment in shares of a Fund should be
made without first reading that Fund's Prospectus.
THE VICTORY PORTFOLIOS:
The Victory Balanced Fund
Class A Shares
Class B Shares
The Victory Diversified Stock Fund
Class A Shares
Class B Shares
The Victory Financial Reserves Fund
The Victory Fund For Income Fund
The Victory Government Mortgage Fund
The Victory Growth Fund
The Victory Institutional Money Market Fund
Select Shares
Investor Shares
The Victory Intermediate Income Fund
The Victory International Growth Fund
Class A Shares
Class B Shares
The Victory Investment Quality Bond Fund
The Victory Lakefront Fund
The Victory Limited Term Income Fund
The Victory National Municipal Bond Fund
Class A Shares
Class B Shares
The Victory New York Tax-Free Fund
Class A Shares
Class B Shares
- 8 -
<PAGE>
The Victory Ohio Municipal Bond Fund
The Victory Ohio Municipal Money Market Fund
The Victory Ohio Regional Stock Fund
Class A Shares
Class B Shares
The Victory Prime Obligations Fund
The Victory Real Estate Investment Fund
The Victory Special Growth Fund
The Victory Special Value Fund
Class A Shares
Class B Shares
The Victory Stock Index Fund
The Victory Tax-Free Money Market Fund
The Victory U.S. Government Obligations Fund
Select Shares
Investor Shares
The Victory Value Fund
- 9 -
<PAGE>
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding voting securities.
There can be no assurance that a Fund will achieve its investment objective.
ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS.
The following policies and limitations supplement the Funds' investment policies
set forth in the Prospectuses. The Funds' investments in the following
securities and other financial instruments are subject to the other investment
policies and limitations described in the Prospectuses and this SAI.
Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any security or
other asset, or sets forth a policy regarding quality standards, such standard
or percentage limitation will be determined immediately after and as a result of
the Fund's acquisition of such security or other asset except in the case of
borrowing (or other activities that may be deemed to result in the issuance of a
"senior security" under the Investment Company Act of 1940 (the "1940 Act")).
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when determining whether the investment complies with a
Fund's investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity.
The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of that Fund's outstanding voting securities unless
(1) a policy expressly is deemed to be a fundamental policy of the Fund or (2) a
policy expressly is deemed to be changeable only by such majority vote. A Fund
may, following notice to its shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Fund or which
currently are not available but which may be developed to the extent such
investment practices are both consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus.
The following sections list each Fund's investment objective and its investment
policies, limitations, and restrictions. The securities in which the Funds can
invest and the risks associated with these securities are discussed in the
section "Instruments in Which the Funds Can Invest."
- 10 -
<PAGE>
DEFINED TERMS. All capitalized terms listed in a Fund's Investment Policies and
Limitations section referring to permissible investments are described in the
section "Instruments in Which the Funds Can Invest."
The following terms are used throughout the Investment Objective and Investment
Policies and Limitations sections.
S&P: Standard & Poor's Ratings Group
Moody's: Moody's Investors Service, Inc.
Fitch: Fitch Investors Service, Inc.
NRSRO: Nationally Recognized Statistical Ratings Organization
THE VICTORY BALANCED FUND
INVESTMENT OBJECTIVE. The Balanced Fund seeks to provide income and long-term
growth of capital.
INVESTMENT POLICIES AND LIMITATIONS. The Balanced Fund pursues its investment
objective by investing in equity securities and fixed income securities. The
Balanced Fund may invest in any type or class of security.
Important Characteristics of the Balanced Fund's Investments:
In making investment decisions involving EQUITY SECURITIES, Key Asset
Management Inc., the investment adviser of the Funds (the "Adviser"), considers:
o The growth and profitability prospects for the economic sector and
markets in which the company operates and for the products or services
it provides
o The financial condition of the company o The price of the security and
how that price compares to historical price levels, to current price,
levels in the general market, and to prices of competing companies;
projected earnings estimates; and earnings growth rate for the company
In making investment decisions involving DEBT SECURITIES, the Adviser
considers:
o Quality: The Balanced Fund primarily purchases investment-grade debt
securities. o Maturity: The average weighted maturity of the Balanced
Fund's fixed income securities will range from 5 to 15 years. This
range may be changed in response to changes in market conditions.
- 11 -
<PAGE>
In making investment decisions involving PREFERRED STOCK, the Adviser
considers:
o The issuer's financial strength, including its historic and current
financial condition
o The issuer's projected earnings, cash flow, and borrowing requirements
o The issuer's continuing ability to meet its obligations
Under normal market conditions, the Balanced Fund:
o Will invest 40% to 70% of its total assets in equity securities and
securities convertible into common stock
o Will invest at least 25% of its total assets in fixed income
securities
For temporary defensive purposes, the Balanced Fund may invest up to 100% of its
total assets in U.S. Government obligations or short-term debt obligations.
The Balanced Fund may invest in futures, puts, and options in an effort to hedge
against market risk. The Balanced Fund may also invest in the following
securities: ADRs, Banker's Acceptances, certificates of deposit, commercial
paper, demand and time deposits, foreign securities, master demand notes,
mortgage-related securities, receipts, repos, reverse repos, rights, variable
and floating rate securities, warrants and when-issued securities.
THE VICTORY DIVERSIFIED STOCK FUND
INVESTMENT OBJECTIVE. The Diversified Stock Fund seeks to provide long-term
growth of capital.
INVESTMENT POLICIES AND LIMITATIONS. The Diversified Stock Fund pursues its
investment objective by investing primarily in common stocks and securities
convertible into common stocks issued by established domestic and foreign
companies.
The Adviser seeks to invest in securities that it considers undervalued in
relation to historical earnings and the value of the issuer's underlying assets.
In making investment decisions, the Adviser may consider cash flow, book value,
dividend yield and growth potential, quality of management, adequacy of
revenues, earnings, capitalization, and future relative earnings growth. The
Adviser will pursue investments that provide above average dividend yield or
potential for appreciation.
Under normal market conditions, the Diversified Stock Fund:
o Will invest at least 80% of its total assets in equity securities
and securities convertible into common stock
o May invest up to 20% of its total assets in:
o Equity securities of foreign issuers
- 12 -
<PAGE>
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
For temporary defensive purposes, the Diversified Stock Fund may invest up to
100% of its total assets in U.S. Government obligations or short-term debt
obligations.
The Diversified Stock Fund may invest in futures and options in an effort to
hedge against market risks.
The Diversified Stock Fund may also invest in the following securities: ADRs,
Banker's Acceptances, certificates of deposit, commercial paper, investment
company securities, master demand notes, repurchase agreements, receipts,
reverse repurchase agreements, variable rate and floating rate securities,
warrants, when-issued securities and Zero-Coupon Bonds.
THE VICTORY FINANCIAL RESERVES FUND
INVESTMENT OBJECTIVE. The Financial Reserves Fund seeks to obtain as high a
level of current income as is consistent with preserving capital and providing
liquidity.
INVESTMENT POLICIES AND LIMITATIONS. The Financial Reserves Fund pursues its
investment objective by investing primarily in a portfolio of high-quality U.S.
dollar-denominated money market instruments. Normally, the Financial Reserves
Fund invests only in instruments that are rated in the highest category by two
or more NRSROs, or in the highest category if rated by only one NRSRO, or if
unrated, determined to be of equivalent quality. The Board of Trustees has
established policies to ensure that the Financial Reserves Fund invests in high
quality, liquid instruments.
An NRSRO, such as S&P, Fitch, or Moody's, assigns credit ratings to securities
based on the borrower's ability to meet its obligation to make principal and
interest payments.
Generally, the Financial Reserves Fund primarily invests in:
o Negotiable certificates of deposit, time deposits and bankers'
acceptances of U.S. and foreign banks
o U.S. Treasury obligations and obligations of government sponsored
agencies, such as the Government National Mortgage Association
("GNMAs"), the Federal National Mortgage Association ("FNMAs"), the
Student Loan Mortgage Association ("SLMAs"), the Federal Home Loan
Bank ("FHLB"), and Federal Home Loan Mortgage Corporation ("FHLMC").
o Short-term corporate obligations, such as commercial paper, notes and
bonds
- 13 -
<PAGE>
o Repurchase agreements and reverse repurchase agreements with Federal
Reserve system member banks and dealers in U.S. Government securities
o A Other debt obligations such as master demand notes, short-term
funding agreements, Eurodollar debt obligations, variable and floating
rate securities, and private placement investments
Important Characteristics of the Financial Reserves Fund's Investments:
o Quality: Instruments rated A or above by S&P, Fitch, Moody's or
another NRSRO. For more information on ratings, see the Appendix to
the SAI.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to
397 days.
The Financial Reserves Fund is only available to certain institutions or
individuals that meet minimum investment requirements and have trust accounts
set up through KeyCorp or its affiliates.
THE VICTORY FUND FOR INCOME
INVESTMENT OBJECTIVE. The Fund For Income seeks to provide a high level of
current income, consistent with preservation of shareholders' capital.
INVESTMENT POLICIES AND LIMITATIONS. The Fund For Income pursues its investment
objective by investing primarily in selected mortgage-related securities.
The Fund For Income generally invests at least 65% of the value of its total
assets in:
o Mortgage-Related Securities issued by non-governmental entities
o Unrated mortgages and Government Mortgage-Backed Securities which, in
the opinion of the Adviser, are of equivalent investment quality
o Collateralized mortgage obligations and real estate mortgage
investment conduits.
This is a fundamental policy which may not be changed without shareholder
approval. This policy limits the Fund For Income's ability to invest in
lower-rated securities from which a higher yield may be derived.
The Fund For Income can invest up to 35% of the value of its total assets in:
o U.S. Government Obligations
o Certificates of Deposit
o Bankers' Acceptances
- 14 -
<PAGE>
o Interest-bearing savings deposits of banks having total assets of more
than $1 billion and that are members of the Federal Deposit Insurance
Corporation
o Commercial Paper of prime quality rated A-1 or higher by S&P or
Prime-1 or higher by Moody's or, if not rated, issued by companies
which have an outstanding debt issue rated AA or higher by S&P or Aa
or higher by Moody's o Privately issued debt securities which,
although not mortgage-related securities of the type described above,
are secured by mortgages on residential properties, provided such
securities are rated A or better by Moody's and S&P or, if not rated,
are of equivalent investment quality as determined by the Adviser
(such securities may entitle the holder to participate in income
derived from the mortgaged properties or from sales thereof) o U.S.
Corporate Debt Obligations rated A or higher by Moody's and S&P
The Fund For Income can invest up to 33 1/3% of the value of its total assets
in:
o When-Issued Securities
o Delayed-Delivery Transactions
The Fund For Income can invest up to 20% of the value of its total assets in:
o Securities Lending Transactions
The Fund For Income can invest up to 10% of the value of its total assets in:
o Repurchase Agreements with maturities of more than 7 days o Investment
Company Securities
Temporary Investments. For defensive purposes, the Adviser may, at certain
times, decrease the percentage of the Fund's assets invested in these
instruments. When business or financial conditions warrant, the Fund For Income
may take a temporary defensive position and invest without limit in the
foregoing securities. The Fund For Income may borrow money for temporary or
emergency purposes (not for investment purposes) but only in an amount not
exceeding 5% of the value of its total assets at the time of the borrowing.
From time to time, the Fund For Income, to the extent consistent with its
investment objective, policies, and restrictions, may invest in securities of
issuers with which the Adviser or its affiliates have a lending relationship.
- 15 -
<PAGE>
THE VICTORY GOVERNMENT MORTGAGE FUND
INVESTMENT OBJECTIVE. The Government Mortgage Fund seeks to provide a high level
of current income consistent with safety of principal.
INVESTMENT POLICIES AND LIMITATIONS. The Government Mortgage Fund will invest
exclusively in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, including mortgage-related securities.
The Government Mortgage Fund's can invest up to 100% of the value of its
total assets in:
o U.S. Government Securities. The Government Mortgage Fund will invest
in the obligations of such agencies or instrumentalities only when the
Adviser believes that the credit risk with respect thereto is minimal.
o Government Mortgage-Backed Securities. The Government Mortgage Fund
can only invest in mortgage-related securities that are issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities, such as the GNMA, the FNMA, the FHLB, and the
FHLMC.
o Collateralized Mortgage Obligations ("CMOs")
o Treasury notes and agencies
The Government Mortgage Fund can invest up to 33 1/3% of the value of its total
assets in:
o Repurchase Agreements
o Reverse Repurchase Agreements
o Futures Contracts
o Securities Lending Transactions
o Delayed-Delivery Transactions
o When-Issued Securities
The Government Mortgage Fund can invest up to 20% of the value of its total
assets in:
o Receipts, which are sold as zero coupon securities
The Government Mortgage Fund can invest up to 10% of the value of its total
assets in:
o Investment Company Securities
o Short-Term Funding Agreements
The Government Mortgage Fund also can invest in:
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit ("ECDs")
o Yankee Certificates of Deposit ("Yankee CDs")
o Eurodollar Time Deposits ("ETDs")
- 16 -
<PAGE>
o Canadian Time Deposits ("CTDs")
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Private Placement Investments
The Government Mortgage Fund may invest up to 15% of the value of its total
assets in illiquid securities.
Temporary Investments. The Government Mortgage Fund also may invest temporarily
in high quality investments or cash during times of unusual market conditions
for defensive purposes and in order to accommodate shareholder redemption
requests although currently it does not intend to do so. Any portion of the
Government Mortgage Fund's assets maintained in cash will reduce the amount of
assets in securities and thereby reduce the Government Mortgage Fund's yield or
total return.
From time to time, the Government Mortgage Fund, to the extent consistent with
its investment objective, policies, and restrictions, may invest in securities
of issuers with which the Adviser or its affiliates have a lending relationship.
THE VICTORY GROWTH FUND INVESTMENT OBJECTIVE. The Growth Fund seeks to provide
long-term growth of capital.
INVESTMENT POLICIES AND LIMITATIONS. The Growth Fund pursues its investment
objective by investing primarily in equity securities of companies with superior
prospects for long-term earnings growth and price appreciation. The issuers
usually are listed on a nationally recognized exchange.
In making investment decisions, the Adviser will look for above average growth
rates, high return on equity, issuers that reinvest their earnings in their
business, and strong balance sheets.
Under normal conditions, the Growth Fund:
o Will invest at least 80% of its total assets in common stocks and
securities convertible into common stocks
o May invest up to 20% of its total assets in:
o Preferred stocks
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
- 17 -
<PAGE>
For temporary defensive purposes, the Growth Fund may invest up to 100% of its
total assets in U.S. Government obligations or short-term debt obligations.
The Growth Fund may invest in futures and options in an effort to hedge against
market risks.
The Growth Fund may also invest in the following securities: ADRs, Bankers
Acceptances, Certificates of Deposit, Commercial Paper, foreign and domestic
demand and time deposits, foreign securities, investment company securities,
master demand notes, puts, receipts, repos and reverse repos, variable and
floating rate securities, warrants, when-issued securities and zero coupon
bonds.
THE VICTORY INSTITUTIONAL MONEY MARKET FUND
INVESTMENT OBJECTIVE. The Institutional Money Market Fund's investment objective
is to seek to obtain as high a level of current income as is consistent with
preserving capital and providing liquidity.
INVESTMENT POLICIES AND LIMITATIONS. The Institutional Money Market Fund pursues
its investment objective by investing primarily in a portfolio of high-quality,
U.S. dollar-denominated money market instruments. The Institutional Money Market
Fund may invest only in obligations determined by the Adviser to present minimal
credit risks under guidelines adopted by the Fund's Board of Trustees.
Investments will be limited to those obligations which, at the time of purchase,
(i) possess one of the two highest short-term ratings from at least two NRSROs
or (ii) possess, in the case of multiple-rated securities, one of the two
highest short-term ratings by at least two NRSROs; or (iii) do not possess a
rating (i.e. are unrated) but are determined by the Adviser to be of comparable
quality to the rated instruments eligible for purchase by the Institutional
Money Market Fund under the guidelines adopted by the Trustees. For purposes of
these investment limitations, a security that has not received a rating will be
deemed to possess the rating assigned to an outstanding class of the issuer's
short-term debt obligations if determined by the Adviser to be comparable in
priority and security to the obligation selected for purchase by the
Institutional Money Market Fund. The above described securities which may be
purchased by the Institutional Money Market Fund are hereinafter referred to as
Eligible Securities.
Pursuant to Rule 2a-7 under the 1940 Act, the Institutional Fund will maintain a
dollar-weighted average portfolio maturity which does not exceed 90 days.
- 18 -
<PAGE>
The Institutional Money Market Fund can invest in:
o Bankers' Acceptances
o Certificates of Deposit
o Commercial Paper o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o U.S. Government Obligations
o Other Investment Companies
o Repurchase Agreements
o Reverse Repurchase Agreements
o Participation Interests
o Extendible Debt Securities
o Master Demand Notes
o Receipts
o When-Issued Securities o Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Zero Coupon Bonds
THE VICTORY INTERMEDIATE INCOME FUND
INVESTMENT OBJECTIVE. The Intermediate Income Fund seeks to provide a high level
of income.
INVESTMENT POLICIES AND LIMITATIONS. The Intermediate Income Fund pursues its
investment objective by investing primarily in debt securities issued by
corporations and the U.S.
Government and its agencies and instrumentalities.
All debt securities purchased by the Intermediate Income Fund will be investment
grade.
Under normal market conditions, the Intermediate Income Fund will invest at
least 65% of the value of its total assets in:
o Investment-grade Corporate Securities with remaining maturities at the
time of purchase of one year or more including asset-backed securities
and convertible and exchangeable debt securities
o Zero-Coupon Securities
o Mortgage-Related Securities
o State, municipal, or industrial revenue bonds
- 19 -
<PAGE>
o U.S. Government Mortgage-backed securities
o Debt securities convertible into, or exchangeable for, common stocks
o State and municipal securities when, in the opinion of the Adviser
their yields are competitive with comparable taxable debt obligations.
The Intermediate Income Fund can invest up to 33 1/3% of the value of its total
assets in:
o Futures Contracts
o When-issued and delayed-delivery securities
o Repurchase Agreements
The Intermediate Income Fund can invest up to 20% of the value of its total
assets in:
o Preferred Stocks
o Notes with remaining maturities at the time of purchase of less than
one year
o Commercial Paper
o Variable Amount Master Demand Notes
o Bankers' Acceptances
o Certificates of Deposit
o Time deposits of domestic and foreign branches of U.S. banks and
foreign banks
o Receipts
o Private Placement Investment
o Master Demand Notes
o Junk Bonds
o Foreign Securities
o CMOs
o International Bonds
The Intermediate Income Fund can invest up to 10% of the value of its total
assets in:
o Investment Company Securities
The Intermediate Income Fund also can invest in:
o OTC Options
Some of the securities in which the Intermediate Income Fund invests may have
warrants or options attached.
THE VICTORY INTERNATIONAL GROWTH FUND
INVESTMENT OBJECTIVE. The International Growth Fund seeks to provide capital
growth consistent with reasonable investment risk.
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INVESTMENT POLICIES AND LIMITATIONS. The International Growth Fund pursues its
investment objective by investing primarily in equity securities of foreign
corporations, most of which are denominated in foreign currencies.
The International Growth Fund will invest most of its assets in securities of
companies located either in developed countries in Western Europe or in Japan,
although it may purchase securities of companies located in developing countries
and other developed countries. In making investment decisions, the Adviser may
analyze the economies of foreign countries and the growth potential for
individual sectors and securities.
Under normal market conditions, the International Growth Fund:
o Will invest at least 65% of its total assets in securities (including
American Depository Receipts) of companies that derive more than 50%
of their gross revenues from or have more than 50% of their assets
outside the United States.
o Will invest at least 65% of its total assets in securities for which
the principal trading markets are located in at least three different
countries (excluding the United States).
o May invest up to 35% of its total assets in:
o Domestic money market securities
o Securities convertible into common stock
o "Sponsored" and "unsponsored" American Depository Receipts and
similar securities
For temporary defensive purposes, the International Growth Fund may invest up to
100% of its assets in:
o A single foreign country
o U.S. Government obligations
o Investment-grade corporate debt securities
o Short-term debt obligations
The International Growth Fund may invest in futures and options in an effort to
hedge against market and currency risks.
The International Growth Fund may also invest in the following securities:
Bankers Acceptances, certificates of deposit, master demand notes, and warrants
THE VICTORY INVESTMENT QUALITY BOND FUND
INVESTMENT OBJECTIVE. The Investment Quality Bond Fund seeks to provide a high
level of income.
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INVESTMENT POLICIES AND LIMITATIONS. The Investment Quality Bond Fund pursues
its investment objective by investing primarily in investment-grade bonds issued
by corporations and the U.S. Government and its agencies or instrumentalities.
All instruments purchased by the Investment Quality Bond Fund will be rated, at
the time of purchase, within the four highest rating categories by an NRSRO
(investment grade) or, if unrated, will be of comparable quality, as determined
by the Adviser.
Under normal market conditions, the Investment Quality Bond Fund will invest at
least 65% of the value of its total assets:
o U.S. Government Obligations
o Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o CMOs
o Non-Governmental Mortgage-Backed Securities
o U.S. Corporate Debt Obligations
o Notes with remaining maturities at the time of purchase of one year or
more
o Debt securities convertible into, or exchangeable for, common stocks
o First mortgage loans and participation certificates in pools of
mortgages issued or guaranteed by the U.S. Government or its agencies
or instrumentalities.
o State and municipal securities when, in the opinion of the Adviser
their yields are competitive with those of comparable taxable debt
obligations.
The Investment Quality Bond Fund can invest up to 33 1/3% of the value of its
total assets in:
o Securities Lending Transactions
o Reverse Repurchase Agreements
o When-Issued and Delayed-Delivery Securities
The Investment Quality Bond Fund can invest up to 25% of the value of its total
assets in:
o Futures And Options. The Investment Quality Bond Fund will not: (a)
sell futures contracts, purchase put options, or write call options
if, as a result, more than 331/3 % of the Investment Quality Bond
Fund's total assets would be hedged with futures and options under
normal conditions; (b) purchase futures contracts or write put options
if, as a result, the Investment Quality Bond Fund's total obligations
upon settlement or exercise of purchased futures contracts and written
put
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options would exceed 331/3% of its total assets; or (c) purchase call
options if, as a result, the current value of option premiums for call
options purchased by the Fund would exceed 5% of the Investment
Quality Bond Fund's total assets. These limitations do not apply to
options attached to or acquired or traded together with their
underlying securities.
The Investment Quality Bond Fund can invest up to 20% of the value of its total
assets in:
o Preferred stocks o Notes with remaining maturities at the time of
purchase of less than one year
o Commercial Paper. The Investment Quality Bond Fund will purchase only
commercial paper rated in one of the two highest categories at the
time of purchase by an NRSRO or, if not rated, found by the Trustees
to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top
ratings categories) by an NRSRO that is neither controlling,
controlled by, or under common control with the issuer of, or any
issuer, guarantor, or provider of credit support for, the instruments.
o Variable Amount Master Demand Notes
o Bankers' Acceptances
o Certificates of Deposit and time deposits of domestic and foreign
branches of U.S. banks and foreign banks
o ECDs
o Yankee CDs
o ETDs
o CTDs
o Repurchase Agreements
o Receipts
o Foreign Securities. 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
will not hold foreign currency in amounts exceeding 5% of its total
assets as a result of such investments.
The Investment Quality Bond Fund can invest up to 10% of the value of its total
assets in:
o Investment Company Securities
The Investment Quality Bond Fund also can invest in:
o Private Placement Investments
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o Illiquid Investments
o Loans and Other Direct Debt Instruments
o Restricted Securities
o Warrants
o Variable Amount Master Demand Notes
o Variable And Floating Rate Notes
o Miscellaneous Securities
Some of the securities in which the Investment Quality Bond Fund invests may
have warrants or options attached.
From time to time, the Investment Quality Bond Fund, to the extent consistent
with its investment objective, policies, and restrictions, may invest in
securities of issuers with which the Adviser or its affiliates have a lending
relationship.
THE VICTORY LAKEFRONT FUND
INVESTMENT OBJECTIVE. The Lakefront Fund seeks to provide long-term growth of
capital and dividend income.
INVESTMENT POLICIES AND LIMITATIONS. The Lakefront Fund pursues its investment
objective by investing primarily in a diversified group of equity securities
with an emphasis on high-quality, financially strong companies whose stocks are
undervalued.
Under normal market conditions, the Lakefront Fund:
o Will invest at least 80% of its total assets in equity securities and
securities convertible into common stock.
o May invest up to 20% of its total assets in:
o Preferred stock
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
The Lakefront Fund may invest up to 33 1/3 of the value of its total assets in:
o Reverse Repurchase Agreements
The Lakefront Fund may also invest in:
o Illiquid Securities
o Other Investment Companies
The Lakefront Fund may also invest in: ADRs, Bankers Acceptances, certificates
of deposit, commercial paper, demand and time deposits, foreign securities,
master demand notes, puts, receipts, repurchase agreements, reverse repurchase
agreements, variable and floating rate securities, warrants, when-issued
securities and zero-coupon bonds.
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THE VICTORY LIMITED TERM INCOME FUND
INVESTMENT OBJECTIVE. The Limited Term Income Fund seeks to provide income
consistent with limited fluctuation of principal.
INVESTMENT POLICIES AND LIMITATIONS. The Limited Term Income Fund pursues its
investment objective by investing in high grade, fixed income securities with a
dollar-weighted average maturity of one to five years, based upon remaining
maturities.
The Limited Term Income Fund will invest only in high-grade debt securities;
i.e., those which are rated at the time of purchase in one of the three highest
rating groups assigned by an NRSRO or, if unrated, which the Adviser deems to be
of comparable quality.
Under normal market conditions, the Limited Term Income Fund will invest in:
o U.S. Corporate Debt Obligations
o Equipment lease and trust certificates
o Collateralized Mortgage Obligations
o U.S. Government Obligations
o Fixed-income securities convertible into, or exchangeable for, common
stocks, as well as repurchase agreements collateralized by such
instruments
o Repurchase Agreements
o First mortgage loans
o Income participation loans
o Participation certificates in pools of mortgages
o Asset-Backed Securities
The Limited Term Income Fund can invest up to 33 1/3% of the value of its total
assets in:
o Futures Contracts
o Securities Lending Transactions
o Reverse Repurchase Agreements
o When-Issued and Delayed Delivery Securities
o Repurchase Agreements
The Limited Term Income Fund can invest up to 20% of the value of its total
assets in:
o Short-Term Obligations. There may be times when, in the Adviser's
opinion, market conditions warrant that, for temporary defensive
purposes, the Limited Term Income Fund hold more than 20% of its total
assets in short-term obligations. To the extent that the Limited Term
Income Fund's assets are so invested, they will not be invested so as
to meet its investment objective.
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<PAGE>
o Receipts
o Foreign Securities. The Limited Term Income Fund may invest up to 20%
of the value of its total assets in debt securities of foreign
issuers, including foreign banks. The Limited Term Income Fund will
not hold foreign currency in amounts exceeding 5% of its total assets
as a result of such investments.
The Limited Term Income Fund also can invest in:
o Zero Coupon Bonds
o International Bonds
o U.S. Government Securities
o Government Mortgage-Backed Securities
o CMOs
o Non-Governmental Mortgage-Backed Securities
o Variable and Floating Rate Securities
o Private Placement Investments
o Variable Amount Master Demand Notes.
Some of the securities in which the Limited Term Income Fund invests may have
warrants or options attached.
From time to time, the Limited Term Income Fund, to the extent consistent with
its investment objective, policies and restrictions, may invest in securities of
issuers with which the Adviser or its affiliates have a lending relationship.
THE VICTORY NATIONAL MUNICIPAL BOND FUND
INVESTMENT OBJECTIVE. The National Municipal Bond Fund seeks to provide a high
level of current interest income, exempt from federal income taxes, as is
consistent with the preservation of capital.
INVESTMENT POLICIES AND LIMITATIONS. The National Municipal Bond Fund pursues
its investment objective by investing primarily in municipal bonds of varying
maturities issued by or on behalf of states, territories, and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities, and instrumentalities, the interest from which, in the
opinion of bond counsel for the issuer, is exempt from federal income tax. The
Adviser anticipates that the National Municipal Bond Fund ordinarily will be
fully invested in obligations of municipalities whose interest is exempt from
federal income tax. Under normal conditions, 80% or more of its income
distributions will be exempt from federal income taxes, including the
alternative minimum tax.
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<PAGE>
The National Municipal Bond Fund can invest in:
o Industrial Development Bonds
o Refunding Contracts
o Resource Recovery Bonds
o Tax and Revenue Anticipation Notes and Bond Anticipation Notes
o Demand Features
o Under 331/3%
o Zero Coupon Bonds
o 331/3%
o Variable and Floating Rate Securities
o Investment Company Securities
o 331/3%
o Standby Commitments
o Lower-Rated Municipal Securities
o Federally Taxable Obligations
o Restricted Securities
o Tax-Exempt Commercial Paper
The National Municipal Bond Fund can invest up to 33 1/3% of the value of its
total assets in:
o Futures Contracts
o Reverse Repurchase Agreements
o Securities Lending Transactions
o Repurchase Agreements
o When-Issued and Delayed Delivery Securities
The National Municipal Bond Fund can invest up to 20% of the value of its total
assets in:
o Municipal Lease Obligations
The National Municipal Bond Fund may change its investment focus temporarily for
defensive purposes. During periods when, in the opinion of the Adviser a
temporary defensive posture in the market is appropriate, the National Municipal
Bond Fund may hold cash that is not earning interest or invest in obligations of
issuers whose interest may be taxable at the state and/or federal level. The
National Municipal Bond Fund may also invest in short-term municipal obligations
and money market instruments (including other investment companies). Under such
circumstances, the National Municipal Bond Fund may temporarily invest so that
less than 80% of its income distributions will be federally or state tax-free.
Federally taxable obligations include, but are not limited to, obligations
issued by the U.S. Government or any of its agencies or instrumentalities and
repurchase agreements. The National Municipal Bond Fund does not intend to
invest in federally taxable obligations under normal conditions.
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Temporary Investments. The National Municipal Bond Fund may also invest in high
quality investments or cash temporarily during times of unusual market
conditions for defensive purposes and in order to accommodate shareholder
redemption requests although currently it does not intend to do so. Any portion
of the National Municipal Bond Fund's assets maintained in cash will reduce the
amount of assets in securities and thereby reduce the National Municipal Bond
Fund's yield or total return.
THE VICTORY NEW YORK TAX-FREE FUND
INVESTMENT OBJECTIVE. The New York Tax-Free Fund seeks to provide a high level
of current income exempt from federal, New York State, and New York City income
taxes, consistent with the preservation of shareholders' capital.
INVESTMENT POLICIES AND LIMITATIONS. Under normal market conditions, the New
York Tax-Free Fund pursues its investment objective by investing at least 80%
(and generally all) of its portfolio in securities, the interest on which is
exempt from federal income tax, and will maintain at least 65% of the portfolio
in insured investments of New York State and its public authorities,
instrumentalities, and municipalities. The New York Tax-Free Fund generally
invests all of its portfolio in municipal securities and insured municipal
securities.
However, during normal market conditions and during periods when there is an
adequate supply of other types of municipal securities in which the New York
Tax-Free Fund may invest, the New York Tax-Free Fund intends to invest
substantially all of its assets in securities, the interest on which does not
constitute a tax preference item.
The New York Tax-Free Fund can invest in:
o Municipal Securities
o Variable Rate Demand Notes
o Municipal Securities
o Demand Features
o Refunding Contracts
o Resource Recovery Bonds
o Tax and Revenue Anticipation Notes
o Variable and Floating Rate Securities
o Zero Coupon Bonds
o Illiquid Investments
o Restricted Securities
o Tax-Exempt Commercial Paper
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<PAGE>
The New York Tax-Free Fund can invest up to 33 1/3% of the value of its total
assets in:
o Reverse Repurchase Agreements
o Securities Lending Transactions
o Delayed-Delivery Transactions
o When-Issued Securities
o Repurchase Agreements
The New York Tax-Free Fund can invest up to 20% of the value of its total assets
in:
o Municipal Lease Obligations
o Tax Preference Securities. A Tax Preference Security is a security,
the interest on which constitutes a tax preference item, and
consequently, may be subject to the federal alternative minimum tax on
individuals.
The New York Tax-Free Fund can invest up to 10% of the value of its total assets
in:
o Investment Company Securities
Temporary Investments. The New York Tax-Free Fund anticipates being as fully
invested as practicable in municipal securities; however, there may be occasions
when, as a result of maturities of portfolio securities, sales of Fund shares,
or in order to meet redemption requests, the New York Tax-Free Fund may hold
cash that is not earning income. In addition, there may be occasions when, in
order to raise cash to meet redemptions, the New York Tax-Free Fund may be
required to sell securities at a loss.
In adverse markets, the New York Tax-Free Fund may take temporary defensive
positions and invest up to 50% of its portfolio in short-term investments which
may be uninsured. To the extent that these short-term investments are not
tax-exempt securities, the income received by the New York Tax-Free Fund may be
taxable to investors. These investments will be limited to:
o U.S. Government Obligations
o Commercial Paper rated in the highest grade by either Moody's or S&P
o High-quality obligations of U.S. banks belonging to the Federal
Reserve System having assets of $10 billion or more
o Municipal Securities
The Adviser believes that it is likely that sufficient Municipal Securities will
be available to satisfy the New York Tax-Free Fund's investment objective and
policies. In meeting its investment policies, the Fund may invest all or any
part of its total assets in Municipal Securities which are private activity
bonds. Moreover, although the New York Tax-Free Fund does not presently intend
to do so on a regular basis, it may invest more than 25% of its total assets in
Municipal Securities which are related in such a way that an economic,
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<PAGE>
business or political development or change affecting one such security would
likewise affect the other Municipal Securities. Examples of such securities are
obligations, the repayment of which is dependent upon similar types of projects
or projects located in the same state. Such investments would be made only if
deemed necessary or appropriate by the Adviser.
THE VICTORY OHIO MUNICIPAL BOND FUND
INVESTMENT OBJECTIVE. The investment objective of the Ohio Municipal Bond Fund
seeks to produce a high level of current interest income which is exempt from
both federal income tax and Ohio personal income tax.
INVESTMENT POLICIES AND LIMITATIONS. Under normal market conditions, the Ohio
Municipal Bond Fund pursues its investment objective by investing at least 80%
of its total assets in investment grade obligations issued by or on behalf of
the State of Ohio and its political subdivisions, the interest on which, in the
opinion of the issuer's bond counsel at the time of issuance, is exempt from
both federal income tax and Ohio personal income tax and not treated as a tax
preference item for purposes of the federal alternative minimum tax ("Ohio
Tax-Exempt Obligations"). Under normal market conditions, the Ohio Municipal
Bond Fund will invest at least 65% of its total assets in Ohio Tax-Exempt
Obligations that are bonds.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect the Ohio Municipal Bond
Fund's net asset value. Because the Ohio Municipal Bond Fund invests primarily
in debt securities, which fluctuate in value, the Ohio Municipal Bond Fund's
shares will fluctuate in value.
The Ohio Municipal Bond Fund may also invest in:
o Municipal Securities. Under normal market conditions, at least 80% of
the total assets of the Fund will be invested in Municipal Securities.
o Refunded Municipal Bonds. Investments by the Fund in refunded
municipal bonds that are secured by escrowed obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
are considered to be investments in U.S. Government obligations for
purposes of the diversification requirements to which the Fund is
subject under the 1940 Act. As a result, more than 5% of the Fund's
total assets may be invested in such refunded bonds issued by a
particular municipal issuer. The escrowed securities securing such
refunded municipal bonds will consist exclusively of U.S. Government
obligations, and will be held by an independent escrow agent or be
subject to an irrevocable pledge of the escrow account to the debt
service on the original bonds.
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The Ohio Municipal Bond Fund can invest in:
o Ohio Tax-Exempt Obligations
o Taxable Obligations. The Fund may invest up to 20% of its net assets
in taxable obligations or debt securities the interest income from
which may be treated as an item of tax preference for purposes of the
federal alternative minimum tax if, for example, suitable tax-exempt
obligations are unavailable or if the acquisition of such securities
is deemed appropriate for temporary defensive purposes.
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Zero Coupon Bonds
o U.S. Government Obligations
o Collateralized Mortgage Obligations
o Mortgage-Related Securities
o Tax-Exempt Commercial Paper
o Commercial Paper
The Fund may hold uninvested cash reserves pending investment, during temporary
defensive periods or if, in the opinion of the Adviser, suitable Ohio Tax-Exempt
Obligations are unavailable. There is no percentage limitation on the amount of
assets which may be held uninvested. Uninvested cash reserves will not earn
income, and thus are not being utilized so as to meet the Ohio Municipal Bond
Fund's investment objective.
The Ohio Municipal Bond Fund can invest up to 20% of the value of its total
assets in:
o Variable and Floating Rate Securities
The Ohio Municipal Bond Fund can invest up to 33 1/3% of the value of its total
assets in:
o Futures Contracts
o Puts
o Stand-By Commitments
o Receipts
o When-Issued Securities
o Repurchase Agreements.
o Reverse Repurchase Agreements
o Private Placement Investments
o Delayed Delivery Transactions
The Ohio Municipal Bond Fund can invest up to 10% of the value of its total
assets in:
o Investment Company Securities
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From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which the Adviser or its affiliates have a lending relationship.
The Ohio Municipal Bond Fund may purchase:
o Bankers' Acceptances
o Certificates of Deposit
o Commercial Paper
o Variable and Floating Rate Notes
o Securities of Other Investment Companies
Temporary Investments. The Ohio Municipal Bond Fund may also invest temporarily
in high quality investments or cash during times of unusual market conditions
for defensive purposes and in order to accommodate shareholder redemption
requests although currently it does not intend to do so. Any portion of the Ohio
Municipal Bond Fund's assets maintained in cash will reduce the amount of assets
in securities and thereby reduce the Fund's yield or total return.
The Adviser believes that it is likely that sufficient Municipal Securities will
be available to satisfy the Ohio Municipal Bond Fund's investment objective and
policies. In meeting its investment policies, the Ohio Municipal Bond Fund may
invest all or any part of its total assets in Municipal Securities which are
private activity bonds. Moreover, although the Ohio Municipal Bond Fund does not
presently intend to do so on a regular basis, it may invest more than 25% of its
total assets in Municipal Securities which are related in such a way that an
economic, business or political development or change affecting one such
security would likewise affect the other Municipal Securities. Examples of such
securities are obligations, the repayment of which is dependent upon similar
types of projects or projects located in the same state. Such investments would
be made only if deemed necessary or appropriate by the Adviser.
THE VICTORY OHIO MUNICIPAL MONEY MARKET FUND
INVESTMENT OBJECTIVE. The Ohio Municipal Money Market Fund seeks to provide
current income exempt from federal regular income tax and the personal income
taxes imposed by the State of Ohio and Ohio municipalities consistent with
stability of principal.
INVESTMENT POLICIES AND LIMITATIONS. To pursue its objective, the Ohio Municipal
Money Market Fund invests at least 80% of its total assets in short-term Ohio
municipal securities. The interest income on these securities is exempt from
federal regular income tax. Federal
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regular income tax does not include the individual or corporate federal
alternative minimum tax. The Ohio Municipal Money Market Fund expects to invest
at least 65% of its total assets in debt securities that pay interest which is
also exempt from Ohio state income tax.
Normally, the Ohio Municipal Money Market Fund invests only in instruments that
are rated in the highest category by two or more NRSROs, or in the highest
category if rated by only one NRSRO, or if unrated, determined to be of
equivalent quality. The Board of Trustees has established policies to ensure
that the Ohio Municipal Money Market Fund invests in high quality, liquid
instruments.
Generally, the Ohio Municipal Money Market Fund primarily invests in:
o Short-term municipal obligations, such as commercial paper, notes and
bonds
o Tax, revenue, and bond anticipation notes
o Variable rate demand notes, municipal bonds, and participation
interests in any of the above obligations
Important Characteristics of the Ohio Municipal Money Market Fund's Investments:
o Quality: Instruments rated A or above by S&P, Fitch, Moody's or
another NRSRO. For more information on ratings, see the Appendix to
the SAI.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to
397 days.
When market conditions warrant a defensive strategy, the Ohio Municipal Money
Market Fund may invest up to 100% of its total assets in short-term, taxable
money market instruments or cash. For more information about other securities in
which the Ohio Municipal Money Market Fund can invest, see "Other Securities and
Investment Practices" in the Prospectus.
THE VICTORY OHIO REGIONAL STOCK FUND
INVESTMENT OBJECTIVE. The Ohio Regional Stock Fund seeks to provide capital
appreciation.
INVESTMENT POLICIES AND LIMITATIONS. The Ohio Regional Stock Fund pursues its
investment objective by investing primarily in equity securities issued by
companies headquartered in the State of Ohio.
In making investment decisions, the Adviser analyzes cash flow, book value,
dividend growth potential, quality of management, earnings, and capitalization.
The Ohio Regional Stock Fund looks at any information that reflects the
potential for future earnings growth.
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The Ohio Regional Stock Fund invests in nationally recognized companies and
lesser-known companies that may have smaller capitalization, but also the
potential for growth.
Under normal conditions, the Ohio Regional Stock Fund:
o Will invest at least 80% of its total assets in common stocks and
securities convertible into common stocks.
o May invest up to 20% of its total assets in:
o Short-term debt obligations
o Investment-grade corporate debt securities
o Investment company securities
For temporary defensive purposes, the Ohio Regional Stock Fund may invest up to
100% of its total assets in U.S. Government obligations or short-term debt
obligations.
The Ohio Regional Stock Fund may invest in futures and options in an effort to
hedge against market risk.
The Ohio Regional Stock Fund may also invest in: ADRs, Bankers Acceptances,
Certificates of Deposit, Commercial Paper, foreign and domestic demand and time
deposits, foreign securities, investment company securities, master demand
notes, puts, receipts, repos and reverse repos, variable and floating rate
securities, warrants, when-issued securities and zero coupon bonds.
THE VICTORY PRIME OBLIGATIONS FUND
INVESTMENT OBJECTIVE. The Prime Obligations Fund seeks to provide current income
consistent with liquidity and stability of principal.
INVESTMENT POLICIES AND LIMITATIONS. The Prime Obligations Fund pursues its
investment objective by investing primarily in short-term, high-quality debt
instruments.
Normally, the Prime Obligations Fund invests only in instruments that are rated
in the highest category by two or more NRSROs, or in the highest category if
rated by only one NRSRO, or if unrated, determined to be of equivalent quality.
The Board of Trustees has established policies to ensure that the Prime
Obligations Fund invests in high quality, liquid instruments.
Generally, the Prime Fund invests primarily in:
o Negotiable certificates of deposit, time deposits and bankers'
acceptances of U.S. and foreign banks.
o Short-term corporate obligations, such as commercial paper, notes and
bonds.
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o Repurchase agreements and reverse repurchase agreements with Federal
Reserve system member banks and dealers in U.S. Government securities.
o A Other debt obligations such as master demand notes, short-term
funding agreements, Eurodollars, variable and floating rate
securities, and private placement investments.
o U.S. Government obligations which may be backed by the
creditworthiness of the issuing agency, such as GNMAs, FNMAs and
SLMAs.
o When-issued or delayed-delivery securities.
Important Characteristics of the Prime Obligations Fund's Investments:
o Quality: Instruments rated A or above by S&P, Fitch, Moody's or
another NRSRO. For more information on ratings, see the Appendix to
the SAI.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to
397 days.
THE VICTORY REAL ESTATE INVESTMENT FUND
INVESTMENT OBJECTIVE. The Real Estate Investment Fund seeks to provide total
return through investments in real estate related securities.
INVESTMENT POLICIES AND LIMITATIONS. The Real Estate Investment Fund pursues its
objective by investing primarily in common stocks, including real estate
investment trusts ("REITs"), rights to purchase these securities, convertible
securities and preferred stocks.
Under normal market conditions, the Real Estate Investment Fund will invest
substantially all of its assets in:
o Common stocks (including REITs)
o Rights or warrants to purchase common stocks
o Securities convertible into common stocks when the Adviser believes
that the conversion will be profitable
o Preferred stocks
The Real Estate Investment Fund may also invest up to 20% of its total assets in
securities of foreign real estate companies. For temporary defensive purposes,
the Real Estate Investment Fund may invest up to 100% of its total assets in
U.S. Government obligations or short-term debt obligations.
The Real Estate Investment Fund may also invest in: ADRs, Bankers Acceptances,
certificates of deposit, commercial paper, demand and time deposits, foreign
securities, master demand notes, puts, receipts, repurchase agreements, reverse
repurchase agreements, variable and floating rate securities, warrants,
when-issued securities and zero-coupon bonds.
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THE VICTORY SPECIAL GROWTH FUND
INVESTMENT OBJECTIVE. The Special Growth Fund seeks to provide capital
appreciation.
INVESTMENT POLICIES AND LIMITATIONS. The Special Growth Fund pursues its
investment objective by investing in equity securities of companies with market
capitalization of $750 million or less.
In making investment decisions, the Adviser will look for above average growth
rates, high return on equity, issuers that reinvest their earnings in their
business, and strong balance sheets.
Under normal circumstances, the Special Growth Fund:
o Will invest at least 65% of its total assets in equity securities of
companies with market capitalization of $750 million or less. These
equity investments include:
o Common stock
o Preferred stock
o Convertible preferred stock
o Debt convertible into equity securities
o Securities convertible into common stock
o May invest up to 35% of its total assets in:
o Equity securities of companies with larger market capitalizations
of up to $1 billion
o Investment-grade debt securities
o May invest up to 5% of its total assets in lower-rated debt
securities, commonly referred to as "junk bonds."
For temporary defensive purposes, the Special Growth Fund may invest up to 100%
of its total assets in U.S. Government obligations or short-term debt
obligations.
The Special Growth Fund may invest in futures and options in an effort to hedge
against market risk.
The Special Growth Fund may also invest in the following securities: ADRs,
Bankers Acceptances, certificates of deposit, commercial paper, foreign
securities, loans and other direct debt instruments, master demand notes,
receipts, repurchase agreements, reverse repurchase agreements, variable and
floating rate securities, warrants, when-issued securities and zero-coupon
bonds.
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THE VICTORY SPECIAL VALUE FUND
INVESTMENT OBJECTIVE. The Special Value Fund seeks to provide long-term growth
of capital and dividend income.
INVESTMENT POLICIES AND LIMITATIONS. The Special Value Fund pursues its
investment objective by investing primarily in equity securities of small- and
medium-size companies listed on nationally recognized exchanges. Small-size
companies are defined as those having market capitalization of less than $1
billion and medium-size companies are defined as those having a market
capitalization of between $1 billion and $5 billion.
The Adviser looks for companies with above average total return potential whose
equity securities are under-valued and considered statistically cheap.
Under normal circumstances, the Special Value Fund will invest at least 65% of
its total assets in:
o Common and preferred stocks
o Securities convertible into common stock of small and medium-sized
companies
o Debt securities
For temporary defensive purposes, the Special Value Fund may invest up to 100%
of its total assets in U.S. Government obligations or short-term debt
obligations.
The Special Value Fund may invest in futures and options in an effort to hedge
against market risk.
The Special Value Fund may also invest in the following securities: ADRs,
Bankers Acceptances, certificates of deposit, commercial paper, foreign
securities, master demand notes, receipts, repurchase agreements, reverse
repurchase agreements, variable and floating rate securities, warrants,
when-issued securities, and zero-coupon bonds.
THE VICTORY STOCK INDEX FUND
INVESTMENT OBJECTIVE. The Stock Index Fund seeks to provide long-term capital
appreciation by attempting to match the investment performance of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
INVESTMENT POLICIES AND LIMITATIONS. The Stock Index Fund pursues its investment
objective by attempting to duplicate the capital performance and dividend income
of the S&P 500 Index. The Stock Index Fund invests primarily in many of the
equity securities which are in the S&P 500 Index and secondarily in stock
futures.
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The S&P 500 Index is composed of 500 common stocks. To minimize small positions
and transactions expenses, the Stock Index Fund need not invest in every stock
included in the S&P 500 Index. The Stock Index Fund may purchase stocks that are
not included in the S&P 500 Index if the Adviser believes that those purchases
will reduce "tracking error" (the difference between the Stock Index Fund's
investment results, before expenses, and that of the S&P 500 Index).
The Stock Index Fund is not managed in the traditional sense using economic,
financial, and market analysis. Therefore, the Stock Index Fund will not
necessarily sell a stock that is underperforming. Brokerage costs, fees,
operating expenses, and tracking errors may cause the Stock Index Fund's total
return to be lower than that of the S&P 500 Index.
In connection with investments in options and stock futures, the Stock Index
Fund may invest in:
o Preferred stocks
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
The Stock Index Fund may also invest in: Bankers Acceptances, certificates of
deposit, commercial paper, foreign and domestic demand and time deposits, master
demand notes, puts, receipts, repurchase agreements and reverse repurchase
agreements, variable and floating rate securities, warrants, when-issued
securities and zero-coupon bonds.
THE VICTORY TAX-FREE MONEY MARKET FUND
INVESTMENT OBJECTIVE. The Tax-Free Money Market Fund seeks to provide current
interest income free from federal income taxes consistent with relative
liquidity and stability of principal.
INVESTMENT POLICIES AND LIMITATIONS. To pursue its investment objective, the
Tax-Free Money Market Fund invests at least 80% of its total assets in
short-term, high-quality municipal securities issued by or on behalf of U.S.
states, territories and possessions. The interest income on these securities is
exempt from federal regular income tax. Federal regular income tax does not
include the individual or corporate federal alternative minimum tax.
Normally, the Tax-Free Money Market Fund invests only in instruments that are
rated in the highest category by two or more NRSROs, or in the highest category
if rated by only one NRSRO, or if unrated, determined to be of equivalent
quality. The Board of Trustees has established policies to ensure that the
Tax-Free Money Market Fund invests in high quality, liquid instruments.
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Generally, the Tax-Free Money Market Fund primarily invests in:
o General obligation and revenue securities.
o Moral obligation securities and refunded bonds.
o Variable rate demand notes, and municipal bonds.
Important Characteristics of the Fund's Investments:
o Quality: Instruments rated A or above by S&P, Fitch, Moody's or another
NRSRO. For more information on ratings, see the Appendix to the SAI.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to 397
days.
When market conditions warrant a defensive strategy, the Tax-Free Money Market
Fund may invest up to 100% of its total assets in short-term, taxable money
market instruments or cash.
THE VICTORY U.S. GOVERNMENT OBLIGATIONS FUND
INVESTMENT OBJECTIVE. The U.S. Government Obligations Fund seeks to provide
current income consistent with liquidity and stability of principal.
INVESTMENT POLICIES AND LIMITATIONS. The U.S. Government Obligations Fund
pursues this investment objective by investing only in short-term U.S.
Government securities backed by the full faith and credit of the U.S. Treasury.
Generally, the U.S. Government Obligations Fund primarily invests in:
o U.S. Treasury bills, notes, and other obligations issued or guaranteed by
the U.S. Government or its agencies or instrumentalities.
o Repurchase agreements and reverse repurchase agreements.
Important Characteristics of the U.S. Government Obligations Fund's Investments:
o Quality: Instruments issued by the U.S. Treasury are of the highest
quality, since they are backed by the U.S. Government or its agencies or
instrumentalities.
o Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with maturities ranging from one day to 397
days.
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THE VICTORY VALUE FUND
INVESTMENT OBJECTIVE. The Value Fund seeks to provide long-term growth of
capital and dividend income.
INVESTMENT POLICIES AND LIMITATIONS. The Value Fund pursues its investment
objective by investing primarily in a diversified group of equity securities
with an emphasis on companies with above average total return potential. The
securities in the Value Fund usually are listed on a nationally recognized
exchange.
The Adviser seeks equity securities of under-valued companies.
Under normal conditions, the Value Fund:
o Will invest at least 80% of its total assets in equity securities and
securities convertible into common stock
o May invest up to 20% of its total assets in:
o Preferred stocks
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
For temporary defensive purposes, the Value Fund may invest up to 100% of its
total assets in U.S. Government obligations or short-term debt obligations.
The Value Fund may invest in futures and options in an effort to hedge against
market risk.
The Value Fund may also invest in: ADRs, Bankers Acceptances, certificates of
deposit, commercial paper, demand and time deposits, foreign securities, master
demand notes, puts, receipts, repurchase agreements, reverse repurchase
agreements, variable and floating rate securities, warrants, when-issued
securities and zero-coupon bonds.
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FUNDAMENTAL RESTRICTIONS OF THE FUNDS
ISSUING SENIOR SECURITIES: THE FUNDS MAY NOT:
Issue any senior security (as defined in the 1940 Act), except that (a) each
Fund may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) each Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; and (c) subject to the restrictions set forth
below, each Fund may borrow money as authorized by the 1940 Act.
UNDERWRITING SECURITIES: THE FUNDS MAY NOT:
Underwrite securities issued by others, except to the extent that each Fund may
be considered an underwriter within the meaning of the Securities Act of 1933
(the "1933 Act") in the disposition of restricted securities.
BORROWING MONEY:
A) (EXCEPT FOR THE FINANCIAL RESERVES FUND, GOVERNMENT BOND FUND,
INSTITUTIONAL MONEY MARKET FUND AND NATIONAL MUNICIPAL BOND FUND) THE FUNDS
MAY NOT:
Borrow money, except that (a) each Fund (except the Fund For Income) may
enter into commitments to purchase securities in accordance with its
investment program, including delayed-delivery and when-issued securities
and reverse repurchase agreements, provided that the total amount of any
such borrowing does not exceed 33 1/3% of the Fund's total assets; and (b)
each Fund may borrow money for temporary or emergency purposes in an amount
not exceeding 5% of the value of its total assets at the time when the loan
is made. The Ohio Municipal Money Market Fund has no 5% limit on temporary
borrowing. Except for the Ohio Municipal Money Market Fund and Fund For
Income, any borrowings representing more than 5% of the Fund's total assets
must be repaid before the Fund may make additional investments. The Ohio
Municipal Money Market Fund will not purchase any securities while any such
borrowings (including reverse repurchase agreements) are outstanding. For
purposes of this restriction, with regard to the International Growth Fund,
collateral arrangements with respect to margins for currency futures
contracts are not deemed to be a pledge of assets.
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<PAGE>
B) THE FINANCIAL RESERVES FUND, GOVERNMENT BOND FUND, INSTITUTIONAL MONEY
MARKET FUND AND NATIONAL MUNICIPAL BOND FUND MAY NOT:
Borrow money, except (i) from a bank for temporary or emergency purposes
(not for leveraging or investment) or (ii) by engaging in reverse
repurchase agreements, provided that (i) and (ii) in combination
("borrowings") do not exceed an amount equal to one third of the current
value of its total assets (including the amount borrowed) less liabilities
(not including the amount borrowed) at the time the borrowing is made.
This limitation is construed in conformity with the 1940 Act, and if any
time Fund borrowings exceed an amount equal to one third of the current
value of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) at the time the borrowing is made due
to a decline in net assets, such borrowings will be reduced within three
days (not including Sundays and holidays) to the extent necessary to comply
with the 33 1/3% limitation. Provided that, for the Government Bond Fund,
any such borrowing representing more than 5% of the Fund's total assets
must be repaid before the Fund may make additional investments.
PURCHASING OR SELLING REAL ESTATE: (EXCEPT FOR THE FUND FOR INCOME AND NEW YORK
TAX-FREE FUND) THE FUNDS MAY NOT:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Funds from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by the Funds in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not hereby precluded.
PURCHASING OR SELLING COMMODITIES:
A) (EXCEPT FOR THE FINANCIAL RESERVES FUND, FUND FOR INCOME, INSTITUTIONAL
MONEY MARKET FUND, NEW YORK TAX-FREE FUND AND OHIO MUNICIPAL MONEY MARKET
FUND) THE FUNDS MAY NOT:
Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Funds from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities).
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<PAGE>
B) THE FINANCIAL RESERVES FUND, FUND FOR INCOME, INSTITUTIONAL MONEY
MARKET FUND, NEW YORK TAX-FREE FUND AND OHIO MUNICIPAL MONEY MARKET
FUND MAY NOT:
Purchase or sell commodities or commodity contracts.
LENDING:
A) (EXCEPT FOR THE FINANCIAL RESERVES FUND, FUND FOR INCOME,
INSTITUTIONAL MONEY MARKET FUND, NEW YORK TAX-FREE FUND AND OHIO
MUNICIPAL MONEY MARKET FUND) THE FUNDS MAY NOT:
Lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of publicly issued debt
securities or to repurchase agreements.
B) THE FINANCIAL RESERVES FUND, INSTITUTIONAL MONEY MARKET FUND AND
OHIO MUNICIPAL MONEY MARKET FUND MAY NOT:
Make loans to other persons, except (i) by the purchase of debt
obligations in which the Fund is authorized to invest in accordance
with its investment objective, and (ii) by engaging in repurchase
agreements. In addition, each Fund may lend its portfolio securities
to broker-dealers or other institutional investors, provided that the
borrower delivers cash or cash equivalents as collateral to the Fund
and agrees to maintain such collateral so that it equals at least 100%
of the value of the securities loaned. Except for the Ohio Municipal
Money Market Fund, any such securities loan may not be made if, as a
result thereof, the aggregate value of all securities loaned exceeds
33 1/3% of the total assets of the Fund.
C) THE FUND FOR INCOME MAY NOT:
Make loans to other persons except through the use of repurchase
agreements or the purchase of commercial paper. For these purposes,
the purchase of a portion of an issue of debt securities which is part
of an issue to the public shall not be considered the making of a
loan.
D) THE NEW YORK TAX-FREE FUND MAY NOT:
Make loans to other persons except through the use of repurchase
agreements, the purchase of commercial paper or by lending portfolio
securities. For these purposes,
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<PAGE>
the purchase of a portion of an issue of debt securities which is part
of an issue to the public shall not be considered the making of a loan.
JOINT TRADING ACCOUNTS: (EXCEPT FOR THE FINANCIAL RESERVES FUND, FUND FOR
INCOME, GOVERNMENT BOND FUND, INSTITUTIONAL MONEY MARKET FUND, NATIONAL
MUNICIPAL BOND FUND, NEW YORK TAX-FREE FUND, OHIO MUNICIPAL MONEY MARKET FUND
AND U.S. GOVERNMENT OBLIGATIONS FUND) THE FUNDS MAY NOT:
Participate on a joint or joint and several basis in any securities trading
account.
DIVERSIFICATION:
A) (EXCEPT FOR THE FINANCIAL RESERVES FUND, FUND FOR INCOME,
INSTITUTIONAL MONEY MARKET FUND, NATIONAL MUNICIPAL BOND FUND, NEW
YORK TAX-FREE FUND, OHIO MUNICIPAL BOND FUND, OHIO MUNICIPAL MONEY
MARKET FUND, TAX-FREE MONEY MARKET FUND AND U.S. GOVERNMENT
OBLIGATIONS FUND) THE FUNDS MAY NOT:
With respect to 75% of each Funds' total assets, purchase the
securities of any issuer (other than securities issued or guaranteed
by the U.S. Government or any of its agencies or instrumentalities)
if, as a result, (a) more than 5% of each Fund's total assets would be
invested in the securities of that issuer, or (b) each Fund would hold
more than 10% of the outstanding voting securities of that issuer.
(Note: In accordance with Rule 2a-7 under the 1940 Act, the Prime
Obligations Fund may invest up to 25% of its assets in securities of a
single issuer for a period of up to three business days.)
B) THE FUND FOR INCOME MAY NOT:
Purchase the securities of any issuer (except the United States
government, its agencies and instrumentalities), with regard to 50% of
total assets, if as a result more than 5% of its total assets would be
invested in the securities of such issuer.
In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state
and each multi-state agency of which such state is a member is a
separate issuer. Where securities are backed only by assets and
revenues of a particular instrumentality, facility, or subdivision,
such entity is considered the issuer.
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<PAGE>
C) THE NATIONAL MUNICIPAL BOND FUND AND NEW YORK TAX-FREE FUND MAY
NOT:
Purchase the securities of any issuer (except the United States
government, its agencies and instrumentalities, and for the New York
Tax Free Fund, the State of New York and its municipalities) if as a
result more than 25% of either Fund's total assets are invested in the
securities of a single issuer, and with regard to 50% of total assets,
if as a result more than 5% of either Fund's total assets would be
invested in the securities of such issuer.
With regard to the New York Tax-Free Fund, in determining the issuer
of a tax-exempt security, each state and each political subdivision,
agency, and instrumentality of each state and each multi-state agency,
of which such state is a member, is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered
the issuer.
D) THE OHIO MUNICIPAL MONEY MARKET FUND MAY NOT:
Invest more than 10% of its assets in one issuer, with respect to 75%
of the Fund's total assets. The total amount of the remaining 25% of
the value of the Fund's total assets could be invested in a single
issuer if the Adviser believes such a strategy to be prudent. Under
Rule 2a-7 under the 1940 Act, the Fund is also subject to certain
diversification requirements.
E) THE TAX-FREE MONEY MARKET FUND MAY NOT:
Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities if, immediately after such purchase, more than 5% of
the value of its total assets would be invested in such issuer, except
that up to 25% of the value of the Tax-Free Money Market Fund's total
assets may be invested without regard to such 5% limitation. For
purposes of this limitation, a security is considered to be issued by
the government entity (or entities) whose assets and revenues
guarantee or back the security; with respect to a private activity
bond that is backed only by the assets and revenues of a
non-governmental user, a security is considered to be issued by such
non-governmental user.
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<PAGE>
CONCENTRATION:
A) (EXCEPT FOR THE FINANCIAL RESERVES FUND, FUND FOR INCOME,
GOVERNMENT BOND FUND, GOVERNMENT MORTGAGE FUND, INSTITUTIONAL MONEY
MARKET FUND, NEW YORK TAX-FREE FUND AND U.S. GOVERNMENT OBLIGATIONS
FUND) THE FUNDS 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; and for
the National Municipal Bond Fund, other than tax-exempt obligations
issued or guaranteed by a U.S. territory or possession or a state or
local government, or a political subdivision of the foregoing) if, as
a result, more than 25% of a Fund's total assets would be invested in
the securities of companies whose principal business activities are in
the same industry. In the utilities category, the industry shall be
determined according to the service provided. For example, gas,
electric, water and telephone will be considered as separate
industries. Provided that with regard to the Ohio Municipal Bond Fund
and Tax-Free Money Market Fund, this limitation shall not apply to
municipal securities or governmental guarantees of municipal
securities; but for these purposes only, industrial development bonds
that are backed only by the assets and revenues of a non-governmental
issuer shall not be deemed to be municipal securities. Notwithstanding
the foregoing, the Prime Obligations Fund and Tax-Free Money Market
Fund have no limitation with respect to certificates of deposit and
bankers' acceptances issued by domestic banks, or repurchase
agreements secured thereby. For the National Municipal Bond Fund,
industrial development revenue bonds which are issued by
nongovernmental entities within the same industry shall be subject to
this industry limitation. In addition, the Ohio Municipal Money Market
Fund will not invest 25% or more of its assets in securities, the
interest upon which is paid from revenues of similar type projects; it
may invest 25% or more of its assets in industrial development bonds.
B) THE FINANCIAL RESERVES FUND AND INSTITUTIONAL MONEY MARKET FUND MAY
NOT:
Purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States
government, its agencies or instrumentalities) if, as a result thereof:
(i) more than 5% of either Fund's total assets would be invested in the
securities of such issuer, provided, however, that in the case of
certificates of deposit, time deposits and bankers' acceptances, up to
25% of the Fund's total assets may be invested without regard to such
5% limitation, but shall instead be subject to a 10% limitation; (ii)
more than 25% of either Fund's total assets would be invested in the
securities of one or more issuers having their principal business
activities in the same industry, provided, however, that it may invest
more
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<PAGE>
than 25% of its total assets in the obligations of domestic banks.
Neither finance companies as a group nor utility companies as a group
are considered a single industry for purposes of this policy (i.e.,
finance companies will be considered a part of the industry they
finance and utilities will be divided according to the types of
services they provide). (Note: In accordance with Rule 2a-7 under the
1940 Act, the Fund may invest up to 25% of its total assets in
securities of a single issuer for a period of up to three business
days.)
C) THE NEW YORK TAX-FREE FUND MAY NOT:
With respect to non-municipal investments, purchase securities (other
than securities of the United States government, its agencies or
instrumentalities), if as a result of such purchase 25% or more of the
Fund's total assets would be invested in any one industry, or enter
into a repurchase agreement if, as a result thereof, more than 10% of
its total assets would be subject to repurchase agreements maturing in
more than seven days.
SECURITIES OF SIMILAR PROJECTS: THE FUND FOR INCOME AND NEW YORK TAX-FREE FUND
MAY NOT:
Invest more than 25% of their respective total assets in securities whose
interest payments are derived from revenue from similar projects.
OIL, GAS, OR OTHER MINERAL EXPLORATION: THE FUND FOR INCOME AND INSTITUTIONAL
MONEY MARKET FUND MAY NOT:
Invest in oil, gas or other mineral exploration or development programs.
TAX-EXEMPT INCOME: THE OHIO MUNICIPAL MONEY MARKET FUND MAY NOT:
Invest its assets so that less than 80% of its annual interest income is exempt
from the federal income tax and Ohio taxes.
USE OF ASSETS AS SECURITY: THE FUND FOR INCOME MAY NOT:
Pledge, mortgage, or hypothecate its assets, except that, to secure borrowings
permitted by its fundamental restriction on borrowing, it may pledge securities
having a market value at the time of pledge not exceeding 10% of the value of
its total assets.
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NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS
The following restrictions are not fundamental and may be changed without
shareholder approval:
BOARD AND MANAGEMENT OWNERSHIP OF ISSUERS:
A) (EXCEPT FOR THE FINANCIAL RESERVES FUND, FUND FOR INCOME, GOVERNMENT
BOND FUND, INSTITUTIONAL MONEY MARKET FUND, NATIONAL MUNICIPAL BOND FUND
AND SPECIAL GROWTH FUND) EACH FUND:
Will not purchase or retain securities of any issuer if the officers or
Trustees of the Victory Portfolios or the officers or directors of its
investment adviser owning beneficially more than one-half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
B) THE FINANCIAL RESERVES FUND AND INSTITUTIONAL MONEY MARKET FUND MAY NOT:
Purchase or retain the securities of any issuer, any of whose officers,
directors, or security holders is a trustee, director, or officer of the
Fund or of its investment adviser, if or so long as the Board of Trustees,
directors, and officers of the Fund and of its Investment Adviser together
own beneficially more than 5% of any class of securities of such issuer.
UNSEASONED ISSUERS: (EXCEPT FOR THE FUND FOR INCOME, GOVERNMENT BOND FUND AND
NATIONAL MUNICIPAL BOND FUND) EACH FUND:
Will not invest more than 10% (5% for the Financial Reserves Fund, Institutional
Money Market Fund, Ohio Municipal Money Market Fund and New York Tax Free Fund)
of its total assets in the securities of issuers which together with any
predecessors have a record of less than three years of continuous operation.
ILLIQUID SECURITIES: EACH FUND:
Will not invest more than 15% (10% for the Financial Reserves Fund,
Institutional Money Market Fund, Ohio Municipal Money Market Fund, Prime
Obligations Fund, Tax-Free Money Market Fund and U.S. Government Obligations
Fund) of its net assets in illiquid securities. Illiquid securities are
securities that are not readily marketable or cannot be disposed of promptly
within seven days and in the usual course of business at approximately
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<PAGE>
the price at which the Fund has valued them. Such securities include, but are
not limited to, time deposits and repurchase agreements with maturities longer
than seven days. Securities that may be resold under Rule 144A, securities
offered pursuant to Section 4(2) of, or securities otherwise subject to
restrictions or limitations on resale under the 1933 Act ("Restricted
Securities") shall not be deemed illiquid solely by reason of being
unregistered. The Adviser determines whether a particular security is deemed to
be liquid based on the trading markets for the specific security and other
factors. However, because state securities laws may limit the Fund's investment
in Restricted Securities (regardless of the liquidity of the investment),
investments in Restricted Securities resalable under Rule 144A will continue to
be subject to applicable state law requirements until such time, if ever, that
such limitations are changed.
REAL ESTATE:
A) THE FINANCIAL RESERVES FUND:
Does not currently intend to invest in real estate limited
partnerships.
B) THE SPECIAL GROWTH FUND:
Does not currently intend to invest in securities of real estate
investment trusts that are not readily marketable, or to invest in
securities of real estate limited partnerships that are not listed on
the New York Stock Exchange or the American Stock Exchange or traded
on the NASDAQ National Market System.
SHORT SALES AND PURCHASES ON MARGIN: THE FUNDS WILL NOT:
Make short sales of securities; however, the Funds, except for the Financial
Reserves Fund, Fund for Income, Institutional Money Market Fund, New York
Tax-Free Fund and Ohio Municipal Money Market Fund, may make short sales
"against the box." The Funds will not purchase securities on margin except for
such short-term credits as are necessary for the clearance of portfolio
transactions, provided that this restriction will not be applied to limit the
use of options, futures contracts, and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment program of
each Fund.
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OTHER INVESTMENT COMPANIES:
A) (EXCEPT FOR THE FUND FOR INCOME AND OHIO MUNICIPAL MONEY MARKET
FUND) EACH FUND MAY:
Invest up to 5% of its total assets in the securities of any one
investment company, but may not own more than 3% of the securities of
any one investment company or invest more than 10% of its total assets
in the securities of other investment companies. Pursuant to an
exemptive order received by the Victory Portfolios from the Commission,
the Funds may invest in the other money market funds of the Victory
Portfolios. The Institutional Money Market Fund, Financial Reserves
Fund, National Municipal Bond Fund and Government Bond Fund may only
invest in shares of money market funds that are not "affiliated
persons" of the Funds (unless permitted by Commission regulations or
exemptive relief) and that limit their investments to securities
appropriate for those Funds. The New York Tax-Free Fund may only invest
in shares of tax-exempt money market funds that are not "affiliated
persons" of the Funds (unless permitted by Commission regulations or
exemptive relief) and that limit their investments to securities
appropriate for the Fund. The investment advisor of the Institutional
Money Market Fund, Financial Reserves Fund, National Municipal Bond
Fund, Government Bond Fund and New York Tax-Free Fund will waive the
portion of its fee attributable to the assets of each Fund invested in
such money market funds to the extent required by the laws of any
jurisdiction in which shares of the Funds are registered for sale.
B) THE NATIONAL MUNICIPAL BOND FUND AND OHIO MUNICIPAL MONEY MARKET
FUND MAY NOT:
Purchase securities of other investment companies, except in the open
market where no commission except the ordinary broker's commission is
paid. Such limitation does not apply to securities received as
dividends, through offers of exchange, or as a result of a
reorganization, consolidation, or merger.
C) THE FUNDS MAY NOT:
Purchase the securities of any registered open-end investment company
or registered unit investment trust in reliance on Section 12(d)(1)(G)
or Section 12(d)(1)(F) of the 1940 Act, which permits operation as a
"fund of funds."
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OPTIONS:
A) THE BALANCED FUND, DIVERSIFIED STOCK FUND, INSTITUTIONAL MONEY
MARKET FUND, INTERNATIONAL GROWTH FUND, LIMITED TERM INCOME FUND, OHIO
MUNICIPAL BOND FUND, OHIO REGIONAL STOCK FUND, STOCK INDEX FUND AND
TAX-FREE MONEY MARKET FUND, EACH
Will not write or sell puts, straddles, spreads, or combinations
thereof or write or purchase put options (except that the Ohio
Municipal Bond Fund and Tax-Free money Market Fund may acquire puts
with respect to municipal securities in their portfolio and sell those
puts in connection with a sale of such municipal securities) or
purchase call options.
B) THE FINANCIAL RESERVES FUND AND INSTITUTIONAL MONEY MARKET FUND MAY
NOT:
Write or purchase any put or call option.
C) THE OHIO MUNICIPAL MONEY MARKET FUND MAY NOT:
Purchase or sell puts, calls, straddles, spreads, or any combination
of them, except that the Fund may purchase Municipal Securities
accompanied by agreements of sellers to repurchase them at the Fund's
option.
D) THE PRIME OBLIGATIONS FUND MAY NOT:
Write or purchase put options or purchase call options.
E) THE TAX-FREE MONEY MARKET FUND MAY NOT:
Acquire an over the counter put if, immediately after such
acquisition, more than 5% of the value of the Fund's total assets
would be subject to over the counter puts from the same institution
except that (i) up to 25% of the value of the Fund's total assets may
be subject to puts without regard to such 5% limitation and (ii) the
5% limitation is inapplicable to puts that, by their terms, would be
readily exercisable in the event of a default in payment of principal
or interest on the underlying securities. In applying the
above-described limitation, the Fund will aggregate securities subject
to over the counter puts from any one institution with the Fund's
investments, if any, in securities issued or guaranteed by that
institution. In addition, the Fund may not acquire an over the counter
put that, by its terms, would be readily exercisable in the event of a
default in payment of principal or interest on the underlying security
or
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securities if, immediately after that acquisition, the value of the
security or securities underlying that put, when aggregated with the
value of any other securities issued or guaranteed by the issuer of
the put, would exceed 10% of the value of the Fund's total assets.
STATE, MUNICIPAL AND PRIVATE ACTIVITY OBLIGATIONS:
A) THE DIVERSIFIED STOCK FUND, INTERNATIONAL GROWTH FUND, LIMITED TERM
INCOME FUND, OHIO REGIONAL STOCK FUND, STOCK INDEX FUND AND U.S.
GOVERNMENT OBLIGATIONS FUND, EACH:
Will not buy state, municipal, or private activity bonds.
B) THE NATIONAL MUNICIPAL BOND FUND MAY NOT:
Invest in "private activity bonds" as defined in the Tax Reform Act of
1986.
USE OF ASSETS AS SECURITY:
A) THE FINANCIAL RESERVES FUND AND INSTITUTIONAL MONEY MARKET FUND MAY
NOT:
Pledge assets, except that the Fund may pledge not more than one third
of its total assets (taken at current value) to secure borrowings made
in accordance with its fundamental limitation on borrowing.
B) THE NEW YORK TAX FREE FUND MAY NOT:
Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings as permitted above under the Fund's fundamental investment
limitations, it may pledge securities having a market value at the
time of pledge not exceeding 10% of the value of the Fund's total
assets.
C) THE OHIO MUNICIPAL MONEY MARKET FUND MAY NOT:
Mortgage, pledge, or hypothecate any assets except to secure permitted
borrowings. In those cases, it may mortgage, pledge, or hypothecate
assets having a market value not exceeding 10% of the value of total
assets at the time of the pledge. In addition the Fund will not
borrow, pledge, mortgage or hypothecate any assets in excess of one
third of the Fund's total assets.
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EXERCISE OF CONTROL:
A) THE FINANCIAL RESERVES FUND MAY NOT:
Invest in companies for the purpose of exercising control or
management and will not purchase the securities of any issuer if, as
to 75% of its total assets, it would own more than 10% of the voting
securities of any such issuer.
B) THE INSTITUTIONAL MONEY MARKET FUND MAY NOT:
Invest in companies for the purpose of exercising control or
management.
WARRANTS:
A) THE FINANCIAL RESERVES FUND MAY NOT:
Invest more than 5% of its net assets in warrants, valued at lower of
cost or market. In addition the Fund will not invest more than 2% of
its net assets in warrants not listed on the New York or American
Stock Exchange.
B) THE GOVERNMENT MORTGAGE FUND WILL:
Limit its investments in warrants to no more than 5% of its net
assets, and of this 5%, no more than 2% will be invested in warrants
which are not listed on the New York Stock Exchange or American Stock
Exchange.
C) THE OHIO MUNICIPAL MONEY MARKET FUND WILL NOT:
Invest more than 5% of its net assets in warrants, valued at lower of
cost or market. In addition the Fund will not invest more than 2% of
its net assets in warrants not listed on the New York or American
Stock Exchanges.
OIL, GAS, AND MINERAL EXPLORATION AND DEVELOPMENT PROGRAMS:
A) THE FINANCIAL RESERVES FUND WILL NOT:
Invest in oil, gas, or other mineral exploration or development
programs. The Fund does not currently intend to invest in oil, gas or
other mineral leases.
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B) THE NEW YORK TAX-FREE FUND MAY NOT:
Purchase or sell oil, gas or other mineral exploration or development
programs.
C) THE OHIO MUNICIPAL MONEY MARKET FUND MAY NOT:
Purchase or sell oil, gas, or other mineral exploration or development
programs, or related leases.
SAVINGS AND LOAN OBLIGATIONS: THE FINANCIAL RESERVES FUND WILL NOT:
Purchase obligations of savings and loan institutions and savings banks.
MONEY MARKET FUNDS:
A) THE FINANCIAL RESERVES FUND WILL NOT:
Purchase commercial paper which is not rated in the single highest
category by Duff & Phelps, Inc., Fitch, S&P or Moody's, or if unrated,
which is not deemed to be of equivalent quality pursuant to procedures
reviewed by the Trustees.
B) THE INSTITUTIONAL MONEY MARKET FUND WILL NOT:
Purchase commercial paper which is not rated in the single highest
category by one NRSRO, or if unrated, which is not deemed to be of
equivalent quality pursuant to procedures reviewed by the Trustees.
C) THE OHIO MUNICIPAL MONEY MARKET FUND WILL NOT:
Invest less than 95% of its total assets in securities rated in one of
the two highest short-term rating categories by a NRSRO or be of
comparable quality to securities having such ratings. The Fund will
invest no more than 5% of its total assets in securities that would be
considered to be in the second highest rating category ("Second Tier
Securities"), and subject to this limitation the Fund will not invest
more than the greater of 1% of its total assets or $1 million in Second
Tier Securities of any one issuer.
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INVESTMENT GRADE OBLIGATIONS: THE NATIONAL MUNICIPAL BOND FUND MAY NOT:
Hold more than 5% of its total assets in securities that have been downgraded
below investment grade.
BORROWINGS:
A) THE FINANCIAL RESERVES FUND, INSTITUTIONAL MONEY MARKET FUND AND
NATIONAL MUNICIPAL BOND FUND MAY NOT:
Purchase any security while borrowing representing more than 5% of its
total assets are outstanding.
B) THE SPECIAL GROWTH FUND MAY:
Borrow money only from a bank.
LENDING:
A) THE FINANCIAL RESERVES FUND AND INSTITUTIONAL MONEY MARKET FUND
WILL NOT:
Lend more than 5% of their respective portfolio securities.
B) THE SPECIAL GROWTH FUND:
Does not currently intend to make loans, but this limitation does not
apply to purchases of debt securities or to repurchase agreements.
SECURITIES TRADING ACCOUNTS: THE FUND FOR INCOME, INSTITUTIONAL MONEY MARKET
FUND AND NEW YORK TAX-FREE FUND MAY NOT:
Participate on a joint, or a joint and several, basis in any trading account in
securities, except pursuant to an exemptive order or as otherwise permitted by
the 1940 Act. The "bunching" of orders for the sale or purchase of portfolio
securities with other funds advised by the Adviser or its affiliates to reduce
brokerage commissions or otherwise to achieve best overall execution is not
considered participation in a trading account in securities.
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CONCENTRATION: THE FUND FOR INCOME MAY NOT:
With respect to non-municipal bond investments, purchase securities (other than
securities of the United States government, its agencies or instrumentalities),
if as a result of such purchase 25% or more of the total Fund's assets would be
invested in any one industry, or enter into a repurchase agreement if, as a
result thereof, more than 10% of its total assets would be subject to repurchase
agreements maturing in more than seven days.
DIVERSIFICATION: THE OHIO MUNICIPAL MONEY MARKET FUND WILL NOT:
With respect to 75% of the Fund's total assets, purchase the securities of any
issuers (other than securities issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities) if, as a result, more than 5% of the
Fund's total assets would be invested in the securities of any one issuer. Of
the remaining 25% of the Fund's total assets, no more than 10% may be invested
in securities of one or more issuers, and then only if they are "first tier
securities."
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INSTRUMENTS IN WHICH THE FUNDS CAN INVEST
The instruments in which the Funds can invest, according to their investment
policies and limitations are described below.
The following paragraphs provide a brief description of some of the types of
securities in which the Funds may invest in accordance with their investment
objective, policies, and limitations, including certain transactions the Funds
may make and strategies they may adopt. The following also contains a brief
description of certain risk factors. The Funds may, following notice to their
shareholders, take advantage of other investment practices which presently are
not contemplated for use by the Funds or which currently are not available but
which may be developed, to the extent such investment practices are both
consistent with a Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in a Fund's Prospectus and
this Statement of Additional Information.
U.S. CORPORATE DEBT OBLIGATIONS. U.S. Corporate Debt Obligations include bonds,
debentures, and notes. Debentures represent unsecured promises to pay, while
notes and bonds may be secured by mortgages on real property or security
interests in personal property. Bonds include, but are not limited to, debt
instruments with maturities of approximately one year or more, debentures,
mortgage-related securities, stripped government securities, and zero coupon
obligations. Bonds, notes, and debentures in which the Funds may invest may
differ in interest rates, maturities, and times of issuance. The market value of
a Fund's fixed income investments will change in response to interest rate
changes and other factors. During periods of falling interest rates, the values
of outstanding fixed income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Moreover, while securities with longer maturities tend to produce
higher yields, the price of longer maturity securities are also subject to
greater market fluctuations as a result of changes in interest rates.
Changes by recognized agencies in the rating of any fixed income security and in
the ability of an issuer to make payments of interest and principal also affect
the value of these investments. Except under conditions of default, changes in
the value of a Fund's securities will not affect cash income derived from these
securities but will affect the Fund's net asset value.
BANKERS' ACCEPTANCES. Bankers' Acceptances are negotiable drafts or bills of
exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' Acceptances will be those guaranteed by
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domestic and foreign banks, if at the time of purchase such banks have capital,
surplus, and undivided profits in excess of $100,000,000 (as of the date of
their most recently published financial statements).
CERTIFICATES OF DEPOSIT. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Certificates of Deposit and demand and time deposits invested in by a Fund will
be those of domestic and foreign banks and savings and loan associations, if (a)
at the time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation (the
"FDIC") or the Savings Association Insurance Fund.
EURODOLLAR CERTIFICATES OF DEPOSIT ("ECDs") are U.S. dollar-denominated
certificates of deposit issued by branches of foreign and domestic banks located
outside the United States.
YANKEE CERTIFICATES OF DEPOSIT ("Yankee CDs") are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States.
EURODOLLAR TIME DEPOSITS ("ETDs") are U.S. dollar-denominated deposits in a
foreign branch of a U.S. bank or a foreign bank.
CANADIAN TIME DEPOSITS ("CTDs") are U.S. dollar-denominated certificates of
deposit issued by Canadian offices of major Canadian Banks.
COMMERCIAL PAPER. Commercial paper is unsecured promissory notes issued by
corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by an NRSRO or, if not rated, found by the
Trustees to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by an NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments. For a description of the rating symbols of
each NRSRO see the Appendix to this Statement of Additional Information.
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INTERNATIONAL BONDS. International Bonds include Euro and Yankee obligations,
which are U.S. dollar-denominated international bonds for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Eurodollar Bonds"). International Bonds also
include Canadian and Supranational Agency Bonds (e.g., International Monetary
Fund). (See "Foreign Debt Securities" for a description of risks associated with
investments in foreign securities.)
FOREIGN DEBT SECURITIES. Investments in securities of foreign companies
generally involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there generally is less publicly available
information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards, practices, and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of a Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation, or
confiscatory taxation; limitations on the removal of securities, property, or
other assets of a Fund; there may be political or social instability; there may
be increased difficulty in obtaining legal judgments; or diplomatic developments
which could affect U.S. investments in those countries. The Adviser will take
such factors into consideration in managing a Fund's investments. A Fund will
not hold foreign currency in amounts exceeding 5% of its assets as a result of
such investments.
REPURCHASE AGREEMENTS. Securities held by a Fund may be subject to Repurchase
Agreements. Under the terms of a Repurchase Agreement, a Fund would acquire
securities from financial institutions or registered broker-dealers deemed
creditworthy by the Adviser pursuant to guidelines adopted by the Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest).
If the seller were to default on its repurchase obligation or become insolvent,
a Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.
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REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds for temporary purposes by
entering into reverse Repurchase Agreements. Reverse Repurchase Agreements are
considered to be borrowings under the 1940 Act.
Pursuant to such agreement, a Fund would sell a portfolio security to a
financial institution such as a bank and a broker-dealer, and agree to
repurchase such security at a mutually agreed-upon date and price. At the time a
Fund enters into a Reverse Repurchase Agreement, it will place in a segregated
custodial account assets (such as cash or other liquid high-grade securities)
consistent with the Fund's investment restrictions having a value equal to the
repurchase price (including accrued interest), the collateral will be
marked-to-market on a daily basis, and will be monitored continuously to ensure
that such equivalent value is maintained. Reverse Repurchase Agreements involve
the risk that the market value of the securities sold by a Fund may decline
below the price at which the Fund is obligated to repurchase the securities.
SHORT-TERM FUNDING AGREEMENTS. A Fund may invest in Short-Term Funding
Agreements (sometimes referred to as "GICs") issued by insurance companies.
Pursuant to such agreements, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
the Fund, on a monthly basis, guaranteed interest which is based on an index.
The Short-Term Funding Agreement provides that this guaranteed interest will not
be less than a certain minimum rate. Because the principal amount of a
Short-Term Funding Agreement may not be received from the insurance company on
seven days notice or less, the agreement is considered to be an illiquid
investment and, together with other instruments in a Fund which are not readily
marketable, will not exceed 10% of the Fund's total assets. In determining
dollar-weighted average portfolio maturity, a Short-Term Funding Agreement will
be deemed to have a maturity equal to the period of time remaining until the
next readjustment of the guaranteed interest rate.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable Amount Master Demand Notes are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Although there is no secondary market for these notes, a Fund
may demand payment of principal and accrued interest at any time and may resell
the notes at any time to a third party. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of a Variable
Amount Master Demand Note if the issuer defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. While the notes typically are not rated by credit rating agencies,
issuers of Variable Amount Master Demand Notes must satisfy the same criteria as
set forth above for unrated commercial paper, and the Adviser will monitor
continuously the issuer's financial status and
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ability to make payments due under the instrument. Where necessary to ensure
that a note is of "high quality," a Fund will require that the issuer's
obligation to pay the principal of the note be backed by an unconditional bank
letter or line of credit, guarantee or commitment to lend. For purposes of a
Fund's investment policies, a Variable Amount Master Demand Note will be deemed
to have a maturity equal to the longer of the period of time remaining until the
next readjustment of its interest rate or the period of time remaining until the
principal amount can be recovered from the issuer through demand.
VARIABLE RATE DEMAND NOTES. Variable Rate Demand Notes are tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Funds also may invest in participation Variable Rate
Demand Notes, which provide a Fund with an undivided interest in underlying
Variable Rate Demand Notes held by major investment banking institutions. Any
purchase of Variable Rate Demand Notes will meet applicable diversification and
concentration requirements.
VARIABLE AND FLOATING RATE NOTES. A Variable Rate Note is one whose terms
provide for the readjustment of its interest rate on set dates and which, upon
such readjustment, reasonably can be expected to have a market value that
approximates its par value. A Floating Rate Note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, reasonably can be expected to have a market value that
approximates its par value. Such notes frequently are not rated by credit rating
agencies; however, a Fund only will purchase unrated Variable and Floating Rate
Notes purchased by the Fund will only be those determined by the Adviser, under
guidelines established by the Trustees, to pose minimal credit risks and to be
of comparable quality, at the time of purchase, to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, the Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuers of such notes (such issuers include financial,
merchandising, bank holding and other companies) and will continuously monitor
their financial condition. Although there may be no active secondary market with
respect to a particular Variable or Floating Rate Note purchased by a Fund, the
Fund may resell the note at any time to a third party. The absence of an active
secondary market, however, could make it difficult for a Fund to dispose of a
Variable or Floating Rate Note in the event that the issuer of the note
defaulted on its payment obligations and a Fund could, for this or other
reasons, suffer a loss to the extent of the default. Variable or Floating Rate
Notes may be secured by bank letters of credit.
Variable or Floating Rate Notes may have maturities of more than one year, as
follows:
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1. A Variable or Floating Rate Note that is issued or guaranteed by the United
States government or any agency thereof and which has a variable rate of
interest readjusted no less frequently than annually will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A Variable or Floating Rate Note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A Variable or Floating Rate Note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A Variable or Floating Rate Note that is subject to a demand feature will be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where a Fund is entitled
to receive the principal amount of the note either at any time on no more than
30 days' notice or at specified intervals not exceeding one year and upon no
more than 30 days' notice.
EXTENDIBLE DEBT SECURITIES. Extendible Debt Securities are securities that can
be retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, a Fund may treat Extendible Debt
Securities as maturing on the next optional retirement date.
RECEIPTS. Receipts are separately traded interest and principal component parts
of bills, notes, and bonds issued by the U.S. Treasury that are transferable
through the Federal book entry system, known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry
Safekeeping ("CUBES"). These instruments are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank; the custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates or
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and
Certificates of Accrual on Treasury Securities ("CATS").
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ZERO-COUPON BONDS. Zero-Coupon Bonds are purchased at a discount from the face
amount because the buyer receives only the right to a fixed payment on a certain
date in the future and does not receive any periodic interest payments. The
effect of owning instruments which do not make current interest payments is that
a fixed yield is earned not only on the original investment but also, in effect,
on accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yields on the Zero-Coupon Bond,
but at the same time eliminates the holder's ability to reinvest at higher
rates. For this reason, Zero-Coupon Bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently, which fluctuation increases
in accordance with the length of the period to maturity.
HIGH-YIELD DEBT SECURITIES. High-Yield Debt Securities are lower-rated debt
securities, commonly referred to as "junk bonds" (those rated Ba to C by Moody's
or BB to C by S&P), that have poor protection with respect to the payment of
interest and repayment of principal, or may be in default. These securities are
often considered to be speculative and involve greater risk of loss or price
changes due to changes in the issuer's capacity to pay. The market prices of
High-Yield Debt Securities may fluctuate more than those of higher- rated debt
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates.
While the market for High-Yield Debt Securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly-leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of future performance of the high yield bond market,
especially during periods of economic recession. In fact, from 1989 to 1991, the
percentage of High-Yield Debt Securities that defaulted rose significantly above
prior levels, although the default rate decreased in 1992.
The market for High-Yield Debt Securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, High-Yield
Debt Securities will be valued in accordance with procedures established by the
Victory Portfolios' Board of Trustees, including the use of outside pricing
services.
Judgment plays a greater role in valuing High-Yield Debt Securities than is the
case for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value High-Yield Debt
Securities and a Fund's ability to sell these securities.
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Since the risk of default is higher for High-Yield Debt Securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by a Fund. In considering investments for
a Fund, the Adviser will attempt to identify those issuers of high-yielding debt
securities whose financial condition is adequate to meet future obligations, has
improved, or is expected to improve in the future. Analysis of the Adviser
focuses on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Loans and Other Direct Debt Instruments
are interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent amounts owed to lenders or lending syndicates
(loans and loan participations), to suppliers of goods or services (trade claims
or other receivables), or to other parties. Direct Debt Instruments involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to a Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct Debt Instruments may also include
standby financing commitments that obligate a Fund to supply additional cash to
the borrower on demand.
SECURITIES OF OTHER INVESTMENT COMPANIES. A Fund may invest up to 5% of its
total assets in the securities of any one investment company, but may not own
more than 3% of the securities of any one investment company or invest more than
10% of its total assets in the securities of other investment companies.
Pursuant to an exemptive order received by the Victory Portfolios from the
Securities and Exchange Commission, a Fund may invest in the money market funds
of the Victory Portfolios. The Adviser will waive its investment advisory fee
with respect to assets of a Fund invested in any of the money market funds of
the Victory Portfolios, and, to the extent required by the laws of any state in
which a Fund's shares are sold, the Adviser will waive its investment advisory
fee as to all assets invested in other investment companies.
U.S. GOVERNMENT OBLIGATIONS. U.S. Obligations are obligations issued or
guaranteed by the U.S. Government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the
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agency or instrumentality. No assurance can be given that the U.S. Government
will provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law.
MUNICIPAL SECURITIES. Municipal Securities are obligations, typically bonds and
notes, issued by or on behalf of states, territories, and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities, and instrumentalities, the interest on which, in the
opinion of the issuer's bond counsel at the time of issuance, is both exempt
from federal income tax and not treated as a preference item for individuals for
purposes of the federal alternative minimum tax.
Two specific types of Municipal Securities are "Ohio Tax-Exempt Obligations" and
"New York Tax-Exempt Obligations." Ohio Tax-Exempt Obligations are Municipal
Securities issued by the State of Ohio and its political subdivisions, the
interest on which is, in the opinion of the issuer's bond counsel at the time of
issuance, excluded from gross income for purposes of both federal income
taxation and Ohio personal income tax. New York Tax-Exempt Obligations are
Municipal Securities issued by the State of New York and its political
subdivisions, the interest on which is, in the opinion of the issuer's bond
counsel at the time of issuance, excluded from gross income for purposes of both
federal income taxation and New York personal income tax.
Generally, Municipal Securities are issued by governmental entities to obtain
funds for various public purposes, such as the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to other public
institutions and facilities. Municipal Securities may include fixed, variable,
or floating rate obligations. Municipal Securities may be purchased on a
when-issued or delayed-delivery basis (including refunding contracts).
The two principal categories of Municipal Securities are "general obligation"
issues and "revenue" issues. Other categories of Municipal Securities are "moral
obligation" issues, private activity bonds, and industrial development bonds.
The prices and yields on Municipal Securities are subject to change from time to
time and depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer (or other entities whose
financial resources are supporting the Municipal Security), general conditions
in the market for tax-exempt obligations, the size of a particular offering, the
maturity of the obligation, and the rating(s) of the issue. There are variations
in the quality of Municipal Securities, both within a particular category of
Municipal Securities and between categories. Current information about the
financial
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condition of an issuer of tax-exempt bonds or notes usually is not as extensive
as that which is made available by corporations whose securities are publicly
traded.
The term Municipal Securities, as used in this SAI, includes private activity
bonds issued and industrial development bonds by or on behalf of public
authorities to finance various privately-operated facilities if the interest
paid thereon is both exempt from federal income tax and not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax. The term Municipal Securities also includes short-term instruments issued
in anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues, such as short-term general obligation notes, tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax-exempt
commercial paper, construction loan notes, and other forms of short-term
tax-exempt loans. Additionally, the term Municipal Securities includes project
notes, which are issued by a state or local housing agency and are sold by the
Department of Housing and Urban Development.
An issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code. Congress or state
legislatures may enact laws extending the time for payment of principal or
interest, or both, or imposing other constraints upon the enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Securities may be materially adversely affected by
litigation or other conditions. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay interest on and principal of their tax-exempt
bonds or notes may be materially impaired or their obligations may be found to
be invalid or unenforceable. Such litigation or conditions may, from time to
time, have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the credit
risk with respect to particular bonds or notes. Adverse economic, business,
legal, or political developments might affect all or a substantial portion of
the Fund's tax-exempt bonds and notes in the same manner.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. The U.S. Supreme Court has held that Congress has the constitutional
authority to enact such legislation. It is not possible to determine what effect
the adoption of such proposals could have on the availability of tax-exempt
bonds for investment by the Fund and the value of its portfolio. Proposals also
may be introduced before state legislatures that would affect the state tax
treatment of
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Municipal Securities. If such proposals were enacted, the availability of
Municipal Securities and their value would be affected.
The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
continuing requirements on issuers of tax-exempt bonds regarding the use,
expenditure and investment of bond proceeds and the payment of rebate to the
United States of America. Failure by the issuer to comply with certain of these
requirements subsequent to the issuance of tax-exempt bonds could cause interest
on the bonds to become includable in gross income retroactive to the date of
issuance.
General obligation issues are backed by the full taxing power of a state or
municipality and are payable from the issuer's general unrestricted revenues and
not from any particular fund or source. The characteristics and method of
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue issues or special obligation issues are backed
only by the revenues from a specific tax, project, or facility. "Moral
obligation" issues are normally issued by special purpose authorities.
Private activity bonds and industrial development bonds generally are revenue
bonds and not payable from the resources or unrestricted revenues of the issuer.
The credit and quality of industrial development revenue bonds is usually
directly related to the credit of the corporate user of the facilities. Payment
of principal of and interest on industrial development revenue bonds is the
responsibility of the corporate user (and any guarantor).
Private activity bonds, as discussed above, may constitute Municipal Securities
depending on their tax treatment. The source of payment and security for such
bonds is the financial resources of the private entity involved; the full faith
and credit and the taxing power of the issuer normally will not be pledged. The
payment obligations of the private entity also will be subject to bankruptcy as
well as other exceptions similar to those described above. Certain debt
obligations known as "industrial development bonds" under prior federal tax law
may have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, sewage or
solid waste disposal facilities, and certain local facilities for water supply
or other heating or cooling facilities. Other private activity bonds and
industrial development bonds issued to fund the construction, improvement or
equipment of privately-operated industrial, distribution, research or commercial
facilities may also be Municipal Securities, but the size of such issues is
limited under current and prior federal tax law. The aggregate amount of most
private activity bonds and industrial development bonds is limited (except in
the case of certain types of facilities) under federal tax law by an annual
"volume cap." The volume cap limits the annual aggregate principal amount of
such
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obligations issued by or on behalf of all government instrumentalities in the
state. Such obligations are included within the term Municipal Securities if the
interest paid thereon is, in the opinion of bond counsel, at the time of
issuance, excluded from gross income for purposes of both federal income
taxation (including any alternative minimum tax) and state personal income tax.
The Fund may not be a desirable investment for "substantial users" of facilities
financed by private activity bonds or industrial development bonds or for
"related persons" of substantial users.
Project notes are secured by the full faith and credit of the United States
through agreements with the issuing authority which provide that, if required,
the U.S. government will lend the issuer an amount equal to the principal of and
interest on the project notes, although the issuing agency has the primary
obligation with respect to its project notes.
Some municipal securities are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. Insured investments are covered by an insurance policy applicable to a
specific security, either obtained by the issuer of the security or by a third
party from a private insurer. Insurance premiums for the municipal bonds are
paid in advance by the issuer or the third party obtaining such insurance. Such
policies are noncancellable and continue in force as long as the municipal bonds
are outstanding and the respective insurers remain in business.
The insurer unconditionally guarantees the timely payment of the principal of
and interest on the insured municipal bonds when and as such payments become due
but shall not be paid by the issuer, except that in the event of any
acceleration of the due date of the principal by reason of mandatory or optional
redemption (other than acceleration by reason of a mandatory sinking fund
payment), default, or otherwise, the payments guaranteed will be made in such
amounts and at such times as payments of principal would have been due had there
not been such acceleration. The insurer will be responsible for such payments
less any amounts received by the bondholder from any trustee for the municipal
bond issuers or from any other source. The insurance does not guarantee the
payment of any redemption premium, the value of the shares of a Fund, or
payments of any tender purchase price upon the tender of the municipal bonds.
With respect to small issue industrial development municipal bonds and pollution
control revenue municipal bonds, the insurer guarantees the full and complete
payments required to be made by or on behalf of an issuer of such municipal
bonds if there occurs any change in the tax-exempt status of interest on such
municipal bonds, including principal, interest, or premium payments, if any, as
and when required to be made by or on behalf of the issuer pursuant to the terms
of such municipal bonds. This insurance is intended to reduce financial risk,
but the cost thereof will reduce the yield available to shareholders of a Fund.
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The ratings of NRSROs represent their opinions as to the quality of Municipal
Securities. In this regard, it should be emphasized that the ratings of any
NRSRO are general and are not absolute standards of quality, and Municipal
Securities with the same maturity, interest rate, and rating may have different
yields, while Municipal Securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to purchase by a Fund, an
issue of Municipal Securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Fund. The Adviser will
consider such an event in determining whether the Fund should continue to hold
the obligation.
The Adviser believes that it is likely that sufficient Municipal Securities will
be available to satisfy the Fund's investment objective and policies. In meeting
its investment policies, the Fund may invest all or any part of its total assets
in Municipal Securities which are private activity bonds. Moreover, although the
Fund does not presently intend to do so on a regular basis, it may invest more
than 25% of its total assets in Municipal Securities which are related in such a
way that an economic, business or political development or change affecting one
such security would likewise affect the other Municipal Securities. Examples of
such securities are obligations, the repayment of which is dependent upon
similar types of projects or projects located in the same state. Such
investments would be made only if deemed necessary or appropriate by the
Adviser.
OHIO TAX-EXEMPT OBLIGATIONS. As used in the Prospectus and this Statement of
Additional Information, the term "Ohio Tax-Exempt Obligations" refers to debt
obligations issued by the State of Ohio and its political subdivisions, the
interest on which is, in the opinion of the issuer's bond counsel, at the time
of issuance, excluded from gross income for purposes of both federal income
taxation and Ohio personal income tax (as used herein the terms "income tax" and
"taxation" do not include any possible incidence of any alternative minimum
tax). Ohio Tax-Exempt Obligations are issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, roads, schools, water and sewer works, and other
utilities. Other public purposes for which Ohio Tax-Exempt Obligations may be
issued include refunding outstanding obligations and obtaining funds to lend to
other public institutions and facilities. In addition, certain debt obligations
known as "private activity bonds" may be issued by or on behalf of
municipalities and public authorities to obtain funds to provide certain water,
sewage and solid waste facilities, qualified residential rental projects,
certain local electric, gas and other heating or cooling facilities, qualified
hazardous waste facilities, high-speed inter-city rail facilities,
government-owned airports, docks and wharves and mass commuting facilities,
certain qualified mortgages, student loan and redevelopment bonds and bonds used
for certain organizations exempt from federal income taxation. Certain debt
obligations known as "industrial development bonds" under prior federal tax law
may have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing
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facilities, sports facilities, industrial parks, convention or trade show
facilities, airport, mass transit, port or parking facilities, air or water
pollution control facilities, sewage or solid waste disposal facilities, and
certain local facilities for water supply or other heating or cooling
facilities. Other private activity bonds and industrial development bonds issued
to fund the construction, improvement or equipment of privately-operated
industrial, distribution, research or commercial facilities may also be Ohio
Tax-Exempt Obligations, but the size of such issues is limited under current and
prior federal tax law. The aggregate amount of most private activity bonds and
industrial development bonds is limited (except in the case of certain types of
facilities) under federal tax law by an annual "volume cap." The volume cap
limits the annual aggregate principal amount of such obligations issued by or on
behalf of all government instrumentalities in the state. Such obligations are
included within the term Ohio Tax-Exempt Obligations if the interest paid
thereon is, in the opinion of bond counsel, at the time of issuance, excluded
from gross income for purposes of both federal income taxation (including any
alternative minimum tax) and Ohio personal income tax. A Fund which invests in
Ohio Tax-Exempt Obligations may not be a desirable investment for "substantial
users" of facilities financed by private activity bonds or industrial
development bonds or for "related persons" of substantial users. See "Dividends,
Distributions, and Taxes" in the Prospectus.
Prices and yields on Ohio Tax-Exempt Obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the market for tax-exempt obligations, the
size of a particular offering, the maturity of the obligation and ratings of
particular issues, and are subject to change from time to time. Current
information about the financial condition of an issuer of tax-exempt bonds or
notes is usually not as extensive as that which is made available by
corporations whose securities are publicly traded.
Obligations of subdivision issuers of tax-exempt bonds and notes may be subject
to the provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, as amended, affecting the rights and remedies of
creditors. Congress or state legislatures may seek to extend the time for
payment of principal or interest, or both, or to impose other constraints upon
enforcement of such obligations. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay interest on and principal of their tax-exempt
bonds or notes may be materially impaired or their obligations may be found to
be invalid or unenforceable. Such litigation or conditions may, from time to
time, have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the credit
risk with respect to particular bonds or notes. Adverse economic, business,
legal or political developments might affect all or a substantial portion of the
Funds' tax-exempt bonds and notes in the same manner.
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From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. A recent decision of the U.S. Supreme Court has held that Congress has
the constitutional authority to enact such legislation. It is not possible to
determine what effect the adoption of such proposals could have on the
availability of tax-exempt bonds for investment by a Fund and the value of its
portfolio.
The Code imposes certain continuing requirements on issuers of tax-exempt bonds
regarding the use, expenditure and investment of bond proceeds and the payment
of rebate to the United States of America. Failure by the issuer to comply
subsequent to the issuance of tax-exempt bonds with certain of these
requirements could cause interest on the bonds to become includable in gross
income retroactive to the date of issuance.
A Fund may invest in Ohio Tax-Exempt Obligations either by purchasing them
directly or by purchasing certificates of accrual or similar instruments
evidencing direct ownership of interest payments or principal payments, or both,
on Ohio Tax-Exempt Obligations, provided that, in the opinion of counsel to the
initial seller of each such certificate or instrument, any discount accruing on
such certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related Ohio Tax-Exempt Obligations will be
exempt from federal income tax and Ohio personal income tax to the same extent
as interest on such Ohio Tax-Exempt Obligations. A Fund may also invest in Ohio
Tax-Exempt Obligations by purchasing from banks participation interests in all
or part of specific holdings of Ohio Tax-Exempt Obligations. Such participations
may be backed in whole or in part by an irrevocable letter of credit or
guarantee of the selling bank. The selling bank may receive a fee from the Fund
in connection with the arrangement. A Fund will not purchase participation
interests unless it receives an opinion of counsel or a ruling of the Internal
Revenue Service that interest earned by it on Ohio Tax-Exempt Obligations in
which it holds such a participation interest is exempt from federal income tax
and Ohio personal income tax.
MUNICIPAL LEASE OBLIGATIONS. A Fund may invest a portion of its assets in
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, Funds will not
hold such obligations directly as a lessor of the property, but will purchase a
participation interest in a municipal obligation from a bank or other third
party. A participation interest gives a Fund a specified, undivided interest in
the obligation in proportion to its purchased interest in the total amount of
the obligation.
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Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses" providing
that the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance limitations.
LOWER-RATED MUNICIPAL SECURITIES. The Fund does not currently intend to invest
in lower-rated municipal securities. However, the Fund may hold up to 5% of its
assets in municipal securities that have been downgraded below investment grade.
While the market for New York municipal securities is considered to be
substantial, adverse publicity and changing investor perceptions may affect the
ability of outside pricing services used by the Fund to value portfolio
securities, and the Fund's ability to dispose of lower-rated securities. Outside
pricing services are consistently monitored to assure that securities are valued
by a method that the Board of Trustees believes accurately reflects fair value.
The impact of changing investor perceptions may be especially pronounced in
markets where municipal securities are thinly traded.
The Fund may choose, at its expense, or in conjunction with others, to pursue
litigation seeking to protect the interests of security holders if it determines
this to be in the best interest of shareholders.
FEDERALLY TAXABLE OBLIGATIONS. The Fund does not intend to invest in securities
whose interest is federally taxable; however, from time to time, the Fund may
invest a portion of its assets on a temporary basis in fixed-income obligations
whose interest is subject to federal income tax. For example, the Fund may
invest in obligations whose interest is federally taxable pending the investment
or reinvestment in municipal securities of proceeds from the sale of its shares
of portfolio securities.
Should the Fund invest in federally taxable obligations, it would purchase
securities which in the Adviser's judgment are of high quality. This would
include obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of domestic banks; and repurchase agreements. The
Fund's standards for high quality taxable obligations are essentially the same
as those described by Moody's Investors Service, Inc. ("Moody's")
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in rating corporate obligations within its two highest ratings of Prime-1 and
Prime-2, and those described by Standard & Poor's Corporation ("S&P") in rating
corporate obligations within its two highest ratings of A-1 and A-2. In making
high quality determinations the Fund may also consider the comparable ratings of
other nationally recognized rating services.
The Supreme Court has held that Congress may subject the interest on municipal
obligations to federal income tax. Proposals to restrict or eliminate the
federal income tax exemption for interest on municipal obligations are
introduced before Congress from time to time. Proposals also may be introduced
before the New York legislature that would affect the state tax treatment of the
Fund's distributions. If such proposals were enacted, the availability of
municipal obligations and the value of the Fund's holdings would be affected and
the Trustees would reevaluate the Fund's investment objective and policies.
The Fund anticipates being as fully invested as practicable in municipal
securities; however, there may be occasions when, as a result of maturities of
portfolio securities, sales of Fund shares, or in order to meet redemption
requests, the Fund may hold cash that is not earning income. In addition, there
may be occasions when, in order to raise cash to meet redemptions, the Fund may
be required to sell securities at a loss.
REFUNDED MUNICIPAL BONDS. Investments by a Fund in refunded municipal bonds that
are secured by escrowed obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities are considered to be investments in U.S.
Government obligations for purposes of the diversification requirements to which
the Funds is subject under the 1940 Act. As a result, more than 5% of a Fund's
total assets may be invested in such refunded bonds issued by a particular
municipal issuer. The escrowed securities securing such refunded municipal bonds
will consist exclusively of U.S. Government obligations, and will be held by an
independent escrow agent or be subject to an irrevocable pledge of the escrow
account to the debt service on the original bonds.
WHEN-ISSUED SECURITIES. A Fund may purchase securities on a when-issued basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase securities on a when issued basis, the
custodian will set aside cash or liquid portfolio securities equal to the amount
of the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When a Fund
engages in when-issued transactions, it relies on the seller to consummate the
trade. Failure of the seller to do so may result in the Fund incurring a
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loss or missing the opportunity to obtain a price considered to be advantageous.
The Funds do not intend to purchase when issued securities for speculative
purposes, but only in furtherance of its investment objective.
DELAYED-DELIVERY TRANSACTIONS. A Fund may buy and sell securities on a
delayed-delivery basis. These transactions involve a commitment by the Fund to
purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security (and more than seven days in the future). Typically, no
interest accrues to the purchaser until the security is delivered. The Fund may
receive fees for entering into delayed delivery transactions.
When purchasing securities on a delayed-delivery basis, a Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because a Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When the Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.
MORTGAGE-BACKED SECURITIES--IN GENERAL. Mortgage-Backed Securities are backed by
mortgage obligations including, among others, conventional 30-year fixed rate
mortgage obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, Mortgage-Backed Securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular
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issue of pass-through certificates. Prepayment rates are important because of
their effect on the yield and price of the securities. Accelerated prepayments
have an adverse impact on yields for pass-throughs purchased at a premium (i.e.,
a price in excess of principal amount) and may involve additional risk of loss
of principal because the premium may not have been fully amortized at the time
the obligation is repaid. The opposite is true for pass-throughs purchased at a
discount. A Fund may purchase Mortgage-Backed Securities at a premium or at a
discount. Among the U.S. Government securities in which a Fund may invest are
Government Mortgage-Backed Securities (or government guaranteed mortgage-related
securities). Such guarantees do not extend to the value of yield of the
Mortgage-Backed Securities themselves or of the Fund's shares.
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES. Certain obligations of certain
agencies and instrumentalities of the U.S. Government are Mortgage-Backed
Securities. Some such obligations, such as those issued by GNMA are supported by
the full faith and credit of the U.S. Treasury; others, such as those of FNMA,
are supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Federal Farm Credit
Banks or FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies and instrumentalities if it is not
obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit of the
U.S. Government) guarantor of Mortgage-Backed Securities is GNMA. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed as
to timely payment of principal and interest by FNMA and FHLMC, respectively, but
are not backed by the full faith and credit of the U.S. Government.
GNMA CERTIFICATES. Certificates of the GNMA are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that a Fund may purchase are the "modified pass-through" type,
which entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
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The National Housing Act authorizes GNMA to guarantee the timely payment of
principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and credit
of the U.S. Government. GNMA is also empowered to borrow without limitation from
the U.S. Treasury if necessary to make any payments required under its
guarantee.
The estimated average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures usually will
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.
FHLMC SECURITIES. The FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. The FHLMC
issues two types of mortgage pass-through securities ("FHLMC Certificates"),
mortgage participation certificates and CMOs. Participation Certificates
resemble GNMA Certificates in that each Participation Certificate represents a
pro rata share of all interest and principal payments made and owed on the
underlying pool. The FHLMC guarantees timely monthly payment of interest on PCs
and the ultimate payment of principal. Recently introduced FHLMC Gold
Participation Certificates guarantee the timely payment of both principal and
interest.
FHLMC CMOs are backed by pools of agency mortgage-backed securities and the
timely payment of principal and interest of each tranche is guaranteed by the
FHLMC. The FHLMC guarantee is not backed by the full faith and credit of the
U.S. Government.
FNMA SECURITIES. The FNMA was established in 1938 to create a secondary market
in mortgages insured by the FHA, but has expanded its activity to the secondary
market for conventional residential mortgages. FNMA primarily issues two types
of mortgage-backed securities, guaranteed mortgage pass-through certificates
("FNMA Certificates") and CMOs. FNMA Certificates resemble GNMA Certificates in
that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest and principal on FNMA Certificates and CMOs. The FNMA
guarantee is not backed by the full faith and credit of the U.S.
Government.
COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-Backed Securities in which a Fund
may invest may also include CMOs. CMOs are securities backed by a pool of
mortgages in
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which the principal and interest cash flows of the pool are channeled on a
prioritized basis into two or more classes, or tranches, of bonds.
NON-GOVERNMENTAL MORTGAGE-BACKED SECURITIES. A Fund may invest in
mortgage-related securities issued by non-governmental entities. Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers, and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. Such issuers also may be the
originators of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are not direct or indirect government guarantees of payments
in the former pools. However, timely payment of interest and principal of these
pools is supported by various forms of insurance or guarantees, including
individual loan, title, pool, and hazard insurance. The insurance and guarantees
are issued by government entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers, thereof
will be considered in determining whether a Non-Governmental Mortgage-Backed
Security meets a Fund's investment quality standards. There can be no assurance
that the private insurers can meet their obligations under the policies. A Fund
may buy Non-Governmental Mortgage-Backed Related Securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the poolers, the Adviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the opinion of the Adviser are illiquid if, as a result, more
than 15% of the value of the Fund's net assets will be invested in illiquid
securities.
A Fund may purchase mortgage-related securities with stated maturities in excess
of 10 years. Mortgage-related securities include CMOs and participation
certificates in pools of mortgages. The average life of mortgage-related
securities varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments. The rate of such
prepayments, and hence the average life of the certificates, will be a function
of current market interest rates and current conditions in the relevant housing
markets. The impact of prepayment of mortgages is described under "Government
Mortgage-Backed Securities." Estimated average life will be determined by the
Adviser. Various independent mortgage-related securities dealers publish
estimated average life data using proprietary models, and in making such
determinations, the Adviser will rely on such data except to the extent such
data are deemed unreliable by the Adviser. The Adviser might deem data
unreliable which appeared to present a significantly different estimated average
life for a
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security than data relating to the estimated average life of comparable
securities as provided by other independent mortgage-related securities dealers.
ASSET-BACKED SECURITIES. Asset-backed securities are debt securities backed by
pools of automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon. These
issues are normally traded over-the-counter and typically have a short to
intermediate maturity structure, depending on the paydown characteristics of the
underlying financial assets which are passed through to the security holder.
FUTURES AND OPTIONS
FUTURES CONTRACTS. The Funds may enter into futures contracts, options on
futures contracts, and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (the "CFTC"), a U.S. Government agency.
The Funds may enter into contracts for the future delivery of securities and
futures contracts based on a specific security, class of securities or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is outstanding, cash payments based on the level of a specified
securities index.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. A futures
contract on a securities index is an agreement obligating either party to pay,
and entitling the other party to receive, while the contract is outstanding,
cash payments based on the level of
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a specified securities index. The acquisition of put and call options on futures
contracts will, respectively, give a Fund the right (but not the obligation),
for a specified price, to sell or to purchase the underlying futures contract,
upon exercise of the option, at any time during the option period. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Initial margin deposits on futures contracts are customarily set at
levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on its margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for a Fund than might later be available in the market when it effects
anticipated purchases.
The Funds will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase.
The Funds' ability to use futures trading effectively depends on several
factors. First, it is possible that there will not be a perfect price
correlation between a futures contract and its underlying stock index. Second,
it is possible that a lack of liquidity for futures contracts could exist in the
secondary market, resulting in an inability to close a futures position prior
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to its maturity date. Third, the purchase of a futures contract involves the
risk that a Fund could lose more than the original margin deposit required to
initiate a futures transaction.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if a Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities, limiting a Fund's ability
to hedge effectively against interest rate and/or market risk and giving rise to
additional risks. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Funds will not enter into
futures contract transactions for purposes other than bona fide hedging purposes
to the extent that, immediately thereafter, the sum of its initial margin
deposits on open contracts exceeds 5% of the market value of a Fund's total
assets. In addition, a Fund will not enter into futures contracts to the extent
that the value of the futures contracts held would exceed 1/3 of the Fund's
total assets. Futures transactions will be limited to the extent necessary to
maintain a Fund's qualification as a regulated investment company.
The Victory Portfolios have undertaken to restrict their futures contract
trading as follows: first, the Victory Portfolios will not engage in
transactions in futures contracts for speculative purposes; second, the Victory
Portfolios will not market its funds to the public as commodity pools or
otherwise as vehicles for trading in the commodities futures or commodity
options markets; third, the Victory Portfolios will disclose to all prospective
shareholders the purpose of and limitations on its funds' commodity futures
trading; fourth, the Victory Portfolios will submit to the CFTC special calls
for information. Accordingly, registration as a Commodities Pool Operator with
the CFTC is not required.
In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the Commission. Under those requirements, where a Fund has a long position in
a futures contract, it may be required to establish a segregated account (not
with a futures commission merchant or broker) containing cash or certain liquid
assets equal to the purchase price of the contract (less any margin on deposit).
For a short position in futures or forward contracts held by the Fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or certain liquid assets that,
when added to the amounts deposited as margin, equal the market value of the
instruments underlying the
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futures contracts (but are not less than the price at which the short positions
were established). However, segregation of assets is not required if a Fund
"covers" a long position. For example, instead of segregating assets, a Fund,
when holding a long position in a futures contract, could purchase a put option
on the same futures contract with a strike price as high or higher than the
price of the contract held by a Fund. In addition, where a Fund takes short
positions, or engages in sales of call options, it need not segregate assets if
it "covers" these positions. For example, where a Fund holds a short position in
a futures contract, it may cover by owning the instruments underlying the
contract. A Fund may also cover such a position by holding a call option
permitting it to purchase the same futures contract at a price no higher than
the price at which the short position was established. Where a Fund sells a call
option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. A Fund
could also cover this position by holding a separate call option permitting it
to purchase the same futures contract at a price no higher than the strike price
of the call option sold by a Fund.
In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Code's requirements for qualification as
a registered investment company and a Fund's intention to qualify as such.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge them. A Fund will minimize
the risk that they will be unable to close out a futures contract by only
entering into futures contracts which are traded on national futures exchanges
and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial
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loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchaser or sale of a futures contract may result in losses in excess of the
amount invested in the contract. However, because the futures strategies engaged
in by the Funds are only for hedging purposes, the Adviser does not believe that
the Funds are subject to the risks of loss frequently associated with futures
transactions. The Funds would presumably have sustained comparable losses if,
instead of the futures contract, it had invested in the underlying financial
instrument and sold it after the decline.
Use of futures transactions by the Funds involve the risk of imperfect or no
correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It is also possible that
the Funds could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
the Funds of margin deposits in the event of bankruptcy of a broker with whom
the Funds have open positions in a futures contract or related option.
OPTIONS. The Funds may sell (write) call options which are traded on national
securities exchanges with respect to common stock in its portfolio. A Fund must
at all times have in its portfolio the securities which it may be obligated to
deliver if the option is exercised. A Fund may write such call options in an
attempt to realize a greater level of current income than would be realized on
the securities alone. A Fund may also write call options as a partial hedge
against a possible stock market decline or to extend a holding period on a stock
which is under consideration for sale in order to create a long-term capital
gain. In view of their investment objective, a Fund generally would write call
options only in circumstances where the Adviser does not anticipate significant
appreciation of the underlying security in the near future or has otherwise
determined to dispose of the security. As the writer of a call option, a Fund
receives a premium for undertaking the obligation to sell the underlying
security at a fixed price during the option period, if the option is exercised.
So long as a Fund remains obligated as a writer of a call option, it forgoes the
opportunity to profit from increases in the market price of the underlying
security above the exercise price of the option, except insofar as the premium
represents such a profit. A Fund retains the risk of loss should the value of
the underlying security decline. A Fund may also enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call option
prior to the expiration of the option. Although the writing of call options only
on national securities exchanges increases the likelihood of a Fund's ability to
make closing purchase transactions, there is no assurance that a Fund will be
able to effect such transactions at any particular time or at any acceptable
price. The writing of call options could result in
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increases in a Fund's portfolio turnover rate, especially during periods when
market prices of the underlying securities appreciate.
PUTS. A Fund may acquire "puts" with respect to Ohio Tax-Exempt Obligations held
in its portfolio.
A put is a right to sell a specified security (or securities) within a specified
period of time at a specified exercise price. A Fund may sell, transfer, or
assign a put only in conjunction with the sale, transfer, or assignment of the
underlying security or securities. The amount payable to a Fund upon its
exercise of a "put" is normally (i) a Fund's acquisition cost of the securities
(excluding any accrued interest which a Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period a Fund owned the securities, plus (ii) all interest accrued on
the securities since the last interest payment date during that period.
Puts may be acquired by a Fund to facilitate the liquidity of its portfolio
assets. Puts may also be used to facilitate the reinvestment of a Fund's assets
at a rate of return more favorable than that of the underlying security. Puts
may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of a Fund's assets. See "Variable and Floating Rate Notes"
and "Valuation" in this SAI.
A Fund expects that they will generally acquire puts only where the puts are
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, a Fund may pay for puts either separately in cash or
by paying a higher price for portfolio securities which are acquired subject to
the puts (thus reducing the yield to maturity otherwise available for the same
securities).
A Fund intends to enter into puts only with dealers, banks, and broker-dealers
which, in the Adviser's opinion, present minimal credit risks.
A Fund may invest, consistent with their investment objective and policies, in
zero coupon bonds, which are debt instruments that do not pay current interest
and are typically sold at prices greatly discounted from par value. The return
on a zero-coupon obligation, when held to maturity, equals the difference
between the par value and the original purchase price. Zero-coupon obligations
have greater price volatility than coupon obligations.
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ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be sold
or disposed of, within seven business days, in the ordinary course of business
at approximately the prices at which they are valued.
Under the supervision of the Victory Portfolios' Board of Trustees, the Adviser
determines the liquidity of the Funds' investments and, through reports from the
Adviser, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of a Fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Funds' rights and obligations
relating to the investment).
Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over the counter options, non-government stripped fixed-rate
mortgage-backed securities, and Restricted Securities.
Also, the Adviser may determine some securities to be illiquid.
However, with respect to over-the- counter options a Fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending on
the assets held to cover the option and the nature and terms of any agreement a
Fund may have to close out the option before expiration.
In the absence of market quotations, illiquid investments are priced at fair
value as determined in good faith by a committee appointed by the Trustees.
If through a change in values, net assets, or other circumstances, a Fund were
in a position where more than 15% of its net assets were invested in illiquid
securities, it would seek to take appropriate steps to protect liquidity.
RESTRICTED SECURITIES. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
1933 Act, or in a registered public offering.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
it decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement.
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If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than prevailed when it decided to seek
registration of the shares.
SECURITIES LENDING TRANSACTIONS. The Funds may from time to time lend securities
from their portfolio to broker-dealers, banks, financial institutions and
institutional borrowers of securities and receive collateral in the form of cash
or U.S. Government Obligations. Under the Funds' current practices (which are
subject to change), the loan collateral must be maintained at all times in an
amount equal to at least 102% of the current market value of the loaned
securities. The Funds will not lend portfolio securities in excess of 20% of the
value of their total assets, nor will the Funds lend their portfolio securities
to any officer, director, employee, or affiliate of the Funds, The Victory
Portfolios, the Adviser, or the Distributor. A Fund must receive a minimum of
100% collateral, plus any interest due in the form of cash or U.S. Government
Obligations. This collateral must be valued daily and should the market value of
the loaned securities increase, the borrower must furnish additional collateral
to a Fund. During the time portfolio securities are on loan, the borrower will
pay the Fund any dividends or interest paid on such securities plus any interest
negotiated between the parties to the lending agreement. Loans will be subject
to termination by the Funds or the borrower at any time. While a Fund will not
have the right to vote securities on loan, they intend to terminate loans and
regain the right to vote if that is considered important with respect to the
investment. A Fund will only enter into loan arrangements with broker-dealers,
banks or other institutions which the Adviser has determined are creditworthy
under guidelines established by the Trustees. The Funds will limit their
securities lending to 33 1/3% of total assets.
HIGH-QUALITY INVESTMENTS. High-quality investments are those obligations which,
at the time of purchase, (i) possess one of the two highest short-term ratings
from an NRSRO or (ii) possess, in the case of multiple-rated securities, one of
the two highest short-term ratings by at least two NRSROs; or (iii) do not
possess a rating (i.e. are unrated) but are determined by the Adviser to be of
comparable quality to the rated instruments described in (i) and (ii). For
purposes of these investment limitations, a security that has not received a
rating will be deemed to possess the rating assigned to an outstanding class of
the issuer's short-term debt obligations if determined by the Adviser to be
comparable in priority and security to the obligation selected for purchase by a
Fund. (The above described securities which may be purchased by the Funds are
hereinafter referred to as "Eligible Securities.")
Pursuant to Rule 2a-7 under the new 1940 Act (the "Rule"), the Money Market
Funds will maintain a dollar-weighted average portfolio maturity which does not
exceed 90 days.
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The weighted average maturity of the U.S. Government Obligations Fund will
usually be 60 days or less since rating agencies normally require shorter
maturities. However, the permitted weighted average maturity for the U.S.
Government Obligations Fund is 90 days.
The Appendix of this SAI identifies each NRSRO which may be utilized by the
Adviser with regard to portfolio investments for the Funds and provides a
description of relevant ratings assigned by each such NRSRO. A rating by an
NRSRO may be utilized only where the NRSRO is neither controlling, controlled
by, or under common control with the issuer of, or any issuer, guarantor, or
provider of credit support for, the instrument.
PARTICIPATION INTERESTS. The Funds may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participation, beneficial interests in a trust, partnership interests or any
other form of indirect ownership. The Funds invest in these participation
interests, in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying securities.
WARRANTS. Warrants are securities that give a Fund the right to purchase equity
securities from the issuer at a specific price (the strike price) for a limited
period of time. The strike price of warrants typically is much lower than the
current market price of the underlying securities, yet they are subject to
greater price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater potential for
capital appreciation as well as capital loss.
REFUNDING CONTRACTS. A Fund generally will not be obligated to pay the full
purchase price if it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated damages to the
issuer (currently 15-20% of the purchase price). A Fund may secure its
obligations under a refunding contract by depositing collateral or a letter of
credit equal to the liquidated damages provisions of the refunding contract.
When required by Commission guidelines, a Fund will place liquid assets in a
segregated custodial account equal in amount to its obligations under refunding
contracts.
STANDBY COMMITMENTS. A Fund may enter into standby commitments, which are puts
that entitle holders to same-day settlement at an exercise price equal to the
amortized cost of the underlying security plus accrued interest, if any, at the
time of exercise. The Funds may acquire standby commitments to enhance the
liquidity of portfolio securities.
Ordinarily, the Funds may not transfer a standby commitment to a third party,
although they could sell the underlying municipal security to a third party at
any time. The Funds may purchase standby commitments separate from or in
conjunction with the purchase of
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securities subject to such commitments. In the latter case, the Funds would pay
a higher price for the securities acquired, thus reducing their yield to
maturity.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the
Funds; and the possibility that the maturities of the underlying securities may
be different from those of the commitments.
FOREIGN INVESTMENT. A Fund may invest in securities issued by foreign branches
of U.S. banks, foreign banks, or other foreign issuers, including American
Depository Receipts ("ADRs") and securities purchased on foreign securities
exchanges. Such investment may subject the Fund to significant investment risks
that are different from, and additional to, those related to investments in
obligations of U.S. domestic issuers or in U.S. securities markets.
The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action
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or unrest, or adverse diplomatic developments. There is no assurance that the
Advisers will be able to anticipate these potential events or counter their
effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
A Fund may invest in foreign securities that impose restrictions on transfer
within the U.S. or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The International Growth Fund currently invests in the securities of issuers
based in a number of foreign countries. The Adviser continuously evaluates
issuers based in countries all over the world. Accordingly, the Fund may invest
in the securities of issuers based in any country, subject to approval by the
Trustees, when such securities met the investment criteria of the Adviser and
are consistent with the investment objectives and policies of the Fund.
MISCELLANEOUS SECURITIES. The Funds can invest in various securities issued by
domestic and foreign corporations, including preferred stocks and investment
grade corporate bonds, notes, and warrants. Bonds are long-term corporate debt
instruments secured by some or all of the issuer's assets, debentures are
general corporate debt obligations backed only by the integrity of the borrower,
and warrants are instruments that entitle the holder to purchase a certain
amount of common stock at a specified price, which price is usually higher than
the current market price at the time of issuance. Preferred stocks are
instruments that combine qualities both of equity and debt securities.
Individual issues of preferred stock will have those rights and liabilities that
are spelled out in the governing document. Preferred stocks usually pay a fixed
dividend per quarter (or annum) and are senior to common stock in terms of
liquidation and dividends rights, and preferred stocks typically do not have
voting rights. A Fund also may invest in zero coupon bonds, which are debt
instruments that do not pay current interest and are typically sold at prices
greatly discounted from par value. The return on a zero-coupon obligation, when
held to maturity, equals the difference between the par value and the original
purchase price. Zero-coupon obligations have greater price volatility than
coupon obligations.
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ADDITIONAL INFORMATION CONCERNING OHIO ISSUERS
The Ohio Municipal Bond Fund and the Ohio Municipal Money Market will invest
most of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease-purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions ("Ohio Obligations"). The Ohio Municipal
Bond Fund is therefore susceptible to general or particular economic, political
or regulatory factors that may affect issuers of Ohio Obligations. The following
information constitutes only a brief summary of some of the many complex factors
that may have an effect. The information does not apply to "conduit" obligations
on which the public issuer itself has no financial responsibility. This
information is derived from official statements of certain Ohio issuers
published in connection with their issuance of securities and from other
publicly available information, and is believed to be accurate. No independent
verification has been made of any of the following information.
Generally the creditworthiness of Ohio Obligations of local issuers is unrelated
to that of obligations of the State itself, and the State has no responsibility
to make payments on those local obligations.
There may be specific factors that at particular times apply in connection with
investment in particular Ohio Obligations or in those obligations of particular
Ohio issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors apply.
However, the information below is intended only as a general summary, and is not
intended as a discussion of any specific factors that may affect any particular
obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1993 is
11,091,000.
While diversifying more into the service and other non-manufacturing areas, the
Ohio economy continues to rely in part on durable goods manufacturing largely
concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
15% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
four years the State rates were
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below the national rates (5.6% versus 6.1% in 1994). The unemployment rate and
its effects vary among particular geographic areas of the State.
There can be no assurance that future national, regional or state-wide economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the Fund or the ability of particular obligors to make timely payments of
debt service on (or lease payments relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations and
expenditures, and is precluded by law from ending its July 1 to June 30 fiscal
year ("FY") or fiscal biennium in a deficit position. Most State operations are
financed through the General Revenue Fund ("GRF"), for which personal income and
sales-use taxes are the major sources. Growth and depletion of GRF ending fund
balances show a consistent pattern related to national economic conditions, with
the ending FY balance reduced during less favorable and increased during more
favorable economic periods. The State has well-established procedures for, and
has timely taken, necessary actions to ensure resource/expenditure balances
during less favorable economic periods. Those procedures included general and
selected reductions in appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1 million in the
GRF and $353 million in the Budget Stabilization Fund ("BSF"), a cash and
budgetary management fund. June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences, an
interim appropriations act was enacted effective July 1, 1991; it included debt
service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in light
of the continuing uncertain nationwide economic situation, there was projected
and timely addressed an FY 1992 imbalance in GRF resources and expenditures. In
response, the Governor ordered most State agencies to reduce GRF spending in the
last six months of FY 1992 by a total of approximately $184 million; the $100.4
million BSF balance, and additional amounts from certain other funds, were
transferred late in the FY to the GRF; and adjustments were made in the timing
of certain tax payments.
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A significant GRF shortfall (approximately $520 million) was then projected for
FY 1993. It was addressed by appropriate legislative and administrative actions,
including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to BSF
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for debt
service or lease rentals on any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF. The
biennium ended June 30, 1995 with a GRF ending fund balance of $928 million, of
which $535.2 million has been transferred into the BSF (which had a November 21,
1995 balance of over $828 million).
The GRF appropriations act for the 1995-96 biennium was passed on June 28, 1995
and promptly signed (after selective vetoes) by the Governor. All necessary GRF
appropriations for State debt service and lease rental payments then projected
for the biennium were included in that act. In accordance with the
appropriations act, the significant June 30, 1995 GRF fund balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, has
been transferred to the BSF and other funds including school assistance funds
and, in anticipation of possible federal program changes, a human services
stabilization fund.
The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State constitutional provisions.
The State may incur debt, limited in amount to $750,000, to cover casual
deficits or failures in revenues or to meet expenses not otherwise provided for.
The Constitution expressly precludes the State from assuming the debts of any
local government or corporation. (An exception is made in both cases for any
debt incurred to repel invasion, suppress insurrection or defend the State in
war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio voters have
authorized the incurrence of State debt and the pledge of taxes or excises to
its payment. At December 2, 1995, $778 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding. The
only such State debt at that date still authorized to be incurred were portions
of the highway bonds, and the following: (a) up to $100 million of obligations
for coal research and development may be outstanding at any one time ($45.3
million outstanding); (b) $360 million of obligations previously authorized for
local infrastructure improvements, no more than $120 million of which may be
issued in any
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calendar year ($685.4 million outstanding); and (c) up to $200 million in
general obligation bonds for parks, recreation and natural resources purposes
which may be outstanding at any one time ($47.2 million outstanding, with no
more than $50 million to be issued in any one year).
The electors approved in November 1995 a constitutional amendment that extends
the local infrastructure bond program (authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years for the
purpose), and authorizes additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million highway obligation authorization, and authorizes not more that $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly that would
submit a constitutional amendment relating to certain other aspects of State
debt. The proposal would authorize, among other things, the issuance of State
general obligation debt for a variety of purposes, with debt service on all
State general obligation debt and GRF-supported obligations not to exceed 5% of
the preceding fiscal year's GRF expenditures.
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations issued
by the Ohio Public Facilities Commission and the Ohio Building Authority and
certain obligations issued by the State Treasurer, $4.5 billion of which was
outstanding or awaiting delivery at December 2, 1995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
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The House has adopted a resolution that would submit to the electors a
constitutional amendment prohibiting the General Assembly from imposing a new
tax or increasing an existing tax unless approved by a three-fifths vote of each
house or by a majority vote of the electors. It cannot be predicted whether
required Senate concurrence to submission will be received.
State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate in
the range of 44% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 120 districts from
voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. The trial court concluded
that aspects of the system (including basic operating assistance) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution. The State appealed and a court of appeals
reversed the trial court's findings for plaintiff districts. The plaintiff
coalition has filed an appeal of the court of appeals decision to the Ohio
Supreme Court. A small number of the State's 612 local school districts have in
any year required special assistance to avoid year-end deficits. A current
program provides for school district cash need borrowing directly from
commercial lenders, with diversion of State subsidy distributions to repayment
if needed. Recent borrowings under this program totalled $94.5 million for 27
districts (including $75 million for one) in FY 1993, $41.1 million for 28
districts in FY 1994, and $71.1 million for 29 districts in FY 1995.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint State/local
commission to monitor the municipality's fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception in
1979, these procedures have been applied to 23 cites and villages; for 18 of
them the fiscal situation was resolved and the procedures terminated.
At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts.
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The Constitution has since 1934 limited to 1% of true value in money the amount
of the aggregate levy (including a levy for unvoted general obligations) of
property taxes by all overlapping subdivisions, without a vote of the electors
or a municipal charter provision, and statutes limit the amount of that
aggregate levy to 10 mills per $1 of assessed valuation (commonly referred to as
the "ten-mill limitation"). Voted general obligations of subdivisions are
payable from property taxes that are unlimited as to amount or rate.
ADDITIONAL INFORMATION CONCERNING NEW YORK ISSUERS
The New York Tax-Free Fund will invest substantially all of its assets in New
York municipal securities. In addition, the specific New York municipal
securities in which The New York Tax-Free Fund will invest will change from time
to time. The New York Tax-Free Fund is therefore susceptible to political,
economic, regulatory or other factors affecting issuers of New York municipal
securities. The following information constitutes only a brief summary of a
number of the complex factors which may affect issuers of New York municipal
securities and does not purport to be a complete or exhaustive description of
all adverse conditions to which issuers of New York municipal securities may be
subject. Such information is derived from official statements utilized in
connection with the issuance of New York municipal securities, as well as from
other publicly available documents. Such information has not been independently
verified by the New York Tax-Free Fund, and the New York Tax-Free Fund assumes
no responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have a material adverse impact on the financial condition of such
issuers. The New York Tax-Free Fund cannot predict whether or to what extent
such factors or other factors may affect the issuers of New York municipal
securities, the market value or marketability of such securities or the ability
of the respective issuers of such securities acquired by the Fund to pay
interest on or principal of such securities. The creditworthiness of obligations
issued by local New York issuers may be unrelated to the creditworthiness of
obligations issued by the State of New York, and there is no responsibility on
the part of the State of New York to make payments on such local obligations.
There may be specific factors that are applicable in connection with investment
in the obligations of particular issuers located within New York, and it is
possible the Fund will invest in obligations of particular issuers as to which
such specific factors are applicable. However, the information set forth below
is intended only as a general summary and not as a discussion of any specific
factors that may affect any particular issuer of New York municipal securities.
The New York Tax-Free Fund may invest in municipal securities issued by New York
State (the "State"), by its various public bodies (the "Agencies") and/or by
other entities located
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within the State, including the City of New York (the "City") and political
subdivisions thereof and/or their agencies.
NEW YORK STATE. The State's most recently completed fiscal year commenced on
April 1, 1994, and ended on March 31, 1995, and is referred to herein as the
State's 1994-95 fiscal year.
The State's budget for the 1994-95 fiscal year was enacted by the Legislature on
June 7, 1994, more than two months after the start of the fiscal year. Prior to
adoption of the budget, the Legislature enacted appropriations for disbursements
considered to be necessary for State operations and other purposes, including
all necessary appropriations for debt service. The State Financial Plan for the
1994-95 fiscal year was formulated on June 16, 1994 and is based on the State's
budget as enacted by the Legislature and signed into law by the Governor. The
State Financial Plan will be updated pursuant to law in July and October and by
February 1.
1994-95 FISCAL YEAR STATE FINANCIAL PLAN. The State issued the third quarterly
update to the current year State Financial Plan on February 1, 1995. A
discussion of the two prior quarterly updates precedes the discussion of the
third quarterly update.
PRIOR QUARTERLY CASH-BASIS UPDATES. The State issued the first of the three
required quarterly updates to the cash-basis 1994-95 State Financial Plan on
July 29, 1994. That update reflected an analysis of actual receipts and
disbursements in the first quarter of the fiscal year, as well as the impact of
legislative actions and other developments after the enactment of the budget.
Following so closely after the initial formulation of the State Financial Plan
reflecting the enactment of the State's 1994-95 budget, the update reflected no
significant changes and did not alter the balanced position of the State's
General Fund in the State Financial Plan. The economic forecast at that time
remained unchanged, following several weeks of mixed news about the pace of the
economy of the nation and New York State.
The State issued its second quarterly, or mid-year, update to the cash-basis
1994-95 State Financial Plan on October 28, 1994. The update projected a
year-end surplus of $14 million in the General Fund, with estimated receipts
reduced by $267 million and estimated disbursements reduced by $281 million,
compared to the State Financial Plan as initially formulated. In that update the
State revised its forecast of national and State economic activity through the
end of calendar year 1995. Although the national economic forecast was basically
unchanged from that on which the initial formulation of the State Financial Plan
was based, the revised State economic forecast was marginally weaker.
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Receipts through the first two quarters of the 1994-95 fiscal year fell short of
expectations by $132 million. These shortfalls were concentrated in the personal
and business income taxes, where quarterly personal income, bank and insurance
tax payments were lower than expected. Based on the revised economic outlook and
this receipt shortfall, projected General Fund receipts for the 1994-95 fiscal
year were reduced by $267 million. Estimates of the yield of the personal income
tax were lowered by $334 million, primarily reflecting weak estimated tax
collections and lower withholding collections due to reduced expectations for
wage and salary growth -- particularly securities industry bonuses -- during the
balance of the year. Business tax receipts were also reduced modestly,
reflecting revised estimates of liability and lower payments from banks and
insurance companies; however, these reductions were partially offset by
increases in the general business corporation and utility taxes. Estimates in
other receipt categories were increased by a total of $113 million. The largest
increases were in the sales tax, reflecting collections to date and the revised
economic outlook, and estate taxes which were buoyed by unexpectedly large
collections during the first six months of the 1994-95 fiscal year. Increases
were also made in estimates for the real property gains tax and the real estate
transfer tax, based on strong collections to date.
Disbursements through the first six months of the fiscal year fell short of
projections by $153 million, owing in part to changes in the timing of payments
but also to lower spending trends in certain programs, most notably in payments
for social services programs. Projections of 1994-95 General Fund disbursements
were reduced by $281 million, with savings in virtually every category of the
State Financial Plan. Payments for social services programs were projected to be
$140 million lower than projected in the State Financial Plan as initially
formulated, reflecting experience through the first six months of the fiscal
year and an initiative to increase Federal reimbursement for administrative
costs. Although school aid costs increased reflecting revisions to the current
and two prior school years based on final audits and revised aid claims, these
costs were expected to be offset by recoveries from the Federal government in
support of programs for pupils with disabilities. Other reductions reflected
lower pension costs, increased health insurance dividends, debt management
savings, and slower spending for certain programs and capital projects. Higher
spending was projected for a single program -- the Department of Correctional
Services -- to accommodate an unanticipated increase in the State's prison
population.
THIRD QUARTERLY CASH-BASIS UPDATE. On February 1, 1995, as part of his Executive
Budget for the 1995-96 fiscal year, the Governor submitted the third quarterly
update to the State Financial Plan for the current year. This update reflects
changes to receipts and disbursements based on: (1) an updated economic forecast
for both the nation and the State, (2) an analysis of actual receipts and
disbursements through the first nine months of the fiscal year, (3) an analysis
of changing program requirements, and (4) the Governor's proposed plan to close
a potential $259 million deficit. The changes are reflected after the mid-year
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update to the State Financial Plan was restated to conform to certain accounting
treatments used by the State Comptroller in reporting actual results, but do not
affect the actual closing cash position of the General Fund.
Estimates of General Fund receipts for the current fiscal year have been reduced
by $585 million, from the mid-year update, and are down $1.058 billion from the
budget enacted in June 1994 (of which $227 million results from the restatement
of the State Financial Plan, noted above). The reductions from the mid-year
update are concentrated in (1) the personal income tax where lower withholdings
and estimated taxes reflect the cessation of job growth in the last half of
1994, and even more severe reductions in brokerage industry bonuses than
expected earlier, and deferrals of capital gains realizations in anticipation of
potential Federal tax changes, and (2) the bank tax, where substantial
overpayments of 1993 liability have depressed net collections in the current
year. Offsetting this projected loss in receipts, however, are projected
reductions of $312 million in disbursements from the mid-year update,
attributable to lower spending through the first nine months of the fiscal year,
and to the use of greater-than-anticipated receipts from the State lottery. The
total reduction in projected disbursements from the budget enacted in June --
including payments from reserve funds -- is $1.008 billion (of which $182
million results from the restatement of the State Financial Plan).
The net result of the projected reductions in receipts and disbursement is a
negative margin of $273 million against the mid-year update's projection of a
$14 million surplus, producing a potential deficit of $259 million for the
1994-95 fiscal year. The Governor has proposed to close this deficit through a
hiring freeze, a review of pending contracts, and spending cuts in certain
programs that were started or expanded in the 1994-95 budget. Major actions to
close the deficit include:
-- $84 million in savings from freezing non-essential capital programs;
-- $59 million in savings from the general State agency hiring and
budget freeze
and halting the development of additional services for mental
hygiene clients in community settings;
-- $21 million in receipts from excess balances in accounts of the
Environmental Facilities Corporation;
-- $30 million in a repayment from the Urban Development Corporation
for advances made by the State in prior years; and
-- $50 million in savings from canceling the Liberty Scholarships program.
After these actions, the balance in the General Fund at the close of the 1994-95
fiscal year is expected to be $157 million. The required deposit to the Tax
Stabilization Reserve Fund is projected to add $23 million to the existing
balance of $134 million in that fund.
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GAAP-BASIS UPDATES. The State issued its first update to the GAAP-basis
Financial Plan for the State's 1994-95 fiscal year on September 1, 1994, based
on the first quarterly cash-basis update to the 1994-95 State Financial Plan
completed in July. In that update, the Division of the Budget projected a
General Fund operating deficit of $690 million, primarily reflecting the impact
of legislative changes to the 1994-95 Executive Budget, including the use of the
1993-94 surplus to finance 1994- 95 expenditures. For all governmental funds,
the summary GAAP-basis Financial Plan showed an excess of expenditures and other
financing uses over revenues and other financing sources of $687 million.
On February 1, 1994, the General Fund GAAP-basis Financial Plan for 1994-95 was
revised to show a projected deficit of $901 million, with total revenues of
$31.613 billion, total expenditures of $32.900 billion, and net other financing
sources and uses of $386 million. The increase in the deficit of $211 million
from the prior projection is primarily the result of projected revenue
shortfalls and the Governor's tax cut recommendation for the 1995 tax year. For
all governmental funds, the deficit is now projected at $854 million, $167
million greater than in the prior projection.
CURRENT FISCAL YEAR (1995-96 STATE FINANCIAL PLAN). On February 1, 1995 the
Governor presented his 1995-96 Executive Budget to the Legislature, as required
by the State Constitution. The Governor's budget is balanced on a cash basis in
the General Fund. The Governor may amend his budget up to 30 days after its
submission to the Legislature. There can be no assurance that the Legislature
will enact the proposed Executive Budget into law, or that actual results will
not differ materially and adversely from the projections set forth below.
The 1995-96 Executive Budget is the first to be submitted by the Governor, who
assumed office on January 1. It proposes actual reductions in the year-over-year
dollar levels of State spending from the General Fund for the first time in over
half a century with a proposed cut of 3.4 percent. Proposed spending on State
operations is projected to drop even more sharply, by 7.7 percent. Nominal
spending from all State funding sources (i.e., excluding Federal aid) is
proposed to drop by 0.3 percent from the prior fiscal year, in contrast to the
prior decade when annual State-funded spending growth averaged more than 6.0
percent. There are, however, risks and uncertainties concerning whether or not
certain tax and spending cuts proposed in the Executive Budget will be enacted,
or if enacted, will be upheld in the face of potential legal challenges. For
example, there can be no assurance that cuts in social-welfare entitlement
programs will not be challenged in court. Further, the Comptroller has indicated
his intention to challenge in court the proposed use of certain pension reserves
in the Executive Budget.
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According to the Executive Budget, in the 1995-96 fiscal year, the State
Financial Plan, based on current-law provisions governing spending and revenues,
would be out of balance by almost $4.7 billion, as a result of three key
factors: (1) the projected structural deficit resulting from the ongoing
disparity between sluggish growth in receipts, the effect of prior-year tax
changes, and the rapid acceleration of spending growth ($2.1 billion); (2) the
impact of unfunded 1994-95 initiatives, including capital projects such as
sports and recreational facilities, an increase in revenue sharing to local
governments, further State takeover of local Medicaid costs, more school aid,
and increased tuition assistance ($1.1 billion); and (3) the use of one-time
solutions to fund recurring spending in the 1994-95 budget ($1.5 billion). Tax
cuts proposed to spur economic growth and provide relief for low and
middle-income tax payers add $240 million to the projected imbalance or budget
gap, bringing the total to approximately $5 billion.
The Executive Budget proposes to close this budget gap for the 1995-96 fiscal
year through (1) 1.9 billion from cost containment savings in social-welfare
programs, particularly Medicaid cost-containment recommendations ($1.277
billion), Income-Maintenance restructuring recommendations ($340 million), and
the consolidation of various child-care programs into a Family Services Block
Grant to counties and New York City; (2) $2.5 billion in savings from State
agency restructuring that is expected to reduce spending on the State workforce,
SUNY and CUNY, mental hygiene programs, capital projects, the prison population,
and public authorities; (3) $350 million in savings from local assistance
reforms, by freezing school aid, revenue sharing and county costs of pre-school
special education at current levels, while proposing program legislation to
provide relief from certain mandates that increase local spending; and (4) $200
million in revenue measures, primarily a new Quick Draw Lottery game and changes
to tax-payment schedules.
The Executive Budget indicates that for years State revenues have grown at a
slower rate than State spending, producing an increasing structural deficit, and
that if the proposals in the Executive Budget are enacted (particularly the
spending cuts described above) the State will start to eliminate the structural
imbalance that has characterized the State's fiscal record. There can, however,
be no assurances that the tax and spending cuts proposed in the Executive Budget
will be enacted as proposed, or that if enacted, will eliminate potential
imbalances in future fiscal years. The Governor's recommended multi-year
personal income tax cuts are designed to reduce the yield on that tax by about
one-third by 1988, and could require significant additional spending cuts in
those years, increased economic growth to provide additional revenues,
additional revenue measures, or a combination of those factors.
ECONOMIC OUTLOOK. The national economy performed better in 1994 than in any year
since the recovery began in 1991. National job and income growth were
substantial. In response, the Federal Reserve Board (FRB) shifted to a policy of
monetary tightening by raising
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interest rates throughout the year. The federal funds rate is currently up 300
basis points from the level of a year ago. As a result, the economy is expected
to slow sharply in the next several quarters, as higher interest rates reduce
the growth in consumer spending and business investment. The Division of the
Budget expects average annual growth in real gross domestic product (GDP) to be
2.8 percent in 1995, following the 4 percent pace estimated for 1994. This is
somewhat more conservative than the 3.1 percent growth rate expected by the Blue
Chip consensus of leading economic forecasters.
Inflationary pressures have increased due to strong national growth throughout
1994, with a fairly low unemployment rate and high capacity utilization, and
economic recoveries in Europe and Japan. However, foreign competition is
expected to help to moderate the increase in the inflation rate. With a slowing
economy and only a modest acceleration of inflation, wage and personal income
growth are expected to be moderate.
The State economy turned in a mixed performance during 1994. The moderate
employment growth that characterized 1993 continued into mid-1994, then
virtually ceased. After July, the trade and construction sectors stopped adding
jobs and government employment declined. Growth, though considerably slower than
earlier in the year, continued in the service sector. Wages grew at around 3.5
percent, reflecting, in part, a plunge in bonus payments from securities firms
whose profits dropped in 1994. Personal income rose 4.0 percent in 1994.
Employment growth is expected to slow to less than 0.5 percent in 1995.
Continued restructuring by large corporations and all levels of government
largely account for the subdued growth rate in the forecast. Slow growth in
employment and average wages is expected to restrain wage growth to a modest 3.2
percent in 1995. Personal income is anticipated to receive a boost from higher
interest rates and rise by 4.4 percent.
Significant uncertainties exist in the forecasts. Consumer spending could be
more robust than anticipated, and recoveries in Europe and Japan may be stronger
than expected, leading to continued strong expansion throughout 1995. Interest
rates, on the other hand, may be at a level that will initiate a
sharper-than-expected slowdown. Financial instability, such as the foreign
exchange turmoil in Mexico, remains possible. The State forecast could fail to
estimate correctly the growth in average wages and the effect of corporate and
government downsizing.
RECEIPTS. The Financial Plan for the 1995-96 fiscal year released on February 1,
1995, projects General Fund receipts, including transfers from other funds, of
$32.516 billion, a reduction of $747 million from the revised 1994-95 State
Financial Plan. Tax receipts are projected at $29.391 billion for the 1995-96
fiscal year, a reduction of $1.071 billion from the prior year.
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Although growth in the base for tax receipts is expected to accelerate during
the 1995-96 fiscal year, tax receipts are expected to fall by 3.5 percent,
principally due to the combined effect of implementing during the 1995-96 fiscal
year (1) a portion of the tax reductions originally enacted in 1987 and deferred
each year since 1990, (2) additional tax cuts to prevent tax increases also
originally enacted in 1987 from taking effect, and (3) the proposed employer day
care credit ($5 million), together with the incremental cost of the tax
reductions enacted in 1994 (more than $500 million), which effectively negate
the effect of projected growth in the recurring revenue base. In addition,
certain nonrecurring revenues in the 1994-95 receipts base, including the
1993-94 surplus of $1.026 billion, additional earmarking to dedicated funds
(more than $210 million) and other miscellaneous one-time receipts (more than
$100 million) are not available in the 1995-96 fiscal year, thereby reducing
potential year-over-year growth by another 4 percentage points.
Personal income tax receipts, which show a sharp increase in 1994-95 and a
projected decline in 1995-96, do not reflect the actual underlying pattern of
tax liability across those fiscal years. In 1994, tax liability is actually
estimated to have grown relatively slowly, less than 2.5 percent, with the
apparently strong reported increase in 1994-95 collections resulting from the
net drawdown of $869 million from the refund reserve, which increased stated
1994-95 cash receipts by that amount. In 1995, before the tax reductions
described below, tax liability would actually have been projected to rise about
6 percent, primarily owing to an acceleration in wage growth (largely
attributable to changes in the timing of bonus payments), a sharp rise in
interest income, and higher reported capital gains.
Personal income tax reductions recommended in the Executive Budget are projected
to produce taxpayer-savings of $720 million in calendar year 1995 reflecting the
scheduled implementation of the 1987 tax reductions, which include a reduction
in the top tax rate from 7.875 percent to 7.59375 percent and an increase in the
standard deduction ranging from 10 to 14 percent, depending on filing status, as
well as the elimination of scheduled changes that would have increased taxes for
low- and middle-income taxpayers. The tax reductions recommended by the Governor
are part of a multi-year program designed to reduce the yield of the income tax
by about one-third by 1998.
Growth in user taxes and fees is expected to slow to about 1 percent in 1995-96,
reflecting nearly $70 million of additional tax relief in this category in the
coming year resulting from tax reductions enacted in 1994, the absence of
extraordinary audit collections received in 1994-95, and a slowdown in the
underlying growth rate of sales and use tax collections from more than 5 percent
in 1994-95 to 3.5 percent in the coming year, offset by a projected improvement
of $41 million as a result of recommended legislation to enhance sales tax
collection procedures. Business tax receipts are projected to fall in the
1995-96 fiscal year largely reflecting the effect of tax reductions enacted in
1994. Underlying liability, which is
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expected to rise only modestly in 1995, is not expected to increase enough to
offset the effect of those tax reductions. Expected growth in other tax receipts
in the 1995-96 fiscal year reflects, among other factors, a slight increase in
the cost of the 1994 tax cuts, the diversion to the Environmental Protection
Fund of a recommended $25 million in receipts from the real estate transfer tax
and proposed legislation accelerating remittance of the transfer tax to the
State. Growth in overall collections from miscellaneous receipts in the coming
fiscal year is expected to result largely from several discrete actions
involving settlement of environmental litigation, the recommended merger of
public authorities, and transactions with the Power Authority, which together
account for over $200 million of projected miscellaneous receipts anticipated in
1995-96. Transfers from other funds continue at prior year levels, with the
addition of the transfer of $220 million in excess funds from the Metropolitan
Mass Transportation Operating Assistance Fund.
DISBURSEMENTS. Disbursements in the General Fund are projected to total $32.361
billion in 1995-96, a decrease of $1,144 million or 3.4 percent. This decline
reflects a broad agenda of cost containment actions, more than offsetting modest
increases for fixed costs, such as pensions, debt service on bonds sold during
the current year, and capital projects under construction.
In the category of grants to local governments, the 1995-96 Executive Budget
recommendations generally preserve support for direct aid, such as school aid,
revenue sharing, and public health programs, at 1994-95 levels. Operating aid to
public schools is capped at 1995-95 amounts, while reimbursements for
transportation and building aid follow current law. Costs for social welfare
programs, however, are recommended to be dramatically reduced, reflecting more
than $1.5 billion in cost containment actions. Medicaid decreases by $662
million, or 11.3 percent, to $5.215 billion; welfare costs decrease $109
million, or 4.9 percent, to $2.111 billion. State support for children's
services is recommended to be converted to a block grant, providing local
governments greater flexibility in administering these programs. All other local
programs decline, primarily reflecting the elimination of $128 million in
operating aid to the New York City Transit Authority, matching the reduction in
New York City support of the Authority.
Spending recommended for State operations is projected to decline by $485
million, or 7.7 percent, to the lowest level since the 1985-86 fiscal year.
Recommendations in the Executive Budget which would reduce the workforce by
approximately 11,400 positions (most of which reduce disbursements in this
category), are projected to result in personal service savings of more than $300
million. Additional savings reflect initiatives of the State University of New
York and mental health agencies to maximize revenues to offset their costs.
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Spending recommended for general State charges is projected to increase $59
million, which reflects the 1995-96 cost associated with returning the New York
State and Local Employee Retirement Systems to the aggregate cost actuarial
method from the projected unit credit actuarial method, as required by the
Comptroller. Costs associated with the proposed early retirement program add
another $22 million. Health insurance costs are projected to increase six
percent and seven percent, for calendar years 1995 and 1996, respectively.
Workers' compensation costs are projected to grow at 3.5 percent. Unemployment
insurance costs are expected to double, in anticipation of up to 6,900 layoffs
of State employees in the 1995-96 fiscal year.
The Executive Budget proposes to offset part of the increase in pension
contributions by using $110 million currently on deposit in the Retirement
Systems' reserves for pension supplementation, which, together with the other
minor changes in assumptions, is expected to reduce the State's 1995-96 pension
contribution to $286 million. The Executive Budget also recommends a similar
offset of $120 million to be provided toward pension bills of other
participating employers. The Comptroller, as sole trustee of the Common
Retirement Fund and administrative head of the Retirement Systems, has indicated
that, if the proposals are enacted, he would commence legal proceedings to
prevent the proposed use of those reserves, which he considers to be a violation
of the State Constitution. The Executive disagrees and considers the use to
comply with the State Constitution.
General Fund debt service on short-term obligations of the State reflects the
elimination of the State's spring borrowing. Transfers in support of debt
service are projected to grow steadily, as the State proposes to continue to
issue bonds to support approximately 48 percent of its capital projects.
Transfers in support of capital projects are projected to increase despite
significant proposed cutbacks in spending, owing in part to the loss of
non-recurring receipts from sources other than the General Fund.
NON-RECURRING RESOURCES. The Division of the Budget estimates that the 1995-96
Financial Plan includes approximately $650 million in non-recurring resources,
approximately 2 percent of the General Fund budget. The Budget Division believes
that recommendations included in the Executive Budget will provide fully
annualized savings in 1996-97 which more than offset the non-recurring resources
used in 1995-96.
GENERAL FUND CLOSING FUND BALANCE. The closing fund balance in the General Fund
for the 1995-96 fiscal year is projected to be $312 million, reflecting the
required deposit of $15 million to the Tax Stabilization Reserve Fund, raising
the balance in that fund to $172 million at the close of the 1995-96 fiscal
year. The remainder reflects the recommended deposit of $140 million to the
Contingency Reserve Fund (CRF) to provide resources to finance potential costs
associated with litigation against the State.
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SPECIAL REVENUE FUNDS. For 1995-96, the State Financial Plan projects
disbursements of $25.825 billion from these funds. This includes $6.696 million
from Special Revenue Funds containing State revenues, and $19.129 billion from
funds containing Federal grants, primarily for social welfare programs.
Disbursements recommended in the Executive Budget from State Special Revenue
Funds are projected to increase $724 million or 12.1 percent from 1994-95. This
increase reflects significant growth in spending supported by lottery proceeds,
State University revenues, and dedicated taxes for transportation purposes.
Total disbursements for programs supported by Federal grants which account for
approximately three-quarters of all spending in the Special Revenue Funds, are
estimated to increase $478 million or 2.6 percent over projected 1994-95. The
single largest program is Medicaid, which comprises 60 percent of this Federal
aid, and is expected to amount to approximately $11.4 billion both in 1994-95
and 1995-96. Growth in other Federal spending is primarily attributable to the
expansion of the school lunch and breakfast programs, increased Federal
reimbursement of certain State costs under the Emergency Assistance to Families
program, and increased spending for the Women with Infant Children (WIC)
program. No significant changes in the type or level of Federal aid are assumed.
CAPITAL PROJECTS FUNDS. Disbursements from the Capital Projects funds in 1995-96
are estimated at $3.901 billion. The estimate is the result of a review required
by the Governor and the Budget Director of the necessity and affordability of
projects, as well as the impact on current and future revenues and debt service
requirements. This review reduced the amount the Division of the Budget
estimates would otherwise have been spent on capital projects by $555 million,
thereby avoiding an estimated increase of $227 million in General Fund support
for capital projects. Significant among the recommended cut-backs resulting from
that review are the following:
-- Freezing mental health community bed development and cancellation of major
modernization projects;
-- Scaling back economic development programs and canceling some stadium
projects;
-- Eliminating the school maintenance program;
-- Reducing new projects for CUNY and SUNY;
-- Constraining the highway and bridge improvement program and deferring rail
projects; and
-- Scaling back planned increases for environmental and recreation programs.
Despite the actions described above, capital spending is still expected to
increase 10.5 percent over the 1994-95 projection of $3.531 billion, and
provides support for:
- -- Highway and bridge contract letting at a $1.100 billion level;
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-- Completion of mental health community beds already committed and major
institutional modernization projects;
-- Expansion and rehabilitation of prisons and youth facilities;
-- High-priority SUNY and CUNY projects; and
-- Increased "pay-as-you-go" funding for environmental and recreation
programs over 1994-95 levels.
The share of State-funded capital projects expected to be financed on a
"pay-as-you-go" basis is 38 percent in 1995-96 (as compared to 36 percent in the
1994-95), and is projected to total $1.1 billion. This is attributable to the
full deposit of all authorized taxes into the Dedicated Highway and Bridge Trust
Fund, the initial deposit of a portion of the real estate transfer tax into the
Environmental Protection Fund, and an increase in the amount transferred from
the General Fund.
DEBT SERVICE FUNDS. Disbursements are estimated at $2.498 billion in the 1995-96
fiscal year, an increase of $288 million or 13 percent from 1994-95. Of this
increase, $61 million results from the loss of non-recurring resources available
in the prior fiscal year, including savings from refundings of State-supported
debt. Debt service would otherwise be projected to grow at 9 percent, reflecting
$68 million for the General Debt Service Fund, $70 million for Dedicated Highway
and Bridge Fund bonds, $30 million for payments from the Mental Hygiene Services
Fund and $62 million for bonds of the Local Government Assistance Corporation
(LGAC).
The increase in debt service costs recommended in the Executive Budget primarily
reflects prior capital commitments financed by bonds issued by the State and
State-supported debt issued by its public authorities, and the completion of the
LGAC program. The increase has been moderated by the reductions to bond-financed
capital spending as discussed above, and reflects debt issuances in 1994-95 and
1995-96 which are lower than they would have been, absent the Governor's review
of capital spending.
CASH FLOW. For the second time in many years, the State will meet its cash flow
needs without relying on a spring borrowing. However, this achievement is
predicated on two actions: the issuance of all remaining LGAC bonds authorized
in the 1990 statute; and the passage of proposed legislation permitting the
State to use, for cash flow purposes only, balances in the Lottery Fund.
Temporary transfers will be returned within five months so that all available
Lottery moneys as well as advances of additional aid can be paid to school
districts in September.
The lingering impact of the 1994-95 receipts shortfall -- as well as the impact
of the potential $5 billion 1995-96 imbalance on cash operations -- exerts
substantial pressures on the State's
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cash balance position in the first three months of the fiscal year. These
pressures are expected to abate later in the 1995-96 fiscal year, as cash
outlays decline from previous levels consistent with cost-savings initiatives
proposed in the Executive Budget.
GAAP-BASIS FINANCIAL PLAN
In 1995-96, the General Fund GAAP basis Financial Plan shows total revenues of
$31.274 billion, total expenditures of $31.576 billion, and net other financing
sources and uses of $1.123 billion; the surplus of $821 million reflects the
$140 million available in the Contingency Reserve Fund (CRF), as well as the
impact of LGAC bonds. New York State's General Fund GAAP basis position for
1995-96 is improved by the ongoing financing program of the Local Government
Assistance Corporation (LGAC). The full amount of the LGAC bond proceeds -- $529
million in 1995-96 -- is treated as a financing source in the GAAP General Fund
operating statement.
Absent the impact of LGAC and the CRF, the 1995-96 GAAP-basis Financial Plan
would show a surplus of $152 million. For all governmental Funds, the summary
GAAP-basis Financial Plan shows an excess of revenues and other financing
sources over expenditures and financing uses of $494 million.
PRIOR FISCAL YEAR (1993-94 GAAP-BASIS RESULTS). On July 29, 1994, the Office of
the State Comptroller issued the General Purpose Financial Statements of the
State of New York for the 1993-94 fiscal year. The Statements were prepared on
GAAP-basis and were independently audited in accordance with generally accepted
auditing standards. The State's Combined Balance Sheet as of March 31, 1994
showed an accumulated surplus in its combined governmental funds of $370
million, reflecting liabilities of $13.219 billion and assets of $13.589
billion. This accumulated Governmental Funds surplus includes a $1.637 billion
accumulated deficit in the General Fund, as well as accumulated surpluses in the
Special Revenue and Debt Service fund types and a $622 million accumulated
deficit in the Capital Projects Fund type.
YEAR-END GAAP FINANCIAL POSITION. The State completed its 1993-94 fiscal year
with a combined Governmental Funds operating surplus of $1.051 billion, which
included an operating surplus in the General Fund of $914 million, in the
Special Revenue Funds of $149 million and in the Debt Service Funds of $23
million, and an operating deficit in the Capital Projects Funds of $35 million.
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GAAP OPERATING RESULTS
GENERAL FUND. The State reported a General Fund operating surplus of $914
million for the 1993-94 fiscal year, as compared to an operating surplus of
$2.065 billion for the prior fiscal year. The 1993-94 fiscal year surplus
reflects several major factors, including the cash basis surplus recorded in
1993-94, the use of $671 million of the 1992-93 surplus to fund operating
expenses in 1993-94, net proceeds of $575 million in bonds issued by the Local
Government Assistance Corporation, and the accumulation of a $265 million
balance in the Contingency Reserve Fund. Revenues increased $543 million (1.7
percent) over prior fiscal year revenues with the largest increase occurring in
personal income taxes. Expenditures increased $1.659 billion (5.6 percent) over
the prior fiscal year, with the largest increase occurring in State aid for
social services programs. Other financing sources declined more than 11 percent,
with a net increase in operating transfers from other funds more than offset by
a decline in proceeds from financing arrangements caused by lower LGAC bond
sales.
Personal income and business taxes increased by $847 million and $247 million,
respectively, offset by reductions in consumption and use taxes and
miscellaneous revenues of $141 million and $318 million, respectively. Personal
income and business taxes increased primarily because the economy performed at a
higher level. General Fund revenues from consumption and use taxes and fees
declined primarily because revenues generated by both motor fuel and highway use
taxes were earmarked instead for the Dedicated Highway and Bridge Trust Fund
which is reported in the Capital Projects Funds. Miscellaneous revenues declined
because certain receipts recorded in the prior year were nonrecurring.
Expenditures for social services programs increased $1.047 billion primarily due
to increases in Medicaid and Income Maintenance. A $370 million increase in
departmental operations was caused primarily by the settlement of outstanding
labor contracts and unfavorable judicial decisions in previously pending
litigation.
Operating transfers from other funds increased, primarily reflecting the receipt
of $200 million from a prior-year claim settlement associated with the Federal
government. In addition, transfers of excess sales tax receipts from the Local
Government Assistance Tax Fund increased by nearly $170 million as a result of
higher sales tax receipts in the Debt Service Funds. The increase in operating
transfers to other funds was caused by an increase in operating subsidies
provided to both the State University of New York and the City University of New
York. Proceeds from financing arrangements declined over $340 million, as a
result of a decrease in the issuance of LGAC bonds.
SPECIAL REVENUE, DEBT SERVICE AND CAPITAL PROJECTS FUNDS. Special Revenue Funds
ended with an operating surplus of $149 million for the 1993-94 fiscal year and,
as a result, the
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accumulated fund balance has increased to $837 million. Revenues increased
$2.055 billion over the prior fiscal year primarily as a result of an increase
in Federal grants to finance increased spending for social services programs,
and in petroleum gross receipt taxes. Expenditures increased by $1.568 billion
primarily related to social services programs. Other financing uses increased by
approximately $500 million, representing increases in Federal reimbursement for
Medicaid patient services provided by various State health and mental hygiene
facilities.
Debt Service Funds ended with an operating surplus of $23 million for the
1993-94 fiscal year, and as a result, the accumulated fund balance has increased
to $1.792 billion. Revenues increased $34 million, primarily as a result of an
increase in dedicated taxes partially offset by a decrease in mental hygiene
patient fees. Debt service expenditures increased $31 million. Other financing
sources representing transfers from other funds increased by $220 million, as a
result of an increase in Federal Medicaid reimbursement for mental hygiene
patients.
An operating deficit of $35 million was reported in the Capital Projects Funds
for the State's 1993-94 fiscal year, and, as a result, the accumulated deficit
fund balance has increased to $622 million. Revenues increased by $458 million
which was primarily attributable to the shifting of certain tax revenues from
the General Fund to the Dedicated Highway and Bridge Trust Fund. Capital
Projects Funds expenditures increased by $61 million. Expenditures for highway
and bridge construction increased by approximately $223 million, but this
increase was offset in large part by a decrease of $160 million relating to
reductions in spending for water pollution control, hazardous waste programs and
various miscellaneous State aid programs. Net other financing sources and uses
decreased $489 million primarily as a result of a reduction in general
obligation bond proceeds and a decrease in transfers from the General Fund.
ECONOMIC OUTLOOK. The national economy began to expand in 1991, although the
growth rate for the first two years of the expansion was modest by historical
standards. The State economy remained in recession until 1993, when employment
growth resumed. Since early 1993, the State has gained approximately 100,000
jobs. Employment growth has been hindered during recent years by significant
cutbacks in the computer and instrument manufacturing, utility, and defense
industries. Personal income increased substantially in 1992 and 1993, aided
significantly by large bonus payments in banking and financial industries.
The State Financial Plan is based on a projection by DOB of national and State
economic activity. DOB forecasts that the overall rate of growth of the national
economy during calendar year 1994 will be similar to the "consensus" of a widely
followed survey of national
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economic forecasters. Growth in the real gross domestic product during 1994 is
projected to be moderate (3.5 percent), with declines in defense spending and
net exports more than offset by increases in consumption and investment.
Continuing efforts by business to reduce costs is expected to exert a drag on
economic growth. Inflation, as measured by the Consumer Price Index, is
projected to remain about 3 percent due to moderate wage growth and foreign
competition. Growth rates for personal income and wages are projected to
increase.
New York's economy is expected to continue to expand during 1994. Industries
that export goods and services to the rest of the country and abroad are
expected to benefit from growing national and international markets. Both
upstate and downstate regions are expected to share in this renewed growth.
Employment is expected to grow moderately throughout the year, although the rate
of increase is expected to be below the experience of the 1980's due to cutbacks
in Federal spending and employment, as well as continued downsizing by large
corporations. Both personal income and wages are expected to record moderate
gains in 1994. Bonus payments in the banking and financial industries are
expected to increase modestly from last year's level.
Receipts through the first two quarters of the 1994-95 fiscal year fell short of
expectations by $132 million.
1994-95 STATE FINANCIAL PLAN. The four governmental fund types that comprise the
State Financial Plan are the General Fund, the Special Revenue Funds, the
Capital Projects Funds, and the Debt Service Funds. This fund structure adheres
to accounting standards of the Governmental Accounting Standards Board.
GENERAL FUND. The General Fund is the general operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1994-95 fiscal year, the General Fund is expected to account for
approximately 52 percent of total governmental-fund receipts and 51 percent of
total governmental-fund disbursements. General Fund monies are also transferred
to other funds, primarily to support certain capital projects and debt service
payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the 1994-95
fiscal year. Total receipts are projected to be $34.321 billion, an increase of
$2.092 billion over total receipts in the prior fiscal year. Total General Fund
disbursements are projected to be $34.248 billion, an increase of $2.351 billion
over the total amount disbursed and transferred in the prior fiscal year.
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SPECIAL REVENUE FUNDS. Special Revenue Funds are used to account for the
proceeds of specific revenue sources such as Federal grants that are legally
restricted, either by the Legislature or outside parties, to expenditures for
specified purposes. Although activity in this fund type is expected to comprise
39 percent of total government funds receipts and disbursements in the 1994-95
fiscal year, about three-quarters of that activity relates to Federally-funded
programs.
Projected receipts in this fund type total $24.598 billion, an increase of
$1.777 billion over the prior year. Total disbursements in this fund type total
$24.982 billion, an increase of $2.259 billion over 1993-94 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, are projected to total $19.048 billion in the
1994-95 fiscal year. Remaining projected spending of $5.934 billion primarily
reflects aid to SUNY supported by tuition and dormitory fees, education aid
funded from lottery receipts, operating aid payments to the Metropolitan
Transportation Authority funded from the proceeds of dedicated transportation
taxes, and costs of a variety of self-supporting programs which deliver services
financed by user fees.
CAPITAL PROJECTS FUNDS. Capital Projects Funds are used to account for the
financial resources used for the acquisition, construction, or rehabilitation of
major state capital facilities and for capital assistance grants to certain
local governments or public authorities. This fund type consists of the Capital
Projects Fund, which is supported by tax dollars transferred from the General
Fund, and 37 other capital funds established to distinguish specific capital
construction purposes supported by other revenues. In the 1994-95 fiscal year,
activity in these funds is expected to comprise 5 percent of total governmental
receipts and 6 percent of total governmental disbursements in the State's
1994-95 fiscal year.
Disbursements from this fund type are projected to increase by $630 million over
prior-year levels, primarily reflecting higher spending for transportation and
mental hygiene projects. The Dedicated Highway and Bridge Trust Fund is
projected to comprise 26 percent of the activity in this fund type -- $982
million in 1994-95-- and is the single largest dedicated fund. Projected
disbursements from this dedicated fund reflect an increase of $339 million over
1993-94 levels. Spending for capital projects will be financed through a
combination of sources: Federal grants (25 percent), public authority bond
proceeds (35 percent), general obligation bond proceeds (10 percent), and
current revenues (30 percent). Total receipts in this fund type are projected at
$3.233 billion, not including $374 million expected to be available from the
proceeds of general obligation bonds.
DEBT SERVICE FUNDS. Debt Service Funds are used to account for the payment of
principal of, and interest on, long-term debt of the State and to meet
commitments under
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lease-purchase and other contractual-obligation financing arrangements. This
fund is expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1994-95 fiscal year. Receipts in these funds in excess of
debt service requirements are transferred to the General Fund and Special
Revenue Funds, pursuant to law.
The Debt Service fund type consists of the General Debt Service Fund, which is
supported primarily by tax dollars transferred from the General Fund, and seven
other funds. In the 1994-95 fiscal year, total disbursements in this fund type
are projected at $2.246 billion, an increase of $314 million or 16.3 percent.
The transfer from the General Fund of $1.443 billion is expected to finance 64
percent of these payments.
The remaining payments are expected to be financed by pledged revenues,
including $1.702 billion in taxes, $400 million in dedicated fees, and $889
billion in patient revenues. After impoundment for debt service, as required,
$3.357 billion is expected to be transferred to the General Fund and other funds
in support of State operations. The largest transfer -- $1.696 billion -- is
made to the Special Revenue Fund type, in support of operations of the mental
hygiene agencies. Another $1.301 billion in excess sales taxes is expected to be
transferred to the General Fund, following payment of projected debt service on
bonds of the Local Government Assistance Corporation ("LGAC").
1994-95 BORROWING PLAN. The State anticipates that its capital programs will be
financed, in part, through borrowings by the State and public authorities in the
1994-95 fiscal year. The State expects to issue $374 million in general
obligation bonds (including $140 million for purposes of redeeming outstanding
BANs) and $140 million in general obligation commercial paper. The Legislature
has also authorized the issuance of up to $69 million in COPs during the State's
1994-95 fiscal year for equipment purchases. The projection of the State
regarding its borrowings for the 1994-95 fiscal year may change if circumstances
require.
LGAC is authorized to provide net proceeds of up to $315 million during the
State's 1994-95 fiscal year, to fund payments to local governments.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.426 billion, including costs of issuances, reserve funds,
and other costs. Included therein are borrowings by (1) the Dormitory Authority
of the State of New York for SUNY, the City University of New York ("CUNY"),
health facilities, and SUNY dormitories; (2) MCFFA for mental health facilities;
(3) Thruway Authority for the Dedicated Highway and Bridge Trust Fund and
Consolidated Highway Improvement Program; (4) UDC for prison and youth
facilities and economic development programs; (5) the Housing Finance Agency for
housing programs; and (6) other
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borrowings by the Environmental Facilities Corporation and the Energy Research
and Development Authority ("ERDA").
NEW YORK LOCAL GOVERNMENT ASSISTANCE CORPORATION. In June 1990, legislation was
enacted creating the "New York Local Government Assistance Corporation" (the
"Corporation"), a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. Over a period of the next several
years, the issuance of those long-term obligations, which will be amortized over
no more than 30 years, is expected to result in eliminating the need for
continuing short-term seasonal borrowing for those purposes, because the timing
of local assistance payments in future years will correspond more closely with
the State's available cash flow. The legislation also imposed a cap on the
annual seasonal borrowing of the State at $4.7 billion, less net proceeds of
bonds issued by the Corporation, except in cases where the Governor and the
legislative leaders have certified both the need for additional borrowing and a
schedule for reducing it to the cap. If borrowing above the cap is thus
permitted in any fiscal year, it is required by law to be reduced to the cap by
the fourth fiscal year after the limit was first exceeded. The Corporation has
issued bonds to provide net proceeds of $3.856 billion and has been authorized
to issue its bonds to provide net proceeds of up to an additional $315 million
during the State's 1994-95 fiscal year. The impact of this borrowing, together
with the availability of certain cash reserves, is that, for the first time in
nearly 35 years, the 1994-95 State Financial Plan includes no short-term
seasonal borrowing. This reflects the success of the LGAC program in permitting
the State to accelerate local aid payments from the first quarter of the current
fiscal year to the fourth quarter of the previous fiscal year.
1993-94 FISCAL YEAR. The State ended its 1993-94 fiscal year with a balance of
$1.140 billion in the tax refund reserve account, $265 million in its
Contingency Reserve Fund ("CRF") and $134 million in its Tax Stabilization
Reserve Fund. These fund balances were primarily the result of an improving
national economy, State employment growth, tax collections that exceeded earlier
projections and disbursements that were below expectations. Deposits to the
personal income tax refund reserve have the effect of reducing reported personal
income tax receipts in the fiscal year when made and withdrawals from such
reserve increase receipts in the fiscal year when made. The balance in the tax
refund reserve account will be used to pay taxpayer refunds, rather than drawing
from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account, $1,026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million will be redeposited in the tax refund reserve
account at the end of the State's 1994-95 fiscal year to continue the process of
restructuring the State's cash flow as part of the LGAC program. The balance in
the CRF will be used to meet the cost of litigation facing the State.
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The Tax Stabilization Reserve Fund may be used only in the event of an
unanticipated General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account, General
Fund receipts in the 1993-94 exceeded those originally projected when the State
Financial Plan for that year was formulated on April 16, 1993 by $1.002 billion.
Greater-than-expected receipts in the personal income tax, the bank tax, the
corporation franchise tax and the estate tax accounted for most of this
variance, and more than offset weaker-than-projected collections from the sales
and use tax and miscellaneous receipts. Collections from individual taxes were
affected by various factors including changes in Federal business laws,
sustained profitability of banks, strong performance of securities firms, and
higher-than-expected consumption of tobacco projects following price cuts.
The higher receipts resulted, in part, because the New York economy performed
better than forecasted. Employment growth started in the first quarter of the
State's 1993-94 fiscal year, and, although this lagged behind the national
economic recovery, the growth in New York began earlier than forecasted. The New
York economy exhibited signs of strength in the service sector, in construction,
and in trade. Long Island and the Mid-Hudson Valley continued to lag behind the
rest of the State in economic growth. The DOB believes that approximately
100,000 jobs were added during the 1993-94 fiscal year.
Disbursements and transfers from the General Fund were $303 million below the
level projected in April 1993, an amount that would have been $423 million had
the State not accelerated the payment of Medicaid billings, which in the April
1993 State Financial Plan were planned to be deferred into the 1994-95 fiscal
year. Compared to the estimates included in the State Financial Plan formulated
in April 1993, lower disbursements resulted from lower spending for Medicaid,
capital projects, and debt service (due to refundings) and $114 million used to
restructure the State's cash flow as part of the LGAC program. Disbursements
were higher-than-expected for general support for public schools, the State
share of income maintenance, overtime for prison guards, and highways now and
ice removal. The State also made the first of six required payments to the State
of Delaware related to the settlement of Delaware's litigation against the State
regarding the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded a
Contingency Reserve Fund ("CFR") as a way to assist the State in financing the
cost of litigation affecting the State. The CFR was initially funded with a
transfer of $100 million attributable to the positive margin recorded in the
1992-93 fiscal year. In addition, the State augmented this initial deposit with
$132 million in debt service savings attributable to the refinancing of State
and public authority bonds during 1993-94. A year-end transfer of $36 million
was also
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made to the CRF, which, after a disbursement for authorized fund purposes,
brought the CRF balance at the end of 1993-94 to $265 million. This amount was
$165 million higher than the amount originally targeted for this reserve fund.
1992-93 FISCAL YEAR. The State ended its 1992-93 fiscal year with a balance of
$671 million in the tax refund reserve account and $67 million in the Tax
Stabilization Reserve Fund.
The State's 1992-93 fiscal year was characterized by performance that was better
than projected for the national and regional economies. National gross domestic
product, State personal income, and State employment and unemployment performed
better than originally projected in April 1992. This favorable economic
performance, particularly at year end, combined with a tax-induced acceleration
of income into 1992, was the primary cause of the General Fund surplus. Personal
income tax collections were more than $700 million higher than originally
projected (before reflecting the tax refund reserve account transaction),
primarily in the withholding and estimated payment components of the tax.
There were large, but mainly offsetting, variances in other categories of
receipts. Significantly higher-than-projected business tax collections and the
receipt of unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association approximately offset
the loss of an anticipated $200-million Federal reimbursement, the loss of
certain budgeted hospital differential revenue as a result of unfavorable court
decisions, and shortfalls in certain miscellaneous revenues.
Disbursements and transfers to other funds were $45 million above projections in
April 1992, although this includes a $150 million payment to health insurers
(financed with a receipt from the MMIA made pursuant to legislation passed in
January 1993). All other disbursements were $105 million lower than projected.
This reduction primarily reflected lower costs in virtually all categories of
spending, including Medicaid, local health programs, agency operations, fringe
benefits, capital projects and debt service as partially offset by
higher-than-anticipated costs for education programs.
1991-92 FISCAL YEAR. The 1991-92 State fiscal year was marked by a protracted
delay in the adoption of a budget, disagreements between the Executive and the
Legislature over receipts and disbursements projections, and continuing
deterioration in the State economy. Persistent under performance of the economy
led to revenue shortfalls which were the primary cause of a $531-million deficit
TRAN borrowing and a $44-million withdrawal from the tax stabilization reserve
fund, depleting the balance in that fund. The tax refund reserve account had a
balance of $29 million at the end of the 1991-92 fiscal year. The deposit to
this account reduced personal income tax collections by $29 million in the
1991-92 fiscal year.
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The State Financial Plan was initially formulated on June 10, 1991, more than
two months after the beginning of the fiscal year. The State Financial Plan was
formulated after disagreement between the Governor and the legislative leaders
over spending levels, revenue-raising measures and estimates of the impact of
legislative actions, and after the Governor vetoed $937 million in spending
measures which the Legislature added to his proposed Executive Budget without
providing the necessary revenues.
The Legislature, after consultation with the Governor, subsequently passed
appropriation bills adding a net of $676 million in spending during the State's
1991-92 fiscal year. The additional spending was expected to be financed through
several actions including tax increases, projected audit revenues, added
operating support for tax enforcement efforts, nonrecurring revenues, and
administrative actions to reduce spending.
Although the economic forecast upon which the 1991-92 State Financial Plan was
based assumed a modest national recovery consistent with the consensus of
forecasters at the time and continued but moderating declines in State
employment, the expectations were too optimistic. The national economy was much
more sluggish than forecasted, and the State economy also fared significantly
worse with continued steep employment declines.
Budget projections for the 1991-92 fiscal year were adversely affected by
several factors, including shortfalls in receipts from the personal income tax
and user taxes and fees, higher-than-expected disbursements for Medicaid and
income maintenance, and the inability of the State to complete certain
nonrecurring transactions. Despite administrative cost savings from actions
taken during the fiscal year of $407 million, the State was required to finance
its operations through the deficit TRANs and fund transfer described above.
STATE FINANCIAL PRACTICES: GAAP BASIS. Historically, the State has accounted
for, reported and budgeted its operations on a cash basis. The State currently
formulates a financial plan which includes all funds required by generally
accepted accounting principles ("GAAPW4,31). The State, as required by law,
continues to prepare its financial plan and financial reports on the cash basis
of accounting as well.
The State's financial position on a GAAP basis as of March 31, 1993 included an
accumulated deficit in its combined governmental funds of $681 million.
Liabilities totaled $12.864 billion and assets of $12.183 billion were available
to liquidate these liabilities. The combined accumulated deficit included
deficits of $2.551 billion in the General Fund and $586 million in the Capital
Projects Funds, and accumulated surpluses of $1.768 billion in the Debt Service
Funds and $688 million in the Special Revenue Funds. During the 1992-93 fiscal
year, the State recorded an operating surplus in the governmental funds of
$2.637 billion, including a General Fund operating surplus of $2.065 billion.
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As of March 31, 1992, the State's financial position included an accumulated
deficit in its combined governmental funds of $3.315 billion; liabilities were
reported at $14.166 billion and assets at $10.851 billion. The accumulated
governmental funds deficit included a $4.616 billion accumulated General Fund
deficit, and a net accumulated surplus of $1.301 billion for all other
governmental funds. During the 1991-92 fiscal year, the State recorded an
operating surplus in the General Fund of $1.668 billion plus a net surplus of
$1.301 billion for all other governmental funds.
GENERAL FUND. In 1992-93, the State recorded a General Fund operating surplus of
$2.065 billion with a net increase in assets of $657 million and a net decrease
in liabilities of $1.408 billion. The increase in assets was comprised of
increases in cash of $430 million, other assets of $404 million and other
receivables of $276 million offset by a decrease in taxes receivable of $453
million. The decrease in liabilities was comprised of decreases in payables to
local governments of $688 million, tax and revenue anticipation notes payable of
$531 million and all other liabilities of 189 million.
The 1991-92 fiscal year General Fund operating surplus of $1.688 billion was
primarily attributable to a net decrease in liabilities of $2.159 billion. This
was comprised of decreases in payables to local governments of $2.132 billion
(primarily reflecting payments by LGAC of school aid) and TRANs payable of $374
million, offset, in part, by increases in accrued liabilities of $283 million
and all other liabilities of $64 million. The decrease in liabilities was offset
in part by a $491 million decline in assets.
ECONOMIC OVERVIEW
The State is the third most populous state in the nation and has a relatively
high level of personal wealth. The State's economy is diverse with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, the State has a declining proportion of
its workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
The State has historically been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic affluence. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business.
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During the calendar years 1982 and 1983, the State's economy in most respects
performed better than that of the nation. However, in the calendar years 1984
through 1991, the State's rate of economic expansion was somewhat slower than
that of the nation. The unemployment rate in the State dipped below the national
rate in the second half of 1981 and has generally remained lower until 1991. The
total employment growth rate in the State has been below the national average
since 1984. Total personal income in the State has risen slightly faster than
the national average every year since 1983, with the exception of 1985, 1990 and
1991.
The State has for many years had a very high State and local tax burden relative
to other states. The State and its localities have used these taxes to develop
and maintain their transportation networks, public schools and colleges, public
health systems, other social services and recreational facilities. Despite these
benefits, the burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, may have contributed to the
decisions of some businesses and individuals to relocate outside, or not locate
within, the State.
To stimulate the State's economic growth, the State has developed programs,
including the provision of direct financial assistance by State-related sources,
designed to assist businesses to expand existing operations located within the
State and to attract new businesses to the State. Local industrial development
agencies raised an aggregate of approximately $7.8 billion in separate
tax-exempt bond issues through December 31, 1993. There are currently over 100
county, city, town and village agencies. No new agencies have been established
since 1987. In addition, the New York State Urban Development Corporation
("UDC") is empowered to issue, subject to approval by the Public Authorities
Control Board, bonds and notes on behalf of private corporations for economic
development projects. The State has also established the New York Insurance
Exchange which permits insurers and individual investors to combine to compete
with Lloyd's of London in the underwriting of large primary and reinsurance
risks. The State has also taken advantage of certain changes in Federal bank
regulations to establish a free international banking zone in the City.
In addition, the State has provided various tax incentives to encourage business
relocation and expansion. These programs include direct tax abatement from local
property taxes for new facilities (subject to locality approval) and investment
tax credits that are applied against the State corporation franchise tax.
Furthermore, legislation passed in 1986 authorizes the creation of up to 40
"economic development zones" in economically distressed regions of the State.
Businesses in these zones are provided a variety of tax and other incentives to
create jobs and make investments in the zones as the beginning of the State's
1994-95 fiscal year, there were 19 such zones.
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The 1994-95 budget contains a significant investment in efforts to spur economic
growth. The budget includes provisions to reduce the level of business taxation
in New York, with cuts in the corporate tax surcharge, the alternative minimum
tax imposed on business and the petroleum business tax, repeal of the State's
hotel occupancy tax, and reductions in the real property gains tax to stimulate
construction and facilitate the real estate industry's access to capital.
Complementing the elimination of the hotel tax is a $10 million investment of
State funds in the "I Love New York" program designed to spur tourism activity
throughout the State.
To help strengthen the State's economic recovery, the 1994-95 budget also
includes more than $200 million in additional funding for economic development
programs. Special emphasis is placed on programs intended to enable New York
State to: (i) invest in high technology industries; (ii) expand access to
foreign markets; (iii) strengthen assistance to small businesses, particularly
those owned by women and minorities; (iv) retain and attract new manufacturing
jobs; (v) help companies and communities impacted by continued cutbacks in
Federal defense spending and ongoing corporate downsizings; and (vi) bolster the
tourism industry. In addition, the budget includes increased levels of support
for programs to rebuild and maintain State infrastructure, and provisions to
create 21 new economic development zones.
STATE AUTHORITIES. The fiscal stability of the State is related, in part, to the
fiscal stability of its public Authorities for financing, constructing and
operating revenue-producing public benefit facilities. Authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization. As of September 30,
1993 there were 18 Authorities that had outstanding debt of $100 million or
more. The aggregate outstanding debt, including refunding bonds, of these 18
Authorities was $63.5 billion as of September 30, 1993. As of March 31, 1994,
aggregate public authority debt outstanding as State-supported debt was $21.1
billion and as State-related debt was $29.4 billion.
Moral obligation financing generally involves the issuance of debt by an
Authority to finance a revenue-producing project or other activity, and that
debt is secured by project revenues and statutory provisions of the State,
subject to appropriation by the Legislature, to make up any deficiencies which
may occur in the issuer's debt service reserve fund. Under lease-purchase or
contractual-obligation financing arrangements, Authorities and certain
municipalities have issued obligations to finance the construction and
rehabilitation of facilities or the acquisition and rehabilitation of equipment,
and expect to cover debt service and amortization of the obligations through the
receipt of rental or other contractual payments made by the State. The State has
also entered into a payment agreement with the
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New York Local Government Assistance Corporation. State lease-purchase or
contractual-obligation financing arrangements involve a contractual undertaking
by the State to make payments to an Authority, municipality or other entity, but
the State's obligation to make such payments is generally expressly made subject
to appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State also participates in the issuance of
certificates of participation in a pool of leases entered into by the State's
Office of General Services on behalf of several State departments and agencies.
The State has also participated in the issuance of certificates of participation
for the acquisition of real property which represent proportionate interests in
lease payments to be paid by the State. Moral obligation financing is an
arrangement pursuant to which the State provides, by statute, that it will pay
such money as may be required to make up any deficiency in a debt service
reserve fund established to assure payment of bonds. Lease-purchase financing is
an arrangement pursuant to which the State leases from a public benefit
corporation or municipality for a term not less than the amortization period of
the debt obligations issued by the public benefit corporation or municipality to
finance acquisition or, pays rent which is used to pay debt service on the
obligations. Contractual-obligation financing is an arrangement pursuant to
which the State makes periodic payments to a public benefit corporation under a
contract with a term not less than the amortization period of the debt
obligations issued by such corporation in connection with such contract.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, the State has
provided financial assistance through appropriations, in some cases of a
recurring nature, to certain of the 18 Authorities for operation and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or otherwise, for debt service. This assistance is expected to continue to be
required in future years.
Several Authorities have, in the past experienced financial difficulties.
Certain Authorities continue to experience financial difficulties, requiring
financial assistance from the State.
The Metropolitan Transportation Authority (the "MTA") oversees New York City's
subway and bus lines by its affiliates, the New York City Transit Authority and
the Manhattan and Bronx Surface Transit Operating Authority (collectively, the
"TA"). Through MTA's subsidiaries, the Long Island Rail Road Company, the
Metro-North Commuter Railroad Company and the Metropolitan Suburban Bus
Authority, the MTA operates certain commuter rail and bus lines in the New York
metropolitan area. In addition, the Staten Island Rapid Transit Operating
Authority, an MTA subsidiary, operates a rapid transit line on Staten Island.
Through its affiliated agency, the Triborough Bridge and Tunnel Authority (the
"TBTA"), the MTA operates certain intrastate toll bridges and tunnels. Because
fare
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revenues are not sufficient to finance the mass transit portion of these
operations, the MTA has depended and will continue to depend for operating
support upon a system of State, local government and TBTA support and, to the
extent available, Federal operating assistance, including loans, grants and
operating subsidies.
If current revenue projections are not realized and/or operating expenses exceed
current projections, the TA or commuter railroads may be required to seek
additional State assistance, raise rates or take other actions.
Over the past several years the State has enacted several taxes--including a
surcharge on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation Region
served by the MTA and a special one-quarter of 1 percent regional sales and use
tax--that provide revenues for mass transit purposes, including assistance to
the MTA. The surcharge, which expired in November 1995, yielded approximately
$507 million in calendar year 1992, of which the MTA was entitled to receive
approximately 90 percent, or approximately $456 million. These amounts include
some receipts resulting from a change in State law to require taxpayers to make
estimated payments on their surcharge liabilities. In addition, in March 1987,
legislation was enacted that creates an additional source of recurring revenues
for the MTA. This legislation requires that the proceeds of a one-quarter of 1%
mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region that heretofore had been paid to the State of New York
Mortgage Agency be deposited in a special MTA fund. These tax proceeds may be
used by the MTA for either operating or capital (including debt service)
expenses. Further, in 1993, the State dedicated a portion of the State petroleum
business tax to fund operating or capital assistance to the MTA. For the 1994-95
State fiscal year, total State assistance to the MTA is estimated at
approximately $1.3 billion.
In 1993, State legislation authorized the funding of a five-year $9.56 billion
MTA capital plan for the five-year period, 1992 through 1996 (the "1992-96
Capital Program"). The MTA has received approval of the 1992-96 Capital Program
based on this legislation from the 1992-96 Capital Program Review Board, as
State law requires. This is the third five-year plan since the Legislature
authorized procedures for the adoption, approval and amendment of a five-year
plan in 1981 for a capital program designed to upgrade the performance of the
MTA's transportation systems and to supplement, replace and rehabilitate
facilities and equipment. The MTA, the TBTA and the TA are collectively
authorized to issue an aggregate of $3.1 billion of bonds (net of certain
statutory exclusions) to finance a portion of the 1992-96 Capital Program. The
1992-96 Capital Program is expected to be financed in significant part through
dedication of State petroleum business taxes referred to above.
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There can be no assurance that all the necessary governmental actions for the
Capital Program will be taken, that funding sources currently identified will
not be decreased or eliminated, or that the 1992-96 Capital Program, or parts
thereof, will not be delayed or reduced. Furthermore, the power of the MTA to
issue certain bonds expected to be supported by the appropriation of State
petroleum business taxes is currently the subject of a court challenge. If the
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional State assistance.
CERTIFICATES OF PARTICIPATION. The New York Fund may invest at times in
certificates of participation which represent proportionate interests in certain
lease or other payments made by the State with respect to equipment or real
property of the departments or agencies of the State. Such payments are subject
to annual appropriation by the Legislature and the availability of money to the
State for making such payments.
NEW YORK CITY. On February 14, 1995, the Mayor released the Preliminary Budget
for the City's 1996 fiscal year (commencing July 1), which addressed a projected
$2.7 billion budget gap. Most of the gap-closing initiatives may be implemented
only with the cooperation of the City's municipal unions, or the State or
Federal governments. The Office of the State Deputy Comptroller for the City of
New York (OSDC) and the State Financial Control Board continue their respective
oversight activities.
The fiscal health of the State is closely related to the fiscal health of its
localities, particularly the City, which has required and continues to require
significant financial assistance from the State. The City's independently
audited operating results for each of its 1981 through 1993 fiscal years, which
ended on June 30, show a General Fund surplus reported in accordance with GAAP.
The City has eliminated the cumulative deficit in its net General Fund position.
In addition, the City's financial statements for the 1993 fiscal year received
an unqualified opinion from the City's independent auditors, the eleventh
consecutive year the City has received such an opinion.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among these actions,
the State created the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for the City of New York ("OSDC") to assist the Control Board in exercising its
powers and responsibilities.
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The City operates under a four-year financial plan which is prepared annually
and is periodically updated. On June 30, 1986, the Control Board's powers of
approval over the City's financial plan were suspended pursuant to the Financial
Emergency Act. However, the Control Board, MAC and OSDC continue to exercise
various monitoring functions relating to the City's financial position. The City
submits its financial plans as well as the periodic updates to the Control Board
for its review.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected Federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided for
in the City's financial plan or if other uncertainties materialize that reduce
expected revenues or increase projected expenditures, then, to avoid operating
deficits, the City may be required to implement additional actions, including
increases in taxes and reductions in essential City services. The City might
also seek additional assistance from the State.
On July 8, 1994 the City submitted to the Control Board a four-year Financial
Plan covering fiscal years 1995 through 1998 (the "1995-1998 Financial Plan").
The 1995-98 Financial Plan reflects a program of proposed actions by the City,
State and Federal governments to close the gaps between projected revenues and
expenditures of $955 million, $1.547 billion and $2.024 billion for the 1996,
1997 and 1998 fiscal years, respectively.
City gap-closing actions total $705 million in the 1996 fiscal year, $1.072 in
the 1997 fiscal year and $1.299 billion in the 1998 fiscal year. These actions,
a substantial number of which are unspecified, include additional spending
reductions, the reduction of City personnel through attrition, government
efficiency initiatives, procurement initiatives and labor productivity
initiatives. Certain of these initiatives may be subject to negotiation with the
City's municipal unions.
State actions proposed in the gap-closing program total $200 million, $375
million and $525 million in the 1996, 1997 and 1998 fiscal years, respectively.
These actions include savings primarily from the proposed State assumption of
certain medicaid costs.
The Federal actions proposed in the gap-closing program are $50 million, $100
million and $200 million in increased Federal assistance in fiscal years 1996
through 1998, respectively.
Various actions proposed in the Financial Plan, including the proposed increase
in State aid, are subject to approval by the Governor and the State Legislature,
and the proposed increase in Federal aid is subject to approval by Congress and
the President. State and Federal actions
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are uncertain and no assurance can be given that such actions will in fact be
taken or that the savings that the City projects will result from these actions
will be realized. The State Legislature failed to approve a substantial portion
of the proposed State assumption of Medicaid costs in the last session. The
Financial Plan assumes that these proposals will be approved by the State
Legislature during the 1996 fiscal year and that the Federal government will
increase its share of funding for the Medicaid program. If these measures cannot
be implemented, the City will be required to take other actions to decrease
expenditures or increase revenues to maintain a balanced financial plan.
The City's projected budget gaps for the 1997 and 1998 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1996 budget are not take into account in projecting the budget gaps
for the 1997 and 1998 fiscal years.
Although the City has maintained balanced budgets in each of its last thirteen
fiscal years, and is projected to achieve balanced operating results for the
1995 fiscal year, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
On March 1, 1994, the City Comptroller issued a report on the state of the
City's economy. The report concluded that, while the City's long recession is
over, moderate growth is the best the City can expect, with the local economy
being held back by continuing weakness in important international economies.
On August 2, 1994, the City Comptroller issued a report on the City's July
Financial Plan. With respect to the 1995 fiscal year, the City Comptroller
stated that, after adjusting for the recently announced $250 million increased
reserve and $90 million decrease in the projected surplus for the 1994 fiscal
year, the total risk could be as much as $768 million to $968 million. Risks
which were identified as substantial risks included a possible $263 million
increase in overtime costs; approval by the State Legislature of a tort reform
program to limit damage claims against the City, which would result in savings
of $45 million; the $65 million proceeds from a proposed asset sale; possible
additional expenditures at HHC totaling $60 million; $60 million of possible
increased pension contributions resulting from lower than assumed pension fund
earnings; assumed improvement in the collection of taxes, fines and fees
totaling $50 million; renegotiation of the terms of certain Port Authority
leases totaling $75 million; the receipt of the $200 million of increased
Federal aid; and $41 million of possible increased expenditures for judgments
and claims.
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On October 14, 1994, the City Comptroller issued a report concluding that the
budget gap for the 1995 fiscal year had increased to $1.4 billion, due, in part,
to continuing shortfalls in tax revenues. The Comptroller also notes that the
gaps for the 1996 through 1998 fiscal years will increase significantly as a
result of an actuarial audit of the City's pension system, to be completed in
the near future. The City Comptroller has previously noted that HHC is
projecting an increase in Medicaid reimbursement, which could result in
approximately $40 million of additional Medicaid payments by the City to HHC in
the 1995 fiscal year.
On July 27, 1994, OSDC issued a report reviewing the July Financial Plan. The
report concluded that a potential budget gap of $616 million existed for the
1995 fiscal year, resulting primarily from $150 million of greater than
anticipated overtime costs in the uniformed agencies; the minimal possibility of
State approval for the tort reform initiative; the potential for $50 million of
increased pension costs as a result of lower than assumed pension fund earnings;
the possibility of $110 million of additional City assistance to HHC; and
uncertainties concerning the receipt of $50 million resulting from the proposed
increased collection efforts. The report identified additional risks for the
1995 fiscal year totaling $152 million.
On October 14, 1994, OSDC issued a report on the local economy. The report
concluded that the expansion of the City's economy broadened and strengthened in
1994 and is expected to continue. However, the report noted that if national
growth slows as some forecasts now indicate, it could dampen prospects for key
sectors in the local economy, especially professional services, manufacturing,
culture and media. The delayed recovery in the international economies most
closely tied to New York, particularly Continental Europe and Japan, may slow
the further recovery of the City's professional business services until later in
1995. In addition, the extremely poor second quarter profits in the securities
industry have yet to fully reverberate throughout the City's economy. Wall
Street has announced job cutbacks and is expected to lower its year-end bonuses,
which the report found would slow the growth in wages and person income. This
would dampen the near-term outlook and constrain the growth in the City tax
revenues, notably the personal income, sale and general corporation tax, in the
coming months. Finally, local government will continue to shed jobs and the rate
of growth of local government expenditures will abate.
On July 28, 1994, the staff of the Control Board issued a report on the July
Financial Plan. In its report the staff concluded that the City faced risks of
more than $1 billion in the 1995 fiscal year, as well as an additional risk of
greater than $165 million annually from increased pension costs if the State
Legislature enacts a pension supplementation bill increasing pension benefits.
The staff noted that the amount of risk involved this early in the fiscal year
is unprecedented and very worrisome. In addition, the staff indicated that the
risks for the 1996 fiscal year exceeded $2 billion and that the risks for each
of the 1997 and 1998 fiscal years
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approximated $3 billion. Risks for the 1995 through 1998 fiscal years included
the potential for increased overtime and pension costs and uncertainties
concerning the proposed reduction in City expenditures for health care costs,
the anticipated revenues from renegotiation of the terms of certain Port
Authority leases, savings resulting from the proposed tort reform program to
limit damage claims against the City, and increased Federal aid.
The City requires certain amounts of financing for seasonal and capital spending
purposes. The City has issued $1.75 billion of notes for seasonal financing
purposes during fiscal year 1994. The City's capital financing program projects
long-term financing requirements of approximately $17 billion for the City's
fiscal years 1995 through 1998. The major capital requirements include
expenditures for the City's water supply and sewage disposal systems, roads,
bridges, mass transit, schools, hospitals and housing.
OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1994-95 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1994-95 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted in
the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the Governor
or the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
CERTAIN MUNICIPAL INDEBTEDNESS. Certain localities in addition to the City could
have financial problems leading to requests for additional State assistance
during the State's 1994-95 fiscal year and thereafter. The potential impact on
the State of such requests by localities is not included in the projections of
the State's receipts and disbursements for the State's 1994-95 fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1992, the total indebtedness of all localities in the
State other than New York City was approximately $15.7 billion. A small portion
(approximately $71.6 million) of that indebtedness represented borrowing to
finance budgetary deficits and was issued pursuant to
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<PAGE>
State enabling legislation. (For further information on the debt of New York
localities, see Table A-8 in Appendix A.) State law requires the Comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1992.
From time to time, Federal expenditure reductions could reduce, or in some cases
eliminate, Federal funding of some local programs and accordingly might impose
substantial increased expenditure requirements on affected localities. If the
State, the City or any of the public authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State could be adversely affected. Localities also face anticipated and
potential problems resulting from certain pending litigation, judicial decisions
and long-range economic trends. Long-range potential problems of declining urban
population, increasing expenditures and other economic trends could adversely
affect localities and require increasing State assistance in the future.
LITIGATION. The State is a defendant in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws.
Adverse developments in those proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced 1994-95 State
Financial Plan. Although other litigation is pending against the State, no
current litigation involves the State's authority, as a matter of law, to
contract indebtedness, issue its obligations, or pay such indebtedness when it
matures, or affects the State's power or ability, as a matter of law, to impose
or collect significant amounts of taxes and revenues. In its Notes to its
General Purpose Financial Statements for the fiscal year ended March 31, 1994,
the State reports its estimated liability for awarded and anticipated
unfavorable judgments at $675 million.
RATINGS. As of June 28, 1993, Moody's rated the City's general obligation bonds
Baa1 and S&P rated such bonds A-. Such ratings reflect only the views of Moody's
and S&P, from which an explanation of the significance of such ratings may be
obtained. There is no assurance that such ratings will continue for any given
period of time or that they will not be revised downward or withdrawn entirely.
Any such downward revision or withdrawal could have an adverse effect on the
market prices of the City's bonds.
- 126 -
<PAGE>
RISK FACTORS
In view of the New York Tax-Free Fund's policy of concentrating its investments
in the obligations of New York State, its municipalities, agencies and
instrumentalities (collectively "New York Issuers"), the following information
is provided to investors. This represents only a brief summary of the
corresponding risks inherent in the Fund and does not purport to be a complete
description. It is based on information obtained from official statements
relating to securities offerings of the State, from independent municipal credit
reports and from other sources. This information is believed to be accurate but
has not been independently verified by the Fund. Additional information may be
obtained from official statements and prospectuses issued by, and other
information reported by the State and its various public bodies and other
entities located within the State in connection with the issuance of their
respective securities.
As noted in the New York Tax-Free Fund's Prospectus, as a fundamental policy, at
least 65% of the Fund's net assets will ordinarily be invested in New York
State, municipal and public authority debt obligations, the interest from which
is exempt from Federal income tax, New York State income tax and New York City
personal income tax ("New York State Tax Exempt Securities"). Therefore, the New
York Tax-Free Fund is more susceptible to political, economic or regulatory
factors and/or events affecting the State and its political subdivisions than
would a more diverse portfolio of securities relating to a number of different
states. In addition, the value of the New York Tax-Free Fund's shares may
fluctuate more widely than the value of shares of a diversified portfolio of
securities relating to a number of different states.
A national recession commenced in mid-1990. The nation then experienced a period
of weak economic growth during 1991 and 1992. In 1993, the nation's economy grew
faster than in 1992, but still at a very moderate rate, as compared to other
recoveries. The rate of economic expansion accelerated considerably in 1994.
National employment and income growth in 1994 were substantial. In response, the
Federal Reserve Board shifted to a policy of monetary tightening by raising
interest rates throughout most of the year. As a result, expansion of the
economy slowed sharply during the first half of 1995 as higher interest rates
reduced the growth of consumer spending and business investment.
The economic recession was more severe in the State and its recovery started
later than in the nation as a whole due in part to the significant downsizing in
the banking and financial services industries, defense related industries and
other major corporations as well as an overbuilt commercial real estate market.
The State recovery, as measured by employment, began near the start of calendar
year 1993. During the calendar year 1993, employment began to increase, though
sporadically, and the unemployment rate declined. Moderate
- 127 -
<PAGE>
employment growth continued into the first half of 1994 but then came to a
virtual halt in the middle of the year. Employment growth once again picked up
in 1995, though as of September, 1995, unemployment in New York State was 6.8%.
New York State's fiscal year begins April 1 of each year. The 1995-1996 budget,
adopted over two months later than the April 1, 1995 deadline, attempted to make
important changes to the State's fiscal policies. For the first time in 50
years, the State's budget called for a reduction in year to year expenditures.
At the same time, the budget attempted to close a $4.8 billion gap identified at
the beginning of the budget process by, in part, significantly reducing
expenditures on certain services. Through the first six months of the 1995-1996
fiscal year, the State has made no significant revisions to the budget and still
projects a balanced budget for the year. However, with the projected slow down
of the national and State economies along with the sizes of the additional tax
reductions expected to be phased in over the next two years, the State's fiscal
outlook remains stressed.
On October 2, 1995, the State Comptroller released a report entitled
"Comptroller's Report on the Financial Condition of New York State 1995" in
which he identified several risks to the State Financial Plan and reaffirmed his
estimate that the State faces a potential imbalance in receipts and
disbursements of at least $2.7 billion for the State's 1996-1997 fiscal year and
at least $3.9 billion for the State's 1997-1998 fiscal year.
Uncertainties with regard to both the economy and potential decisions at the
federal level add further pressure on future budget balance in New York State.
Specific budget proposals being discussed at the federal level but not included
in the State's current economic forecast would, if enacted, have a
disproportionately negative impact on the longer-term outlook for the State's
economy as compared to other states.
To the extent that the State's municipalities, agencies and authorities require
State assistance to meet their financial obligations, the ability of the State
of New York to meet its own obligations as they become due or to obtain
additional financing could be adversely affected and any reduction in such
assistance and subsidies by the State could adversely affect the ability of such
issuers to meet their debt obligations. Any reduction in the actual or perceived
ability of any issuer of New York State Tax-Exempt securities to meet its
obligations (including a reduction in the rating of its outstanding securities)
would be likely to adversely affect the market value and marketability of its
obligations and could adversely affect the values of New York tax-exempt
securities as well.
A substantial principal amount of bonds issued by various municipalities,
agencies and authorities are either guaranteed by the State through
lease-purchase arrangements, other contractual obligations or moral obligation
provisions, which impose no immediate financial
- 128 -
<PAGE>
obligation on the State and require appropriations by the legislature before any
payments can be made. Failure of the State to appropriate necessary amounts or
to take other action to permit such municipalities, agencies or authorities to
meet their obligations could result in their default. If a default were to
occur, it would likely have a significant adverse impact on the market price of
obligations of the State and its municipalities, agencies and authorities. While
debt service is normally paid out of revenues generated by projects of such
issuers, the State has had to appropriate large amounts of funds in recent years
to enable such municipalities, agencies and authorities to meet their financial
obligations and in some cases, prevent default. Additional financial assistance
is expected to be required in the current and in the future fiscal years since
certain municipalities, agencies and authorities continue to experience
financial difficulties.
The combination of state and local taxes in the State has been among the highest
in the nation for many years. The burden of state and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not relocate within, the State. The current high level of taxes
limits the ability of New York State, New York City and other municipalities to
impose higher taxes in the event of future difficulties. In addition,
constitutional challenges to State laws have limited the amount of taxes which
political subdivisions can impose on real property, which may have an adverse
effect on the ability of issuers to meet obligations supported by such taxes. A
variety of additional court actions have been brought against the State and
certain agencies and municipalities relating to financing, amount of real estate
tax, use of tax revenues and other matters, which could adversely affect the
ability of the State or such agencies or municipalities to pay their
obligations.
The fiscal health of the State is closely related to the fiscal health of its
localities, particularly New York City, which has required and continues to
require significant financial assistance from the State. Both the State and the
City face potential economic problems which could seriously affect the ability
of both the State and the City to meet their respective financial obligations.
On July 10, 1995, Standard & Poor's lowered its rating on the City's general
obligation bonds to BBB+ from A-. The City faces continuing and recurring
problems of economic sluggishness compounded by reductions in State aid.
Moreover, large budget gaps projected over the next three years further indicate
the City's lack of financial flexibility. Despite Mayor Guilliani's efforts at
reform, many industry analysts expected further downgrades by the credit
agencies rating in the future.
Beginning in early 1975, the State, the City and other State entities faced
serious financial difficulties which jeopardized the credit standing and
impaired the borrowing abilities of such entities and contributed to higher
interest rates on, and lower market prices for, debt obligations issued by them.
A recurrence of such financial difficulties or failure of certain
- 129 -
<PAGE>
financial recovery programs could result in defaults or declines in the market
values of numerous New York obligations in which the Fund may invest.
Since 1990, Standard & Poor's and Moody's Investor Service, Inc. each lowered
its credit rating on New York State's general obligation bonds and certain other
obligations issued by New York State. Ratings of New York State's general
obligation bonds are among the lowest of all states. As a result, there are
special risks inherent in the Fund's concentration of investments in New York
tax-exempt securities.
The foregoing information as to certain New York risk factors is given to
investors in view of the Fund's policy of concentrating its investments in New
York Issuers. Such information constitutes only a brief summary and does not
purport to be a complete description. See Appendix A to this Statement of
Additional Information for a description of municipal securities ratings.
- 130 -
<PAGE>
DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS
The Financial Reserves Fund, the Institutional Money Market Fund, the Ohio
Municipal Money Market Fund, the Prime Obligations Fund, the Tax-Free Money
Market Fund, and the U.S. Government Obligations Fund (the "Money Market Funds")
use the amortized cost method to determine their net asset value.
USE OF THE AMORTIZED COST METHOD. The Money Market Funds' use of the amortized
cost method of valuing their instruments depends on their compliance with
certain conditions contained in Rule 2a-7 of the 1940 Act. Under Rule 2a-7, the
Trustees must establish procedures reasonably designed to stabilize the net
asset value per share ("NAV"), as computed for purposes of distribution and
redemption, at $1.00 per share, taking into account current market conditions
and the Money Market Funds' investment objectives.
The Money Market Funds have elected to use the amortized cost method of
valuation pursuant to Rule 2a-7. This involves valuing an instrument at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
a Money Market Fund would receive if it sold the instrument. The value of
securities in a Money Market Fund can be expected to vary inversely with changes
in prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Funds will maintain a dollar-weighted
average portfolio maturity appropriate to its objective of maintaining a stable
net asset value per share, provided that a Money Market Fund will not purchase
any security with a remaining maturity of more than 397 days (securities subject
to repurchase agreements may bear longer maturities) nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. Should the
disposition of a Money Market Fund's security result in a dollar weighted
average portfolio maturity of more than 90 days, the Money Market Fund will
invest its available cash to reduce the average maturity to 90 days or less as
soon as possible.
The Victory Portfolios' Trustees also have established procedures reasonably
designed, taking into account current market conditions and the Victory
Portfolios' investment objectives, to stabilize the net asset value per share of
the Money Market Funds for purposes of sales and redemptions at $1.00. These
procedures include review by the Trustees, at such intervals as they deem
appropriate, to determine the extent, if any, to which the net asset value per
share of the Money Market Funds calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds one-half of
one percent, Rule 2a-7 requires that the Board promptly consider what action, if
any, should be initiated. If the Trustees believe that the extent of any
deviation from a Money Market Fund's $1.00 amortized cost price per share may
result in material dilution or other unfair results to new or existing
investors, they will take such steps as they consider appropriate to eliminate
or reduce to the extent reasonably practicable any such dilution or unfair
results. These steps may include selling portfolio instruments prior to
maturity, shortening the dollar-weighted average portfolio maturity, withholding
or reducing dividends, reducing the number of a
<PAGE>
Money Market Fund's outstanding shares without monetary consideration, or using
a net asset value per share determined by using available market quotations.
MONITORING PROCEDURES
The Trustee's procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based upon
available indications of market value. The Trustees will decide what, if any,
steps should be taken if there is a difference of more than 0.5% between the two
values. The Trustees will take any steps they consider appropriate (such as
redemption in kind or shortening a Money Market Fund's average maturity) to
minimize any material dilution or other unfair results arising from differences
between the two methods of determining net asset value.
INVESTMENT RESTRICTIONS
Rule 2a-7 requires that the Money Market Funds limit their investments to
instruments that, in the opinion of the Trustees, present minimal credit risks
and have received the requisite rating from one or more NRSRO. The Money Market
Funds will limit the percentage allocation of their investments so as to comply
with Rule 2a-7, which generally limits to 5% of total assets the amount which
may be invested in the securities of any one issuer. If the instruments are not
rated, the Trustees must determine that they are of comparable quality.
The Money Market Funds may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations. This policy may,
from time to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset value
is affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares of
the Money Market Funds computed by dividing the annualized daily income on a
Money Market Fund's portfolio by the net asset value computed as above may tend
to be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of the
Money Market Funds computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.
VALUATION OF PORTFOLIOS SECURITIES FOR THE MONEY MARKET FUNDS
The net asset value of the Money Market Funds is determined and the shares of
each Money Market Fund are priced as of the Valuation Time(s) on each Business
Day. A "Business Day" is a day on which the New York Stock Exchange and the
Federal Reserve Bank of Cleveland is open for trading and any other day (other
than a day on which no shares of a Money Market Fund are tendered for redemption
and no order to purchase any shares is received) during which there is
sufficient trading in portfolio instruments that a Money Market Fund's net
assets value per share might be materially affected. The New York Stock
<PAGE>
Exchange will not open in observance of the following holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS AND THE
TAX-FREE BOND FUNDS
Investment securities held by the Fund For Income, the Government Mortgage Fund,
the Intermediate Income Fund, the Investment Quality Bond Fund, and the Limited
Term Income Fund (the "Taxable Bond Funds") and the National Municipal Bond
Fund, the New York Tax-Free Fund, and the Ohio Municipal Bond Fund (the
"Tax-Free Bond Funds") are valued on the basis of security valuations provided
by an independent pricing service, approved by the Trustees, which determines
value by using information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities. Specific investment securities which
are not priced by the approved pricing service will be valued according to
quotations obtained from dealers who are market makers in those securities.
Investment securities with less than 60 days to maturity when purchased are
valued at amortized cost which approximates market value. Investment securities
not having readily available market quotations will be priced at fair value
using a methodology approved in good faith by the Trustees.
VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS.
Each equity security held by a Fund is valued at its last sales price on the
exchange where the security is principally traded or, lacking any sales on a
particular day, the security is valued at the mean between the closing bid and
asked prices on that day. Exchange listed convertible debt securities are valued
at the mean between the last bid and asked prices obtained from broker-dealers
or a comparable alternative, such as Bloomberg or Telerate. Each security traded
in the over-the-counter market (but not including securities reported on the
NASDAQ National Market System) is valued at the mean between the last bid and
asked prices based upon quotes furnished by market makers for such securities.
Each security reported on the NASDAQ National Market System is valued at the
sales price on the valuation date or absent a last sales price, at the mean
between the closing bid and asked prices on that day. Non-convertible debt
securities are valued on the basis of prices provided by an independent pricing
service. Prices provided by the pricing service may be determined without
exclusive reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, developments related
to special securities, yield, quality, coupon rate, maturity, type of issue,
individual trading characteristics and other market data. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the supervision of the Victory Portfolios'
officers in a manner specifically authorized by the Board of Trustees.
Short-term obligations having 60 days or less to maturity are valued on the
basis of amortized cost. For purposes of determining net asset value per share,
futures and options contracts generally will be valued 15 minutes after the
close of trading of the NYSE.
<PAGE>
Generally, trading in foreign securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the close of the NYSE. The values of such securities used
in computing the net asset value of each Fund's shares are determined at such
times. Foreign currency exchange rates are also generally determined prior the
close of the NYSE. Occasionally, events affecting the values of such securities
and such exchange rates may occur between the times at which such values are
determined and the close of the NYSE which will not be reflected in the
computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by or under the
supervision of the Board of Trustees.
PERFORMANCE OF THE MONEY MARKET FUNDS
Performance for a class of shares of a Money Market Fund depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in Fund (class) expenses; and
o the relative amount of Fund (class) cash flow.
From time to time the Money Market Funds may advertise the performance of each
class compared to similar funds or portfolios using certain indices, reporting
services, and financial publications.
YIELD. The Money Market Funds calculate the yield for a class daily, based upon
the seven days ending on the day of the calculation, called the "base period."
This yield is computed by:
o determining the net change in the value of a hypothetical account with
a balance of one share at the beginning of the base period, with the
net change excluding capital changes but including the value of any
additional shares purchased with dividends earned from the original
one share and all dividends declared on the original and any purchased
shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with the Money Market Funds,
the yield for a class will be reduced for those shareholders paying those fees.
The seven-day yields of the Money Market Funds for the seven-day period ending
October 31, 1996 are listed in the following table.
<PAGE>
<TABLE>
<CAPTION>
================================================================================================
Yield for the Seven-Day Period Ending
Fund October 31, 1996
- ------------------------------------------------------------------------------------------------
<S> <C>
Financial Reserves Fund 4.79%
- ------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.21%
- ------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 4.97%
- ------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 2.97%
- ------------------------------------------------------------------------------------------------
Prime Obligations Fund 4.54%
- ------------------------------------------------------------------------------------------------
Tax-Free Money Market 2.99%
- ------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares Had not commenced operations as of
10/31/96
- ------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.79%
================================================================================================
</TABLE>
EFFECTIVE YIELD. The Money Market Funds' effective yields are computed by
compounding the unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
The effective yields of Money Market Funds for the seven-day period ending
October 31, 1996 are listed below.
<TABLE>
<CAPTION>
====================================================================================================
Effective Yield for the Seven-Day Period
Fund Ending October 31, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C>
Financial Reserves Fund 4.90%
- ----------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.35%
- ----------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 5.10%
- ----------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 3.01%
- ----------------------------------------------------------------------------------------------------
Prime Obligations Fund 4.64%
- ----------------------------------------------------------------------------------------------------
Tax-Free Money Market 3.03%
- ----------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares Had not commenced operations as of
10/31/96
- ----------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.90%
====================================================================================================
</TABLE>
TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
net capital gain distributions
<PAGE>
(if any), and any change in the net asset value per share of a Fund over the
period. Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in a Fund over a stated
period, and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative total return of 100% over
ten years would produce an average annual total return of 7.18%, which is the
steady annual rate of return that would equal 100% growth on an annually
compounded basis in ten years. While average annual total returns (or
"annualized total return") are a convenient means of comparing investment
alternatives, investors should realize that performance for a Fund is not
constant over time, but changes from year to year, and that average annual total
returns represent averaged figures as opposed to the actual year-to-year
performance of a Fund. When using total return and yield to compare a Fund with
other mutual funds, investors should take into consideration permitted portfolio
composition methods used to value portfolio securities and computing offering
price. The total returns of the Money Market Funds for the one year, five year
and ten year periods ending October 31, 1996 and the period since inception of
each Money Market Fund are as follows:
<TABLE>
<CAPTION>
=================================================================================================================================
For the Period Ending October 31, 1996
---------------------------------------------------------------------
One-Year Five- Ten- Period Since
Period Year Year Inception
Fund Period Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Reserves Fund 5.00% 4.10% 5.60% 6.27%
- ---------------------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.41% 4.34% 5.92% 6.65%
- ---------------------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 5.16% N/A N/A 4.53%
- ---------------------------------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 3.11% 2.73% 3.73% 3.81%
- ---------------------------------------------------------------------------------------------------------------------------------
Prime Obligations Fund 4.78% 4.08% N/A 5.68%
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market 3.04% 2.69% N/A 3.70%
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares Had not
commenced
operations
as of
10/31/96
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.96% 3.98% N/A 5.44%
=================================================================================================================================
</TABLE>
In addition to average annual total returns, the Money Market Funds, on behalf
of a class, may quote unaveraged or cumulative total returns reflecting the
total income over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return.
<PAGE>
Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. The cumulative total
returns of the Money Market Funds for the five year and ten year periods ending
October 31, 1996 and the period since inception are as follows:
<TABLE>
<CAPTION>
=====================================================================================================================
Cumulative Total Returns for the Periods
Ending October 31, 1996
=====================================================================================================================
Five-Year Ten-Year Period Since
Fund Period Period Inception
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial Reserves 22.25% 72.44% 128.52%
- ---------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor 23.67% 77.74% 143.52%
Shares
- ---------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select N/A N/A 6.45%
Shares
- ---------------------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 14.42% 44.22% 52.76%
- ---------------------------------------------------------------------------------------------------------------------
Prime Obligations Fund 22.13% N/A 73.40%
- ---------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market 14.19% N/A 34.73%
- ---------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 21.55% N/A 69.51%
=====================================================================================================================
</TABLE>
PERFORMANCE OF THE NON-MONEY MARKET FUNDS
From time to time, the "standardized yield," "distribution return," "dividend
yield," "average annual total return," "total return," and "total return at net
asset value" of an investment in each class of Non-Money Market Fund shares may
be advertised. An explanation of how yields and total returns are calculated for
each class and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in reviewing the
Non-Money Market Fund's performance. A Non-Money Market Fund's advertisement of
its performance must, under applicable Commission rules, include the average
annual total returns for each class of shares of a Non-Money Market Fund for the
1, 5, and 10-year period (or the life of the class, if less) as of the most
recently ended calendar quarter. This enables an investor to compare the
Non-Money Market Fund's performance to the performance of other funds for the
same periods. However, a number of factors should be considered before using
such information as a basis for comparison with other investments. Investments
in a Non-Money Market Fund are not insured; their yield and total return are not
guaranteed and normally will fluctuate on a daily basis. When redeemed, an
investor's shares may be worth more or less than their original cost. Yield and
total return for any given past period are not a prediction or representation by
The Victory Portfolios of future yields or rates of return on
<PAGE>
its shares. The yield and total returns of the Class A and Class B shares of the
Non-Money Market Funds are affected by portfolio quality, portfolio maturity,
the type of investments the Non-Money Market Fund holds, and operating expenses.
PERFORMANCE - CLASS B SHARES
Class B shares of the Funds were initially offered on the dates listed below.
The performance figures for Class B shares for periods prior to such dates
represent the performance for Class A shares of the Funds, which have been
restated to reflect the applicable CDSC payable at redemption within 6 years
from purchase. Class B Shares are subject to an asset based sales charge of
0.75% of average daily net assets per year and other class-specific expenses.
Had these fees and expenses been reflected, performances quoted would have been
lower.
==============================================================================
Date Class B Shares Were
Fund Initially Offered
- ------------------------------------------------------------------------------
Balanced Fund: Class B 3/1/96
- ------------------------------------------------------------------------------
Diversified Stock Fund: Class B 3/1/96
- ------------------------------------------------------------------------------
Government Bond Fund: Class B 9/26/94
- ------------------------------------------------------------------------------
International Growth Fund: Class B 3/1/96
- ------------------------------------------------------------------------------
National Municipal Bond Fund: Class B 9/26/94
- ------------------------------------------------------------------------------
New York Tax-Free Fund: Class B 9/26/94
- ------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B 3/1/96
- ------------------------------------------------------------------------------
Special Value Fund: Class B 3/1/96
==============================================================================
STANDARDIZED YIELD. The "yield" (referred to as "standardized yield") of the
Non-Money Market Funds for a given 30-day period for a class of shares is
calculated using the following formula set forth in rules adopted by the
Commission that apply to all funds that quote yields:
^6
Standardized Yield = 2 [(a-b +1 -1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense reimbursements).
c = the average daily number of shares of that class outstanding during
the 30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day of
the period, adjusted for undistributed net investment income.
<PAGE>
The standardized yield of a class of shares for a 30-day period may differ from
its yield for any other period. The Commission formula assumes that the
standardized yield for a 30-day period occurs at a constant rate for a six-month
period and is annualized at the end of the six-month period. This standardized
yield is not based on actual distributions paid by a Fund to shareholders in the
30-day period, but is a hypothetical yield based upon the net investment income
from a Fund's portfolio investments calculated for that period. The standardized
yield may differ from the "dividend yield" of that class, described below.
Additionally, because each class of shares of a Fund is subject to different
expenses, it is likely that the standardized yields of the share classes of the
Funds will differ. The yields on the Funds for the 30-day period ended October
31, 1996 were as follows.
================================================================================
Yield for the 30-Day Period
Fund Ended October 31, 1996
- --------------------------------------------------------------------------------
Balanced Fund: Class A 2.475934%
- --------------------------------------------------------------------------------
Balanced Fund: Class B 1.242256%
- --------------------------------------------------------------------------------
Diversified Stock Fund: Class A 1.030993%
- --------------------------------------------------------------------------------
Diversified Stock Fund: Class B (.034264)%
- --------------------------------------------------------------------------------
Fund for Income: Class A 6.821101%
- --------------------------------------------------------------------------------
Government Mortgage Fund: Class A 5.702492%
- --------------------------------------------------------------------------------
Growth Fund: Class A .495293%
- --------------------------------------------------------------------------------
Intermediate Income Fund: Class A 5.123653%
- --------------------------------------------------------------------------------
International Growth Fund: Class A 0
- --------------------------------------------------------------------------------
International Growth Fund: Class B 0
- --------------------------------------------------------------------------------
Investment Quality Bond Fund: Class A 5.415394%
- --------------------------------------------------------------------------------
Limited Term Income Fund: Class A 5.179452%
- --------------------------------------------------------------------------------
National Municipal Bond Fund: Class A 4.246924%
- --------------------------------------------------------------------------------
National Municipal Bond Fund: Class B 3.172017%
- --------------------------------------------------------------------------------
New York Tax-Free Fund: Class A 3.907110%
- --------------------------------------------------------------------------------
New York Tax-Free Fund: Class B 3.388541%
- --------------------------------------------------------------------------------
Ohio Municipal Bond Fund: Class A 4.322468%
- --------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class A .772088%
- --------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B (.541703)%
- --------------------------------------------------------------------------------
Special Growth Fund: Class A (.680886)%
- --------------------------------------------------------------------------------
Special Value Fund: Class A .686329%
- --------------------------------------------------------------------------------
Special Value Fund: Class B (.383830)%
- --------------------------------------------------------------------------------
Stock Index Fund: Class A 2.160275%
- --------------------------------------------------------------------------------
Value Fund: Class A 1.159815%
================================================================================
<PAGE>
DIVIDEND YIELD AND DISTRIBUTION RETURNS. From time to time a Non-Money Market
Fund may quote a "dividend yield" or a "distribution return" for each class.
Dividend yield is based on the Class A or Class B share dividends derived from
net investment income during a stated period. Distribution return includes
dividends derived from net investment income and from net realized capital gains
declared during a stated period. Under those calculations, the dividends and/or
distributions for that class declared during a stated period of one year or less
(for example, 30 days) are added together, and the sum is divided by the maximum
offering price per share of that class on the last day of the period. When the
result is annualized for a period of less than one year, the "dividend yield" is
calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Dividend Yield Dividends of the Class Number of days (accrual period)
of the Class -------------------------------------------------- + x 365
Max. Offering Price of the Class (last day of period)
</TABLE>
For Class A shares, the maximum offering price includes the maximum front-end
sales charge. For Class B shares, the maximum offering price is the net asset
value per share, without considering the effect of the CDSC.
From time to time similar yield or distribution return calculations may also be
made using the Class A net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields on Class A shares
at maximum offering price and net asset value, and distribution returns on Class
A shares at maximum offering price and net asset value as of October 31, 1996
were as follows:
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
For the One-Year Period Ended October 31, 1996
================================================================================================================================
Distribution Distribution
Dividend Dividend Return at Return
Yield Yield Maximum at Net Asset
Fund at Maximum at Net Asset Offering Value
Offering Price Value Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund: Class A 2.81% 2.95% 3.37% 3.54%
- --------------------------------------------------------------------------------------------------------------------------------
Diversified Stock Fund: Class A 1.17% 1.23% 7.77% 8.16%
- --------------------------------------------------------------------------------------------------------------------------------
Fund for Income: Class A 7.64% 7.80% 7.64% 7.80%
- --------------------------------------------------------------------------------------------------------------------------------
Government Mortgage Fund 6.01% 6.32% 6.01% 6.32%
- --------------------------------------------------------------------------------------------------------------------------------
Growth Fund: Class A 0.53% 0.56% 3.85% 4.04%
- --------------------------------------------------------------------------------------------------------------------------------
Intermediate Income Fund: Class A 5.54% 5.81% 5.54% 5.81%
- --------------------------------------------------------------------------------------------------------------------------------
International Growth Fund: Class A 0.12% 0.12% 0.12% 0.12%
- --------------------------------------------------------------------------------------------------------------------------------
Investment Quality Bond Fund 5.60% 5.88% 5.60% 5.88%
- --------------------------------------------------------------------------------------------------------------------------------
Limited Term Income Fund 6.13% 6.25% 6.13% 6.25%
- --------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund: 4.14% 4.35% 4.43% 4.65%
Class A
- --------------------------------------------------------------------------------------------------------------------------------
New York Tax-Free Fund: Class A 5.08% 5.33% 5.73% 5.39%
- --------------------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond Fund 4.48% 4.70% 4.48% 4.70%
- --------------------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class A 0.72% 0.75% 3.93% 4.13%
- --------------------------------------------------------------------------------------------------------------------------------
Special Growth Fund -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Special Value Fund: Class A 0.71% 0.75% 2.97% 3.12%
- --------------------------------------------------------------------------------------------------------------------------------
Stock Index Fund 1.82% 1.91% 3.27% 3.43%
- --------------------------------------------------------------------------------------------------------------------------------
Value Fund 1.37% 1.44% 3.63% 3.81%
================================================================================================================================
</TABLE>
The dividend yield on Class B shares with and without the CDSC, and distribution
returns on Class B shares with and without the CDSC as of October 31, 1996 were
as follows.
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
For the One-Year Period Ended October 31, 1996
================================================================================================================================
Dividend
Dividend Yield Distribution Distribution
Yield with without Returns with Returns
Fund CDSC CDSC CDSC without CDSC
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund: Class B 2.42 2.42 3.01 3.01
- --------------------------------------------------------------------------------------------------------------------------------
Diversified Stock Fund: Class B 1.06 1.06 8.01 8.01
- --------------------------------------------------------------------------------------------------------------------------------
International Growth Fund: Class B .02 .02 .02 .02
- --------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund:
Class B 3.53 3.53 3.83 3.83
- --------------------------------------------------------------------------------------------------------------------------------
New York Tax-Free Fund: Class B 4.54 4.54 4.60 4.60
- --------------------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B .48 .48 3.87 3.87
- --------------------------------------------------------------------------------------------------------------------------------
Special Value Fund: Class B .52 .52 2.90 2.90
================================================================================================================================
</TABLE>
TOTAL RETURNS. The "average annual total return" of a Fund, or of each class of
a Fund, is an average annual compounded rate of return for each year in a
specified number of years. It is the rate of return based on the change in value
of a hypothetical initial investment of $1,000 ("P" in the formula below) held
for a number of years ("n") to achieve an Ending Redeemable Value ("ERV"),
according to the following formula:
^ln
( ERV ) - 1 = Average Annual Total Return
-----
( P )
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns for the Funds, and for Class A shares of the Funds,
the current maximum sales charge (as a percentage of the offering price) is
deducted from the initial investment ("P") (unless the return is shown at net
asset value, as discussed below). For Class B shares, the payment of the
applicable CDSC (5.0% for the first year, 4.0% for second year, 3.0% for the
third and fourth years, 2.0% for the fifth year, 1.0% for the sixth year and
none thereafter) is applied to the investment result for the time period shown
(unless the total return is shown at net asset value, as described below). Total
returns also assume that all dividends and net capital gains distributions
during the period are reinvested to buy additional shares at net asset value per
share, and that the investment is redeemed at the end of the period. The average
annual total return and cumulative total return on Fund shares, and Class A
shares, for the period from the commencement of operations to October 31, 1996
(life of fund) at maximum offering price is shown on the table that follows. The
average annual total return for the one and five year periods (when applicable)
ended October 31, 1996 also are shown on the table that follows.
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Average
Annual Average Annual
Total Cumulative Average Annual Total Return at
Return for Total Return Total Return at Maximum
the Life of for the Life Maximum Offering Price*
the Fund at of the Fund at Offering Price* for the Five-
Maximum Maximum for the One-Year Year Period
Maximum Offering Offering Period Ended Ended October
Fund Sales Charge Price* Price* October 31, 1996 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund: 4.75% 4.86 31.29 10.74 N/A
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
Balanced Fund: 5.00% 10.71 34.22 11.73 N/A
Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Diversified 4.75% 13.69 146.78 21.11 15.36
Stock Fund:
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
Diversified 5.00% 14.42 158.01 22.61 16.28
Stock Fund:
Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Fund for Income 2.00% 8.19 111.31 4.25 5.86
- -----------------------------------------------------------------------------------------------------------------------------------
Government 5.00% 7.51 59.69 0.54 5.89
Mortgage Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Fund 5.00% 14.63 48.90 19.65 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Intermediate 4.75% 2.83 8.42 (0.38) N/A
Income Fund
- -----------------------------------------------------------------------------------------------------------------------------------
International 4.75% 5.44 40.78 0.66 7.46
Growth Fund:
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
International 5.00% 6.12 46.77 0.89 8.21
Growth Fund:
Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Investment 4.75% 3.27 9.77 (0.35) N/A
Quality Bond
Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Limited Term 2.00% 6.21 52.81 2.81 4.97
Income Fund
- -----------------------------------------------------------------------------------------------------------------------------------
National 4.75% 3.40 9.61 0.82 N/A
Municipal Bond
Fund: Class A
- -----------------------------------------------------------------------------------------------------------------------------------
National 5.00% 3.57 10.11 0.85) N/A
Municipal Bond
Fund: Class B
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Average
Annual Average Annual
Total Cumulative Average Annual Total Return at
Return for Total Return Total Return at Maximum
the Life of for the Life Maximum Offering Price*
the Fund at of the Fund at Offering Price* for the Five-
Maximum Maximum for the One-Year Year Period
Maximum Offering Offering Period Ended Ended October
Fund Sales Charge Price* Price* October 31, 1996 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York Tax- 4.75% 6.18 41.01 (0.43 5.62
Free Fund:
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
New York Tax- 5.00% 6.65 44.60 (0.24) 6.15
Free Fund:
Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Ohio Municipal 4.75% 7.06 55.45 0.88 6.50
Bond Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Ohio Regional 4.75% 11.79 119.11 12.23 13.36
Stock Fund:
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
Ohio Regional 5.00% 12.46 128.42 12.95 14.20
Stock Fund:
Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Special Growth 4.75% 11.25 34.89 14.03 N/A
Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Special Value 4.75% 13.21 43.57 14.84 N/A
Fund: Class A
- -----------------------------------------------------------------------------------------------------------------------------------
Special Value 4.75% 14.08 46.75 15.80 N/A
Fund: Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Stock Index 4.75% 15.74 53.14 17.56 N/A
Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Value Fund 4.75% 14.90 49.92 18.76 N/A
===================================================================================================================================
</TABLE>
*For Class B Shares, the calculations are made with the CDSC.
From time to time the Non-Money Market Funds also may quote an "average annual
total return at net asset value" or a cumulative "total return at net asset
value." It is based on the difference in net asset value per share at the
beginning and the end of the period for a hypothetical investment in that class
of shares (without considering front-end or contingent sales charges) and takes
into consideration the reinvestment of dividends and capital gains
distributions. The average annual total return and cumulative total return on
Fund shares, and Class A shares of the Funds, at net asset value for the period
from the commencement of operations to October 31, 1996 (life of fund) are shown
in the table that follows. The average annual total return and cumulative total
return on Class B shares without the CDSC
<PAGE>
for the period from the commencement of operations to October 31, 1996 are also
shown below.
<TABLE>
<CAPTION>
=============================================================================================================================
For period from commencement of
operations to October 31, 1996
Average Annual
FUND Total Return at Net
Asset Value* For
Average Annual Cumulative Total Year Ended
Total Return at Net Return at Net Asset October 31, 996
Asset Value* Value*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund:
Class A 11.72% 37.86% 16.27%
- -----------------------------------------------------------------------------------------------------------------------------
Balanced Fund:
Class B 11.56% 37.22% 15.73%
- -----------------------------------------------------------------------------------------------------------------------------
Diversified Stock
Fund: Class A 14.48% 159.12% 27.16%
- -----------------------------------------------------------------------------------------------------------------------------
Diversified Stock
Fund: Class B 14.42% 158.01% 26.61%
- -----------------------------------------------------------------------------------------------------------------------------
Fund for Income 8.42% 115.34% 6.35%
- -----------------------------------------------------------------------------------------------------------------------------
Government
Mortgage Fund 8.33% 67.67% 5.54%
- -----------------------------------------------------------------------------------------------------------------------------
Growth Fund 16.57% 56.35% 25.66%
- -----------------------------------------------------------------------------------------------------------------------------
Intermediate Income
Fund 4.50% 13.84% 4.56%
- -----------------------------------------------------------------------------------------------------------------------------
International
Growth Fund:
Class A 6.23% 47.82% 5.65%
- -----------------------------------------------------------------------------------------------------------------------------
International
Growth Fund:
Class B 6.12% 46.77% 4.89%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
For period from commencement of
operations to October 31, 1996
Average Annual
FUND Total Return at Net
Asset Value* For
Average Annual Cumulative Total Year Ended
Total Return at Net Return at Net Asset October 31, 996
Asset Value* Value*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Quality
Bond Fund 5.03% 15.26% 4.65%
- -----------------------------------------------------------------------------------------------------------------------------
Limited Term
Income Fund 6.51% 55.87% 4.94%
- -----------------------------------------------------------------------------------------------------------------------------
National Municipal
Bond Fund:
Class A 5.25% 15.09% 5.83%
- -----------------------------------------------------------------------------------------------------------------------------
National Municipal
Bond Fund: Class
B 4.59% 13.11% 4.85%
- -----------------------------------------------------------------------------------------------------------------------------
New York Tax-Free
Fund: Class A 7.09% 48.06% 4.53%
- -----------------------------------------------------------------------------------------------------------------------------
New York Tax-Free
Fund: Class B 6.78% 45.60% 3.72%
- -----------------------------------------------------------------------------------------------------------------------------
Ohio Municipal
Bond Fund 7.88% 63.22% 5.87%
- -----------------------------------------------------------------------------------------------------------------------------
Ohio Regional
Stock Fund: Class
A 12.57% 130.07% 17.79%
- -----------------------------------------------------------------------------------------------------------------------------
Ohio Regional
Stock Fund: Class
B 12.46% 128.42% 16.95%
- -----------------------------------------------------------------------------------------------------------------------------
Special Growth
Fund 13.19% 41.63% 19.73%
- -----------------------------------------------------------------------------------------------------------------------------
Special Value Fund:
Class A 15.12% 50.75% 20.60%
- -----------------------------------------------------------------------------------------------------------------------------
Special Value Fund:
Class B 14.87% 49.75% 19.80%
- -----------------------------------------------------------------------------------------------------------------------------
Stock Index Fund 17.70% 60.80% 23.38%
- -----------------------------------------------------------------------------------------------------------------------------
Value Fund 16.84% 57.41% 24.66%
=============================================================================================================================
</TABLE>
* For Class B shares, calculations are made without the CDSC
<PAGE>
OTHER PERFORMANCE COMPARISONS.
From time to time a Fund may publish the ranking of its performance or the
performance of its Class A or Class B shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Non-Money Market Funds, and ranks the performance of the Funds and their classes
against (1) all other funds in similar categories, for both equity and fixed
income funds. The Lipper performance rankings are based on total return that
includes the reinvestment of capital gains distributions and income dividends
but does not take sales charges or taxes into consideration.
From time to time a Fund may publish the ranking of its performance or
performance of its Class A or Class B shares by Morningstar, Inc., an
independent mutual fund monitoring service that ranks mutual funds, including
the Non-Money Market Funds, in broad investment categories (domestic equity,
international equity taxable bond, municipal bond or other) monthly, based upon
each fund's three, five, and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted for
fees and sales loads. There are five ranking categories with a corresponding
number of stars: highest (5), above average (4), neutral (3), below average (2)
and lowest (1). Ten percent of the funds, series or classes in an investment
category receive five stars, 22.5% receive four stars, 35% receive three stars,
22.5% receive two stars, and the bottom 10% receive one star.
The total return on an investment made in a Fund or in Class A or Class B shares
of a Fund may be compared with the performance for the same period of one or
more of the following indices: the Consumer Price Index, the Salomon Brothers
World Government Bond Index, the Standard & Poor's 500 Index, the Shearson
Lehman Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the
J.P. Morgan Government Bond Index. Other indices may be used from time to time.
The Consumer Price Index generally is considered to be a measure of inflation.
The Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgage-backed securities. The J.P. Morgan Government Bond Index
generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities that
do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not applicable to indices.
From time to time, the yields and the total returns of the Funds or Class A or
Class B shares of a Non-Money Market Fund may be quoted in and compared to other
mutual funds with similar investment objectives in advertisements, shareholder
reports or other communications to shareholders. A Funds may also include
calculations in such communications that
<PAGE>
describe hypothetical investment results. (Such performance examples are based
on an express set of assumptions and are not indicative of the performance of
any Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund's
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of a Fund investment would increase
more quickly than if dividends or other distributions had been paid in cash. A
Fund may also include discussions or illustrations of the potential investment
goals of a prospective investor (including but not limited to tax and/or
retirement planning), investment management techniques, policies or investment
suitability of a Fund, economic conditions, legislative developments (including
pending legislation), the effects of inflation and historical performance of
various asset classes, including but not limited to stocks, bonds and Treasury
bills. From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund, as well as the views of the
investment adviser as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund.) A Fund may also
include in advertisements, charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stock, bonds, and Treasury bills, as compared to an
investment in shares of a Fund, as well as charts or graphs which illustrate
strategies such as dollar cost averaging, and comparisons of hypothetical yields
of investment in tax-exempt versus taxable investments. In addition,
advertisements or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, a Fund may reprint articles (or excerpts)
written regarding a Fund and provide them to prospective shareholders.
Performance information with respect to the Funds is generally available by
calling 1-800-KEY-FUND.
Investors may also judge, and a Fund may at times advertise, the performance of
a Fund or of Class A or Class B shares of a Fund by comparing it to the
performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies, which performance may be contained in
various unmanaged mutual fund or market indices or rankings such as those
prepared by Dow Jones & Co., Inc., Standard & Poor's Corporation, Lehman
Brothers, Merrill Lynch, and Salomon Brothers, and in publications issued by
Lipper Analytical Services, Inc. and in the following publications: IBC's Money
Fund Reports, Value Line Mutual Fund Survey, Morningstar, CDA/Wiesenberger,
Money Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Fortune, Institutional Investor, Ibbotson
Associates, and U.S.A. Today. In addition to yield information, general
information about a Fund that appears in a publication such as those mentioned
above may also be quoted or reproduced in advertisements or in reports to
shareholders.
<PAGE>
Advertisements and sales literature may include discussions of specifics of a
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis. Advertisements may also
include descriptive information about the investment adviser, including, but not
limited to, its status within the industry, other services and products it makes
available, total assets under management, and its investment philosophy.
When comparing yield, total return, and investment risk of an investment in
shares of a Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an investment
in shares of a Fund. For example, certificates of deposit may have fixed rates
of return and may be insured as to principal and interest by the FDIC, while a
Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the U.S.
Government. Money market mutual funds may seek to maintain a fixed price per
share.
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION
The New York Stock Exchange ("NYSE") holiday closing schedule indicated in the
SAI under "Valuation of Portfolio Securities for the Money Market Funds" is
subject to change.
When the NYSE or the Federal Reserve Board of Cleveland is closed, or when
trading is restricted for any reason other than its customary weekend or holiday
closings, or under emergency circumstances as determined by the Commission to
warrant such action, the Funds will determine their net asset value at Valuation
Time. A Fund's net asset value may be affected to the extent that its securities
are traded on days that are not Business Days.
The Victory Portfolios has elected, pursuant to Rule 18f-1 under the 1940 Act,
to redeem shares of each Fund solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder. The remaining portion of the redemption may be made in securities
or other property, valued for this purpose as they are valued in computing the
net asset value of each class of the Fund. Shareholders receiving securities or
other property on redemption may realize a gain or loss for tax purposes and may
incur additional costs as well as the associated inconveniences of holding
and/or disposing of such securities or other property.
Pursuant to Rule 11a-3 under the 1940 Act, the Funds are required to give
shareholders at least 60 days' notice prior to terminating or modifying a Fund's
exchange privilege. The 60- day notification requirement may, however, be waived
if (1) the only effect of a modification would be to reduce or eliminate an
administrative fee, redemption fee, or deferred sales charge ordinarily payable
at the time of exchange or (2) a Fund temporarily suspends the offering of
shares as permitted under the 1940 Act or by the Commission or because it is
unable to invest amounts effectively in accordance with its investment objective
and policies.
<PAGE>
The Funds reserve the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in the Adviser's judgment,
a Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
PURCHASING SHARES.
ALTERNATIVE SALES ARRANGEMENTS - CLASS A AND CLASS B SHARES. The alternative
sales arrangements permit an investor to choose the method of purchasing shares
that is more beneficial depending on the amount of the purchase, the length of
time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B shares are the same
as those of the initial sales charge with respect to Class A shares. Any
salesperson or other person entitled to receive compensation for selling Fund
shares may receive different compensation with respect to one class of shares on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of a Fund instead.
The two classes of shares each represent an interest in the same portfolio
investments of a Fund. However, each class has different shareholder privileges
and features. The net income attributable to Class B shares and the dividends
payable on Class B shares will be reduced by incremental expenses borne solely
by that class, including the asset-based sales charge to which Class B shares
are subject.
CLASS B CONVERSION FEATURE. Ninety-six months after an investor's purchase order
for Class B shares is accepted, such "Matured Class B Shares" automatically will
convert to Class A shares, on the basis of the relative net asset value of the
two classes, without the imposition of any sales load or other charge. Each time
any Matured Class B shares convert to Class A shares, any Class B shares
acquired by the reinvestment of dividends or distributions on such Matured Class
B shares that are still held will also convert to Class A shares, on the same
basis. The conversion feature is intended to relieve holders of Matured Class B
shares of the asset-based sales charge under the Class B Distribution Plan after
such shares have been outstanding long enough that the Distributor may have been
compensated for distribution expenses related to such shares.
The conversion of Matured Class B shares to Class A shares is subject to the
continuing availability of a private letter ruling from the Internal Revenue
Service, or an opinion of counsel or tax adviser, to the effect that the
conversion of Matured Class B shares does not constitute a taxable event for the
holder under Federal income tax law. If such a revenue ruling or opinion is no
longer available, the automatic conversion feature may be suspended, in which
event no further conversion of Matured Class B shares would occur while such
suspension remained in effect. Although Matured Class B shares could then be
exchanged for Class A shares on the basis of relative net asset value of the two
classes, without the imposition of a sales charge or fee, such exchange could
constitute a taxable event for the holder, and absent such exchange, Class B
shares might continue to be subject to the asset-based sales charge for longer
than six years.
<PAGE>
The methodology for calculating the net asset value, dividends and distributions
of the Fund's Class A and Class B shares recognizes two types of expenses.
General expenses that do not pertain specifically to either class are allocated
to the shares of each class, based upon the percentage that the net assets of
such class bears to a Fund's total net assets, and then pro rata to each
outstanding share within a given class. Such general expenses include (1)
management fees, (2) legal, bookkeeping and audit fees, (3) printing and mailing
costs of shareholder reports, prospectuses, statements of additional information
and other materials for current shareholders, (4) fees to the Trustees who are
not affiliated with Key Advisers, (5) custodian expenses, (6) share issuance
costs, (7) organization and start-up costs, (8) interest, taxes and brokerage
commissions, and (9) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (1) Rule 12b- 1
distribution fees and shareholder servicing fees, (2) incremental transfer and
shareholder servicing agent fees and expenses, (3) registration fees, and (4)
shareholder meeting expenses, to the extent that such expenses pertain to a
specific class rather than to a Fund as a whole.
REDUCED SALES CHARGE. Reduced sales charges are available for purchases of
$50,000 or more of Class A shares of a Fund alone or in combination with
purchases of other Class A shares of the Victory Portfolios. To obtain the
reduction of the sales charge, you or your Investment Professional must notify
the Transfer Agent at the time of purchase whenever a quantity discount is
applicable to your purchase.
In addition to investing at one time in any combination of Class A shares of the
Victory Portfolios in an amount entitling you to a reduced sales charge, you may
qualify for a reduction in the sales charge under the following programs:
COMBINED PURCHASES. When you invest in Class A shares of the Victory Portfolios
for several accounts at the same time, you may combine these investments into a
single transaction if purchased through one Investment Professional, and if the
total is $50,000 or more. The following may qualify for this privilege: an
individual, or "company" as defined in Section 2(a)(8) of the 1940 Act; an
individual, spouse, and their children under age 21 purchasing for his, her, or
their own account; a trustee, administrator or other fiduciary purchasing for a
single trust estate or single fiduciary account or for a single or a
parent-subsidiary group of "employee benefit plans" (as defined in Section 3(3)
of ERISA); and tax-exempt organizations under Section 501(c)(3) of the Internal
Revenue Code.
RIGHTS OF ACCUMULATION. "Rights of Accumulation" permit reduced sales charges on
future purchases of Class A shares after you have reached a new breakpoint. You
can add the value of existing Victory Portfolios Class A shares held by you,
your spouse, and your children under age 21, determined at the previous day's
net asset value at the close of business, to the amount of your new purchase
valued at the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of shares of a
Fund alone or in combination with Class A shares of certain other Victory
Portfolios within a 13-month
<PAGE>
period, you may obtain shares of the portfolios at the same reduced sales charge
as though the total quantity were invested in one lump sum, by filing a
non-binding Letter of Intent (the "Letter") within 90 days of the start of the
purchases. Each investment you make after signing the Letter will be entitled to
the sales charge applicable to the total investment indicated in the Letter. For
example, a $2,500 purchase toward a $60,000 Letter would receive the same
reduced sales charge as if the $60,000 had been invested at one time. To ensure
that the reduced price will be received on future purchases, you or your
Investment Professional must inform the Transfer Agent that the Letter is in
effect each time shares are purchased. Neither income dividends nor capital gain
distributions taken in additional shares will apply toward the completion of the
Letter.
You are not obligated to complete the additional purchases contemplated by a
Letter. If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
If you purchase more than the amount specified in the Letter and qualify for a
further sales charge reduction, the sales charge will be adjusted to reflect
your total purchase at the end of 13 months. Surplus funds will be applied to
the purchase of additional shares at the then current offering price applicable
to the total purchase.
EXCHANGING SHARES.
Shares of any Victory Money Market Fund may be exchanged for shares of any of
the Victory Portfolios, including Class A and Class B shares of the Victory
Portfolios. Exchanges for Class A shares of the Victory Portfolios will be
subject to payment of a sales charge.
Shares of a Fund may be exchanged for the same class of shares of any other fund
of the Victory Portfolios. For example, an investor can exchange Class B shares
of a Fund only for Class B shares of another Fund. At present, not all Funds of
the Victory Portfolios offer multiple classes of shares. If a Fund has only one
class of shares that does not have a class designation, that class is "Class A"
for exchange purposes. When Class B shares are redeemed to effect an exchange,
the priorities described in the Prospectuses for the imposition of the Class B
CDSC will be followed in determining the order in which the shares are
exchanged. Shareholders should take into account the effect of any exchange on
the applicability and rate of any CDSC that might be imposed in the subsequent
redemption of remaining shares. Shareholders owning shares of both classes must
specify whether they intend to exchange Class A or Class B shares. If you do not
make a selection, your exchange will be made in Class A shares.
<PAGE>
REDEEMING SHARES.
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of (1) Class A shares, or (2)
Class B shares that were subject to the Class B CDSC when redeemed, in Class A
shares of a Fund or any of the other Victory Portfolios into which shares of the
Fund are exchangeable as described below, at the net asset value next computed
after receipt by the Transfer Agent of the reinvestment order. No service charge
is currently made for reinvestment in shares of the Funds. The shareholder must
ask the Distributor for such privilege at the time of reinvestment. Any capital
gain that was realized when the shares were redeemed is taxable, and
reinvestment will not alter any capital gains tax payable on that gain. If there
has been a capital loss on the redemption, some or all of the loss may not be
tax deductible, depending on the timing and amount of the reinvestment. Under
the Code, if the redemption proceeds of Fund shares on which a sales charge was
paid are reinvested in shares of a Fund or another of the Victory Portfolios
within 90 days of payment of the sales charge, the shareholder's basis in the
shares of the Fund that were redeemed may not include the amount of the sales
charge paid. That would reduce the loss or increase the gain recognized from
redemption. The Funds may amend, suspend, or cease offering this reinvestment
privilege at any time as to shares redeemed after the date of such amendment,
suspension, or cessation. The reinstatement must be into an account bearing the
same registration.
DIVIDENDS AND DISTRIBUTIONS
The Funds distribute substantially all of their net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent required for the Funds to qualify for favorable
federal tax treatment. The Funds ordinarily declare and pay dividends,
separately for Class A and Class B shares, from their net investment income as
follows.
<TABLE>
<CAPTION>
Income Capital
Fund Dividends Gains
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balanced Fund Declared and paid Monthly Declared and paid Annually
Diversified Stock Fund Declared and paid Quarterly Declared and paid Annually
Fund for Income Declared and paid Monthly Declared and paid Annually
Government Mortgage Fund Declared and paid Monthly Declared and paid Annually
Growth Fund Declared and paid Quarterly Declared and paid Annually
Intermediate Income Fund Declared and paid Monthly Declared and paid Annually
International Growth Fund Declared and paid Quarterly Declared and paid Annually
Investment Quality Bond Declared and paid Monthly Declared and paid Annually
Fund
Lakefront Fund Declared and paid Quarterly Declared and paid Annually
Limited Term Income Fund Declared and paid Monthly Declared and paid Annually
Money Market Funds Declared Daily and paid Declared and paid Annually
Monthly
National Municipal Bond Declared and paid Monthly Declared and paid Annually
Fund
New York Tax-Free Fund Declared and paid Monthly Declared and paid Annually
Ohio Municipal Bond Fund Declared and paid Monthly Declared and paid Annually
Ohio Regional Stock Fund Declared and paid Quarterly Declared and paid Annually
Real Estate Investment Fund Declared and paid Quarterly Declared and paid Annually
Special Growth Fund Declared and paid Quarterly Declared and paid Annually
Special Value Fund Declared and paid Quarterly Declared and paid Annually
Stock Index Fund Declared and paid Quarterly Declared and paid Annually
Value Fund Declared and paid Quarterly Declared and paid Annually
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of a class's distributions may vary from time to time depending on
market conditions, the composition of a Fund's portfolio, and expenses borne by
a Fund or borne separately by a class, as described in "Alternative Sales
Arrangements - Class A and Class B," above. Dividends are calculated in the same
manner, at the same time and on the same day for shares of each class. However,
dividends on Class B shares are expected to be lower as a result of the
asset-based sales charge on Class B shares, and Class B dividends will also
differ in amount as a consequence of any difference in net asset value between
Class A and Class B shares.
For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount earned, including both original issue and
market discount, on discount paper accrued ratably to the date of maturity.
Expenses, including the compensation payable to the Adviser, are accrued each
day. The expenses and liabilities of a Fund shall include those appropriately
allocable to the Fund as well as a share of the general expenses and liabilities
of the Victory Portfolios in proportion to the Fund's share of the total net
assets of the Victory Portfolios.
TAXES
Information set forth in the Prospectuses and this SAI that relates to federal
taxation is only a summary of certain key federal tax considerations generally
affecting purchasers of shares of the Funds. The following is only a summary of
certain additional tax considerations
<PAGE>
generally affecting each Fund and its shareholders that are not described in the
Prospectus. No attempt has been made to present a complete explanation of the
federal tax treatment of the Funds or the implications to shareholders, and this
discussion is not intended as a substitute for careful tax planning.
Accordingly, potential purchasers of shares of the Funds are urged to consult
their tax advisers with specific reference to their own tax circumstances. In
addition, the tax discussion in the Prospectus and this SAI is based on tax law
in effect on the date of the Prospectuses and this SAI; such laws and
regulations may be changed by legislative, judicial, or administrative action,
sometimes with retroactive effect.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a Fund is not
subject to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends, and other taxable ordinary income, net of expenses)
and capital gain net income (i.e., the excess of capital gains over capital
losses) that it distributes to shareholders, provided that it distributes at
least 90% of its investment company taxable income (i.e., net investment income
and the excess of net short-term capital gain over net long-term capital loss)
and at least 90% of its tax-exempt income (net of expenses allocable thereto)
for the taxable year (the "Distribution Requirement"), and satisfies certain
other requirements of the Code that are described below. Distributions by a Fund
made during the taxable year or, under specified circumstances, within twelve
months after the close of the taxable year, will be considered distributions of
income and gains for the taxable year and will therefore satisfy the
Distribution Requirement.
If a Fund has a net capital loss (i.e., an excess of capital losses over capital
gains) for any year, the amount thereof may be carried forward up to eight years
and treated as a short-term capital loss which can be used to offset capital
gains in such future years. As of October 31, 1996, the U.S. Government
Obligations Fund had capital loss carryforwards of approximately $94,000, which
expire in 2002; the Financial Reserves Fund had capital loss carryforwards of
approximately $24,000 which expire in 2001; the Limited Term Income Fund had
capital loss carryforwards of approximately $1,642,000 and $553,000 which expire
in 2002 and 2003, respectively; the Intermediate Income Fund had capital loss
carryforwards of approximately $2,498,000, $1,386,000 and $869,000 which expire
in 2001, 2002 and 2003, respectively; the Investment Quality Bond Fund had
capital loss carryforwards of approximately $9,100,000 which expire in 2002; the
Government Mortgage Fund had capital loss carryforwards of approximately
$1,977,000 which expire in 2002; and the Fund for Income had capital loss
carryforwards of approximately $806,000, $588,000 and $328,000 which expire in
2001, 2002 and 2003, respectively. Under Code Sections 382 and 383, if a Fund
has an "ownership change," then the Fund's use of its capital loss carryforwards
in any year following the ownership change will be limited to an amount equal to
the net asset value of the Fund immediately prior to the ownership change
multiplied by the long-term tax-exempt rate (which is published monthly by the
Internal Revenue Service (the "IRS")) in effect for the month in which the
ownership change occurs (the rate for November, 1996 is 5.60%). The Funds will
use their best efforts to avoid having an ownership change. However, because of
circumstances which may be beyond the control or knowledge of a Fund, there can
be no assurance that a Fund will not have, or has not already had, an
<PAGE>
ownership change. If a Fund has or has had an ownership change, then any capital
gain net income for any year following the ownership change in excess of the
annual limitation on the capital loss carryforwards will have to be distributed
by the Fund and will be taxable to shareholders as described under "Fund
Distributions" below.
In addition to satisfying the Distribution Requirement, a regulated investment
company must: (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies (the "Income Requirement"); and (2) derive less than 30% of its gross
income (exclusive of certain gains on designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from the sale
or other disposition of stock, securities, or foreign currencies (or options,
futures, or forward contracts thereon) held for less than three months (the
"Short-Short Gain Test"). For purposes of these calculations, gross income
includes tax-exempt income. However, foreign currency gains, including those
derived from options, futures, and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the regulated
investment company's investments in stock or securities (or options or futures
thereon). Because of the Short-Short Gain Test, a Fund may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent a Fund from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by a Fund at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income that is attributable
to realized market appreciation will be treated as gross income from such sale
or other disposition for this purpose.
In general, gain or loss recognized by a Fund on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of a
debt obligation (including municipal obligations) purchased by a Fund at a
market discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market discount
which accrued while the Fund held the debt obligation. In addition, under the
rules of Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a foreign currency
forward contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless a Fund elects otherwise), generally
will be treated as ordinary income or loss.
The Code also treats as ordinary income a portion of the gain recognized in a
transaction where substantially all of the return realized is attributable to
the time value of a Fund's net
<PAGE>
investment in the transaction and: (1) the transaction consists of the
acquisition of property by the Fund and a contemporaneous contract to sell
substantially identical property in the future; (2) the transaction is a
straddle within the meaning of Section 1092 of the Code; (3) the transaction is
one that was marketed or sold to the Fund on the basis that it would have the
economic characteristics of a loan but the interest-like return would be taxed
as capital gain; or (4) the transaction is described as a conversion transaction
in the Treasury Regulations. The amount of such gain that is treated as ordinary
income generally will not exceed the amount of the interest that would have
accrued on the net investment for the relevant period at a yield equal to 120%
of the applicable federal rate, reduced by the sum of: (1) prior inclusions of
ordinary income items from the conversion transaction and (2) the capitalized
interest on acquisition indebtedness under Code Section 263(g). However, a Fund
has a built-in loss with respect to a position that becomes a part of a
conversion transaction, the character of such loss will be preserved upon a
subsequent disposition or termination of the position. No authority exists that
indicates that the character of the income treated as ordinary under this rule
will not pass through to the Funds' shareholders.
In general, for purposes of determining whether capital gain or loss recognized
by a Fund on the disposition of an asset is long-term or short-term, the holding
period of the asset may be affected (as applicable, depending on the type of the
Fund involved) if (1) the asset is used to close a "short sale" (which includes
for certain purposes the acquisition of a put option) or is substantially
identical to another asset so used, (2) the asset is otherwise held by the Fund
as part of a "straddle" (which term generally excludes a situation where the
asset is stock and Fund grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto), or (3) the
asset is stock and the Fund grants an in-the-money qualified covered call option
with respect thereto. However, for purposes of the Short-Short Gain Test, the
holding period of the asset disposed of may be reduced only in the case of
clause (1) above. In addition, a Fund may be required to defer the recognition
of a loss on the disposition of an asset held as part of a straddle to the
extent of any unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or loss recognized by
a Fund from a closing transaction with respect to, an option written by the Fund
will be treated as a short-term capital gain or loss. For purposes of the
Short-Short Gain Test, the holding period of an option written by a Fund will
commence on the date it is written and end on the date it lapses or the date a
closing transaction is entered into. Accordingly, a Fund may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
Transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
Contracts." Section 1256 Contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such Section 1256 Contracts have not
terminated (by delivery, exercise, entering into a closing transaction, or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 Contracts is taken into account for
the taxable year together with
<PAGE>
any other gain or loss that was recognized previously upon the termination of
Section 1256 Contracts during that taxable year. Any capital gain or loss for
the taxable year with respect to Section 1256 Contracts (including any capital
gain or loss arising as a consequence of the year-end deemed sale of such
Section 1256 Contracts) generally is treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. A Fund, however, may elect not to
have this special tax treatment apply to Section 1256 Contracts that are part of
a "mixed straddle" with other investments of the Fund that are not Section 1256
Contracts. The IRS has held in several private rulings (and Treasury Regulations
now provide) that deemed gains arising from Section 1256 contracts will be
treated for purposes of the Short-Short Gain Test as being derived from
securities held for not less than three months if the gains arise as a result of
a constructive sale under Code Section 1256.
A Fund may enter into notional principal contracts, including interest rate
swaps, caps, floors, and collars. Treasury Regulations provide, in general, that
the net income or net deduction from a notional principal contract for a taxable
year is included in or deducted from gross income for that taxable year. The net
income or deduction from a notional principal contract for a taxable year equals
the total of all of the periodic payments (generally, payments that are payable
or receivable at fixed periodic intervals of one year or less during the entire
term of the contract) that are recognized from that contract for the taxable
year and all of the non-periodic payments (including premiums for caps, floors,
and collars) that are recognized from that contract for the taxable year. No
portion of a payment by a party to a notional principal contract is recognized
prior to the first year to which any portion of a payment by the counterparty
relates. A periodic payment is recognized ratably over the period to which it
relates. In general, a non-periodic payment must be recognized over the term of
the notional principal contract in a manner that reflects the economic substance
of the contract. A non-periodic payment that relates to an interest rate swap,
cap, floor, or collar is recognized over the term of the contract by allocating
it in accordance with the values of a series of cash-settled forward or option
contracts that reflect the specified index and notional principal amount upon
which the notional principal contract is based (or, in the case of a swap, under
an alternative method contained in the proposed regulations and, in the case of
a cap or floor, under an alternative method which the IRS may provide in a
revenue procedure).
A Fund may purchase securities of certain foreign investment funds or trusts
which constitute passive foreign investment companies ("PFICs") for federal
income tax purposes. If a Fund invests in a PFIC, it may elect to treat the PFIC
as a qualifying electing fund (a "QEF"), in which event the Fund will each year
have ordinary income equal to its pro rata share of the PFIC's ordinary earnings
for the year and long-term capital gain equal to its pro rata share of the
PFIC's net capital gain for the year, regardless of whether the Fund receives
distributions of any such ordinary earnings or capital gain from the PFIC. If
the Fund does not elect to treat the PFIC as a QEF, then, in general, (1) any
gain recognized by the Fund upon sale or other disposition of its interest in
the PFIC or any excess distribution received by the Fund from the PFIC will be
allocated ratably over the Fund's holding period of its interest in the PFIC,
(2) the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to
<PAGE>
shareholders will be taxable as an ordinary income dividend, but such portion
will not be subject to tax at the Fund level), (3) the Fund shall be liable for
tax on the portions of such gain or excess distribution so allocated to prior
years in an amount equal to, for each such prior year, the sum of (i) the amount
of gain or excess distribution allocated to such prior year multiplied by the
highest tax rate (individual or corporate) in effect for such prior year and
(ii) interest on the amount determined under clause (i) for the period from the
due date for filing a return for such prior year until the date for filling a
return for the year in which the gain is recognized or the excess distribution
is received at the rates and methods applicable to underpayments of tax for such
period, and (4) the distribution by the Fund to shareholders of the portions of
such gain or excess distribution so allocated to prior years (net of the tax
payable by the Fund thereon) will again be taxable to the shareholders as an
ordinary income dividend.
Under proposed Treasury Regulations, a Fund holding PFIC stock can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the Fund's adjusted tax basis
in that share ("mark to market gain"). Such mark-to-market gain will constitute
ordinary income and will not be subject to the Short-Short Gain Test, and the
Fund's holding period with respect to such PFIC stock will commence on the first
day of the next taxable year. If a Fund makes such election in the first taxable
year it holds PFIC stock, it will not incur the tax described in the preceding
paragraph.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after October
31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, a Fund must satisfy
an asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a Fund's taxable year,
at least 50% of the value of the Fund's assets must consist of cash and cash
items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (provided that, with respect to each
issuer, the Fund has not invested more than 5% of the value of the Fund's total
assets in securities of each such issuer and the Fund does not hold more than
10% of the outstanding voting securities of each such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option. For purposes
of asset diversification testing, obligations issued or guaranteed by certain
agencies or instrumentalities of the U.S. Government, such as the Federal
Agricultural Mortgage Corporation, the Farm Credit System Financial Assistance
Corporation, a Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, the Government
<PAGE>
National Mortgage Corporation, and the Student Loan Marketing Association, are
treated as U.S. Government securities.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to 98% of ordinary
taxable income for the calendar year and 98% of capital gain net income for the
one-year period ended on October 31 of such calendar year (or, at the election
of a regulated investment company having a taxable year ending November 30 or
December 31, for its taxable year (a "taxable year election")). (Tax-exempt
interest on municipal obligations is not subject to the excise tax.) The balance
of such income must be distributed during the next calendar year. For the
foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of calculating the excise tax, a regulated investment company: (1)
reduces its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year and (2) excludes foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (which gains
and losses are included in determining the company's ordinary taxable income for
the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that a Fund may in certain circumstances be required to liquidate portfolio
investments to make sufficient distributions to avoid excise tax liability.
FUND DISTRIBUTIONS
Each Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes. Distributions attributable to dividends received by the Funds from
domestic corporations will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below. Distributions
attributable to interest received by the Funds will not, and distributions
attributable to dividends paid by a foreign corporation generally should not,
qualify for the
<PAGE>
dividend-received deduction. In general, the Balanced Fund, Diversified Stock
Fund, International Growth Fund, National Municipal Bond Fund, New York Tax-Free
Fund, Ohio Regional Stock Fund and Special Value Fund dividends paid on Class A
and Class B shares are calculated at the same time and in the same manner. In
general, dividends on Class B shares are expected to be lower than those on
Class A shares due to the higher distribution expenses charged by the Class B
shares. Dividends may also differ between classes as a result of differences in
other class specific expenses.
Ordinary income dividends paid by a Fund with respect to a taxable year will
qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations such as S corporations, which are not
eligible for the deduction because of their special characteristics, and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
A dividend received by a Fund will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the Fund has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c)(3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the Fund has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the Fund is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund or (2) by application of Code Section 246(b) which in general
limits the dividends-received deduction to 70% of the shareholder's taxable
income (determined without regard to the dividends-received deduction and
certain other items). With respect to the International Growth Fund, only an
insignificant portion of the Fund will be invested in stock of domestic
corporations; therefore the ordinary dividends distributed by the Fund will not
qualify for the dividends-received deduction for corporate shareholders.
A Fund may either retain or distribute to shareholders its net capital gain for
each taxable year. Each Fund currently intends to distribute any such amounts.
If net capital gain is distributed and designated as a capital gain dividend, it
will be taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his shares or whether such gain was
recognized by a Fund prior to the date on which the shareholder acquired his
shares. The Code provides, however, that under certain conditions only 50% of
the capital gain recognized upon a Fund's disposition of domestic qualified
"small business" stock will be subject to tax.
<PAGE>
Conversely, if a Fund elects to retain its net capital gain, the Fund will be
subject to tax thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
The New York Tax-Free Fund, National Municipal Bond Fund, Ohio Municipal Bond
Fund, Ohio Municipal Money Market Fund, and Tax-Free Money Market Fund (the "Tax
Exempt Funds") intend to qualify to pay exempt-interest dividends by satisfying
the requirement that at the close of each quarter of the Tax-Exempt Funds'
taxable year at least 50% of each Fund's total assets consists of tax-exempt
municipal obligations. Distributions from a Tax-Exempt Fund will constitute
exempt-interest dividends to the extent of such Fund's tax-exempt interest
income (net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of a Tax-Exempt Fund are excluded from gross income
for federal income tax purposes. However, shareholders required to file a
federal income tax return will be required to report the receipt of exempt
interest dividends on their returns. Moreover, while exempt-interest dividends
are excluded from gross income for federal income tax purposes, they may be
subject to alternative minimum tax ("AMT") in certain circumstances and may have
other collateral tax consequences as discussed below. Distributions by a
Tax-Exempt Fund of any investment company taxable income or of any net capital
gain will be taxable to shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the regular
tax and is computed at a maximum marginal rate of 28% for non-corporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 will generally constitute an item of tax
preference includable in AMTI for both corporate and non-corporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI. For purposes of the corporate AMT, the corporate
dividends received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders will generally be required
to take the full amount of any dividend received from the Fund into account
(without a dividends-received deduction) in determining their adjusted current
earnings.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be included
in an individual shareholder's gross income and subject to federal income tax.
Further, a shareholder of a
<PAGE>
Tax-Exempt Fund is denied a deduction for interest on indebtedness incurred or
continued to purchase or carry shares of a Tax-Exempt Fund. Moreover, a
shareholder who is (or is related to) a "substantial user" of a facility
financed by industrial development bonds held by a Tax-Exempt Fund will likely
be subject to tax on dividends paid by the Tax-Exempt Fund which are derived
from interest on such bonds. Receipt of exempt-interest dividends may result in
other collateral federal income tax consequences to certain taxpayers, including
financial institutions, property and casualty insurance companies, and foreign
corporations engaged in a trade or business in the United States. Prospective
investors should consult their own advisers as to such consequences.
Investment income that may be received by the International Growth Fund from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the Fund to a reduced rate of, or exemption from, taxes
on such income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested in various
countries is not known: If more than 50% of the value of the Fund's total assets
at the close of its taxable year consist of the stock or securities of foreign
corporations, the Fund may elect to "pass through" to the Fund's shareholders
the amount of foreign taxes paid by the Fund. If the Fund so elects, each
shareholder would be required to include in gross income, even though not
actually received, his pro rata share of the foreign taxes paid by the Fund, but
would be treated as having paid his pro rata share of such foreign taxes and
would therefore be allowed to either deduct such amount in computing taxable
income or use such amount (subject to various Code limitations) as a foreign tax
credit against federal income tax (but not both). For purposes of the foreign
tax credit limitation rules of the Code, each shareholder would treat as foreign
source income his pro rata share of such foreign taxes plus the portion of
dividends received from the Fund representing income derived from foreign
sources. No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Each shareholder should consult his
own tax adviser regarding the potential application of foreign tax credit rules.
Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends, or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by a Fund will be treated in the manner described above regardless
of whether such distributions are paid in cash or reinvested in additional
shares of the Fund (or of another fund). Shareholders receiving a distribution
in the form of additional shares will be treated as receiving a distribution in
an amount equal to the fair market value of the shares received, determined as
of the reinvestment date. In addition, if the net asset value at the time a
shareholder purchases shares of a Fund reflects undistributed net investment
income, recognized net capital gain, or unrealized appreciation in the value of
the assets of the Fund, distributions of such amounts will be taxable to the
shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
<PAGE>
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding for failure to report the receipt of interest or
dividend income properly, or (3) who has failed to certify to the Fund that it
is not subject to backup withholding or is an "exempt recipient" (such as a
corporation).
SALE OR REDEMPTION OF SHARES
The Money Market Funds seek to maintain a stable net asset value of $1.00 per
share; however, there can be no assurance that the Money Market Funds will do
this. In such a case, and for all the Funds other than the Money Market Funds, a
shareholder will recognize gain or loss on the sale or redemption of shares of a
Fund in an amount equal to the difference between the proceeds of the sale or
redemption and the shareholder's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the shareholder purchases
other shares of a Fund within 30 days before or after the sale or redemption. In
general, any gain or loss arising from (or treated as arising from) the sale or
redemption of shares of a Fund will be considered capital gain or loss and will
be long-term capital gain or loss if the shares were held for longer than one
year. However, any capital loss arising from the sale or redemption of shares
held for six months or less will be disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code Section 246(c)(3) and (4) (discussed above
in connection with the dividends-received deduction for corporations) generally
will apply in determining the holding period of shares. Long-term capital gains
of noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a Fund, (2)
disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on such shares but shall be
treated as incurred on the acquisition of the subsequently acquired shares.
<PAGE>
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership
("foreign shareholder"), depends on whether the income from a Fund is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
such foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. Furthermore,
such a foreign shareholder in the International Growth Fund may be subject to
U.S. withholding tax at the rate of 30% (or lower treaty rate) on the gross
income resulting from the Fund's election to treat any foreign taxes paid by it
as paid by its shareholders, but may not be allowed a deduction against such
gross income or a credit against the U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as having
paid. Such a foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Fund, capital gain
dividends and exempt-interest dividends, and amounts retained by the Fund that
are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then ordinary income dividends, capital
gain dividends, and any gains realized upon the sale of shares of the Fund will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund, including the
applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION, LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends, exempt-interest
dividends, and capital gain dividends from regulated investment companies often
differ from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their
<PAGE>
tax advisers as to the consequences of these and other state and local tax rules
affecting investment in a Fund.
TRUSTEES AND OFFICERS
BOARD OF TRUSTEES.
Overall responsibility for management of the Victory Portfolios rests with the
Trustees, who are elected by the shareholders of the Victory Portfolios. The
Victory Portfolios are managed by the Trustees in accordance with the laws of
the State of Delaware. There are currently seven Trustees, six of whom are not
"interested persons" of the Victory Portfolios within the meaning of that term
under the 1940 Act ("Independent Trustees"). The Trustees, in turn, elect the
officers of the Victory Portfolios to supervise actively its day-to-day
operations.
The Trustees of the Victory Portfolios, their addresses, ages, and their
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name, Address and Age With the Victory Portfolios During Past 5 Years
- --------------------- --------------------------- ----------------------
<S> <C> <C>
Leigh A. Wilson,* 52 Trustee and President From 1989 to present, Chairman and Chief Executive Officer,
Glenleigh International Ltd. Glenleigh International Limited; from 1984 to 1989, Chief
53 Sylvan Road North Executive Officer, Paribas North America and Paribas
Westport, CT 06880 Corporation; President and Trustee, The Victory Funds and
the Key Mutual Funds ("KeyFunds").
Robert G. Brown, 73 Trustee Retired; from October 1983 to November 1990, President, Cleveland
5460 N. Ocean Drive Advanced Manufacturing Program (non-profit corporation engaged in
Singer Island regional economic development).
Riviera Beach, FL 33404
Edward P. Campbell, 47 Trustee From July 1996 to present, President; from March 1994 to
Nordson Corporation present, Executive Vice President and Chief Operating
28601 Clemens Road Officer of Nordson Corporation (manufacturer of application
Westlake, OH 44145 equipment); from May 1988 to March 1994, Vice President of
Nordson Corporation; from 1987 to December 1994, member of
the Supervisory Committee of Society's Collective Investment
Retirement Fund; from May 1991 to August 1994, Trustee,
Financial Reserves Fund and from May 1993 to August 1994,
Trustee, Ohio Municipal Money Market Fund; Trustee, The
Victory Funds and the KeyFunds).
Dr. Harry Gazelle, 69 Trustee Retired radiologist, Drs. Hill and Thomas Corp.; Trustee, The
17822 Lake Road Victory Funds
Lakewood, Ohio 44107
Stanley I. Landgraf, 71 Trustee Retired; currently, Trustee, Rensselaer Polytechnic Institute;
41 Traditional Lane Director, Elenel Corporation and Mechanical Technology, Inc.;
Loudonville, NY 12211 Member, Board of Overseers, School of Management, Rensselaer
Polytechnic Institute; Member, The Fifty Group (a Capital Region
business organization); Trustee, The Victory Funds.
Dr. Thomas F. Morrissey, 63 Trustee 1995 Visiting Scholar, Bond University, Queensland,
Weatherhead School of Australia; Professor, Weatherhead School of Management, Case
Management Western Reserve University; from 1989 to 1995, Associate
Case Western Reserve Dean of Weatherhead School of Management; from 1987 to
University December 1994, Member of the Supervisory Committee of
10900 Euclid Avenue Society's Collective Investment Retirement Fund; from May
Cleveland, OH 44106-7235 1991 to August 1994, Trustee, Financial Reserves Fund and
from May 1993 to August 1994, Trustee, Ohio Municipal Money
Market Fund; Trustee, The Victory Funds.
Dr. H. Patrick Swygert, 53 Trustee President, Howard University; formerly President, State
Howard University University of New York at Albany; formerly, Executive Vice
2400 6th Street, N.W. President, Temple University; Trustee, The Victory Funds.
Suite 320
Washington, D.C. 20059
</TABLE>
- ---------------
* Mr. Wilson is deemed to be an "interested person" of the Victory Portfolios
under the 1940 Act solely by reason of his position as President.
<PAGE>
The Board presently has an Investment Policy Committee and a Business, Legal,
and Audit Committee. The members of the Investment Policy Committee are Messrs.
Landgraf (Chairman), Morrissey, and Brown, who will serve until August 1997. The
function of the Investment Policy Committee is to review the existing investment
policies of the Victory Portfolios, including the levels of risk and types of
funds available to shareholders, and make recommendations to the Trustees
regarding the revision of such policies or, if necessary, the submission of such
revisions to the Victory Portfolios' shareholders for their consideration. The
members of the Business, Legal and Audit Committee are Messrs. Swygert
(Chairman), Campbell, and Gazelle who will serve until August 1997. The function
of the Business, Legal, and Audit Committee is to recommend independent auditors
and monitor accounting and financial matters; to nominate persons to serve as
Independent Trustees and Trustees to serve on committees of the Board; and to
review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months ended
October 31, 1996. The Business, Legal and Audit Committee met four times during
the 12 months ended October 31, 1996.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.
Each Trustee (other than Leigh A. Wilson) receives an annual fee of $27,000 for
serving as Trustee of all the Funds of the Victory Portfolios, and an additional
per meeting fee ($2,400 in person and $1,200 per telephonic meeting). Leigh A.
Wilson receives an annual fee of $33,000 for serving as President and Trustee
for all of the funds of the Victory Portfolios, and an additional per meeting
fee ($3,000 in person and $1,500 per telephonic meeting).
<PAGE>
The following table indicates the compensation received by each Trustee from the
Victory "Fund Complex"(1) for the 12 month period ended October 31, 1996.
<TABLE>
<CAPTION>
Aggregate
Pension or Retirement Estimated Annual Compensation Total Compensation
Benefits Accrued as Benefits from Victory from Victory
Portfolio Expenses Upon Retirement Portfolios "Fund Complex" (1)
------------------- --------------- ----------- ------------------
<S> <C> <C> <C> <C>
Leigh A. Wilson, Trustee.......... -0- -0- $51,000 $62,250
Robert G. Brown, Trustee.......... -0- -0- 41,400 50,250
Edward P. Campbell, Trustee....... -0- -0- 39,000 39,000
Harry Gazelle, Trustee............ -0- -0- 39,000 39,000
Stanley I. Landgraf, Trustee...... -0- -0- 39,000 39,000
Thomas F. Morrissey, Trustee...... -0- -0- 39,000 39,000
H. Patrick Swygert, Trustee....... -0- -0- 36,600 36,600
</TABLE>
(1) There are presently 33 mutual funds from which the above-named Trustees
are compensated in the Victory "Fund Complex," but not all of the
above-named Trustees serve on the board of each fund in the "Fund
Complex."
<PAGE>
OFFICERS.
The officers of the Victory Portfolios, their ages, addresses, and principal
occupations during the past five years, are as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH THE PRINCIPAL OCCUPATION
NAME, AGE, AND ADDRESS VICTORY PORTFOLIOS DURING PAST 5 YEARS
- ---------------------------------- -------------------------------- ----------------------------------
<S> <C> <C>
Leigh A. Wilson, 52 President and Trustee From 1989 to present, Chairman
Glenleigh International Ltd. and Chief Executive Officer,
53 Sylvan Road North Glenleigh International Limited;
Westport, CT 06880 from 1984 to 1989, Chief
Executive Officer, Paribas North
America and Paribas Corporation;
President and Trustee of The Victory
Funds and the KeyFunds.
William B. Blundin, 58 Vice President Senior Vice President of BISYS
BISYS Fund Services Fund Services ("BISYS"); officer
125 West 55th Street of other investment companies
New York, New York 10019 administered by BISYS Fund
Services; President and Chief
Executive Officer of Vista Broker-
Dealer Services, Inc., Emerald
Asset Management, Inc. and BNY
Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 51 Vice President Executive Vice President, BISYS.
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 34 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS.
3435 Stelzer Road
Columbus, OH 43219-3035
George O. Martinez, 38 Assistant Secretary From March 1995 to present,
BISYS Fund Services Senior Vice President and Director
3435 Stelzer Road of Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS; from June 1989 to March
1995, Vice President and Associate
General Counsel, Alliance Capital
Management.
Kevin L. Martin, 36 Treasurer From February 1996 to present, BISYS Fund Services
employee of BISYS; from 1984 to 3435 Stelzer Road
February 1996, Senior Manager, Columbus, OH 43219-3035
Ernst & Young.
</TABLE>
<PAGE>
The mailing address of each of the officers of the Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS receives fees from the Victory Portfolios as Administrator.
As of January 17, 1997, the Trustees and officers as a group owned beneficially
less than 1% of all classes of outstanding shares of the Funds.
ADVISORY AND OTHER CONTRACTS
INVESTMENT ADVISER AND SUB-ADVISER.
One of the Fund's most important contracts is with its investment adviser. The
Adviser is a New York corporation registered as an investment adviser with the
Securities and Exchange Commission The Adviser is a wholly owned subsidiary of
KeyBank National Association ("KeyBank"), a wholly-owned subsidiary of KeyCorp.
Effective February 28, 1997, the Adviser became the surviving corporation of the
reorganization of four indirect investment adviser subsidiaries of
KeyCorp--KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers"), Society Asset
Management, Inc. ("SAM"), Spears, Benzak, Salomon & Farrell, Inc. ("SBSF") and
Applied Technologies, Inc. ("ATI"), each registered with the Commission as an
investment adviser. Key Advisers, SAM and ATI were merged with and into SBSF, a
New York corporation organized on February 22, 1972. Pursuant to the terms of
the reorganization, SBSF changed its name to Key Asset Management Inc. SAM, SBSF
and ATI will continue to operate under their existing names as separate
divisions of the Adviser. Affiliates of the Adviser manage approximately $50
billion for numerous clients including large corporate and public retirement
plans, Taft-Hartley plans, foundations and endowments, high net worth
individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127 Public
Square, Cleveland, Ohio 44114. As of September 30, 1996, KeyCorp had an asset
base of $65 billion, with banking offices in 26 states from Maine to Alaska, and
trust and investment offices in 16 states. KeyCorp is the resulting entity of a
merger in 1994 of Society Corporation, the bank holding company of which
KeyBank, formerly Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and leasing companies. KeyBank is the lead affiliate bank of
KeyCorp.
<PAGE>
The following schedule lists the advisory fees for each mutual fund that is
advised by the Adviser.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund
Victory U.S. Government Obligations Fund
Victory Tax-Free Money Market Fund
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund
Victory Limited Term Income Fund
Victory Government Mortgage Fund
Victory Financial Reserves Fund
Victory Fund for Income
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund
Victory New York Tax-Free Fund
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund
Victory Stock Index Fund
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund
Victory Investment Quality Bond Fund
Victory Ohio Regional Stock Fund
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund
Victory Lakefront Fund
Victory Value Fund
Victory Growth Fund
Victory Real Estate Investment Fund
Victory Special Value Fund
Victory Special Growth Fund
<PAGE>
1.10% OF AVERAGE DAILY NET ASSETS
Victory International Growth Fund
Lakefront Capital Investors, Inc. ("Lakefront" or the "Sub-Adviser") serves as
sub-adviser to the Lakefront Fund. For its services under the Investment
Sub-Advisory Agreement, the Adviser pays Lakefront a monthly fee of 0.50% of the
Lakefront Fund's average daily net assets from its advisory fee.
THE INVESTMENT ADVISORY AND INVESTMENT SUB-ADVISORY AGREEMENTS.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Victory Portfolios, on behalf of the Funds (the "Investment Advisory
Agreement"), provides that it will continue in effect as to the Funds for an
initial two-year term and for consecutive one-year terms thereafter, provided
that such continuance is approved at least annually by the Trustees or by vote
of a majority of the outstanding shares of each Fund (as defined under
"Additional Information - Miscellaneous"), and, in either case, by a majority of
the Trustees who are not parties to the Investment Advisory Agreement or
interested persons (as defined in the 1940 Act) of any party to the Investment
Advisory Agreement, by votes cast in person at a meeting called for such
purpose.
The Investment Advisory Agreement is terminable as to any particular Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, by vote of the Board of Trustees
of the Victory Portfolios, or by the Adviser. The Investment Advisory Agreement
also terminates automatically in the event of any assignment, as defined in the
1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with the performance of services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its duties, or from reckless disregard by it of its duties
and obligations thereunder.
From January 1, 1996 until February 28, 1996, Key Mutual Fund Advisers, Inc.
("Key Advisers") served as investment adviser to the Funds.
From January, 1993 until December 31, 1995, Society Asset Management, Inc.
served as investment adviser to the Funds. For the fiscal years ended October
31, 1996, 1995 and 1994, the Key Advisers (and its predecessors) earned the
following advisory fees with respect to each Fund, the amount of fees paid to
the Adviser is net of the amount of fee reduction:
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
Amount of Amount of Amount of Amount
Amount of Fees Amount of Fee Fees Paid to Fee Fees Paid to of Fee
Paid to Advisor Reduction Advisor Reduction Advisor Reduction
--------------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund 2,382,191 376,178 $1,024,165 624,474 $536,712 396,767
Diversified Stock Fund 3,203,628 55,678 2,006,479 126,000 1,548,683 82,207
Financial Reserves Fund 3,985,273 582,762 2,132,744 420,213 2,132,744 584,417
Fund for Income 110,416 87,637 87,483 36,865 84,270 2,027
Government Mortgage Fund 649,548 3,389 702,724 15,995 800,556 30,223
Growth Fund (a) 1,252,383 70,660 526,613 216,181 361,755 218,180
Institutional Money Market
Fund (b) 1,936,239 932,844 314,773 337,327 1,131,754 1,087,613
Intermediate Income Fund 1,575,971 357,865 692,143 325,544 469,249 247,239
International Growth Fund 1,254,792 28,169 901,337 116,464 532,331 90,406
Investment Quality Bond
Fund 1,021,962 185,307 546,647 238,865 436,637 240,057(c)
Limited Term Income Fund 718,806 46,818 710,323 20,789 421,108 6,157
National Municipal Bond
Fund (d) 206,174 206,174 812 25,316 11,825 0
New York Tax-Free Bond 90,610 83,068
Ohio Municipal Bond Fund 401,172 103,079 183,193 163,525 163,756 173,917
Ohio Municipal Money 187,594 244,500 1,692,574/ 320,022/
Market Fund (e) 2,835,777 1,706,115 1,517,669 234,884
Ohio Regional Stock Fund 323,040 4,181 253,943 13,584 247,755 10,682
Prime Obligations Fund 1,628,427 -- 1,907,736 0 2,649,796 0
Special Growth Fund 745,064 33,521 143,381 296,856 152,165 93,307
Special Value Fund 2,375,797 69,296 1,140,267 405,752 588,378 242,661
Stock Index Fund 1,318,984 382,702 489,171 194,774 286,360 100,857
Tax-Free Money Market
Fund 1,124,656 31,987 829,802 34,209 707,270 34,905
U.S. Government Obligations
Fund 4,208,590 0 2,245,705 0 1,614,950 0
Value Fund 3,440,798 62,495 1,771,834 810,820 979,887 575,355(a)
</TABLE>
(a) Fiscal period 12/3/93 (commencement of operations) to October 31, 1994
(b) Fiscal year ended 4/30/95, fiscal period ended 10/31/95
(c) Fiscal period 12/10/93 (commencement of operations) to October 31, 1994
(d) Periods ended 4/30/95 and 10/31/95
(e) Fiscal year ended 10/31/96; two months ended 10/31/95; fiscal year ended
8/30/95 and 8/31/94
Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a sub-adviser. In addition, the Investment Advisory
Agreement provides that the Adviser may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Funds and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of the Adviser.
<PAGE>
GLASS-STEAGALL ACT.
In 1971 the United States Supreme Court held in Investment Company Institute v.
Camp that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board") issued a regulation and interpretation to the
effect that the Glass-Steagall Act and such decision: (a) forbid a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective shareholders of the Funds may include
descriptions of Key Trust Company of Ohio, N.A. and the Adviser including, but
not limited to, (1) descriptions of the operations of Key Trust Company of Ohio,
N.A. and the Adviser; (2) descriptions of certain personnel and their functions;
and (3) statistics and rankings related to the operations of Key Trust Company
of Ohio, N.A. and the Adviser.
PORTFOLIO TRANSACTIONS.
THE MONEY MARKET FUNDS. Pursuant to the Investment Advisory Agreement of the
Victory Portfolios on behalf of the Money Market Funds, the Adviser determines,
subject to the general supervision of the Trustees of the Victory Portfolios,
and in accordance with each Money Market Fund's investment objective, policies
and restrictions, which securities are to be purchased and sold by the Money
Market Funds, and which brokers are to be eligible to execute its portfolio
transactions. Since purchases and sales of portfolio securities by the Money
Market Funds are usually principal transactions, the Money Market Funds incur
little or no brokerage commissions. For the three previous fiscal years ended
October 31, 1996, 1995 and 1994, the Money Market Funds paid no brokerage
commissions. Securities of the Money Market Funds are normally purchased
directly from the issuer or from a market maker for the securities. The purchase
price paid to dealers serving as market makers may include a spread between the
bid and asked prices. The Money Market Funds may also
<PAGE>
purchase securities from underwriters at prices which include the spread
retained by the underwriter from the proceeds of the offering to the issuer.
The Money Market Funds do not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity, but the
Adviser may seek to enhance the yield of the Funds by taking advantage of yield
disparities or other factors that occur in the money markets. For example,
market conditions frequently result in similar securities trading at different
prices. The Adviser may dispose of any portfolio security prior to its maturity
if such disposition and reinvestment of proceeds are expected to enhance yield
consistent with the Adviser's judgment as to desirable portfolio maturity
structure or if such disposition is believed to be advisable due to other
circumstances or conditions. The investment policies of the Money Market Funds
require that investments mature in 90 days or less. Thus, there is likely to be
relatively high portfolio turnover, but since brokerage commissions are not
normally paid on money market instruments, the high rate of portfolio turnover
is not expected to have a material effect on the net income or expenses of the
Money Market Funds.
The Adviser's primary consideration in effecting a security transaction is to
obtain the best net price and the most favorable execution of the order.
Allocation of transactions, including their frequency, among various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders.
INCOME AND EQUITY FUNDS. Pursuant to the Investment Advisory Agreement (and for
Lakefront Value Fund, the Investment Sub-Advisory Agreement), the Adviser (and
the Sub-Adviser) determine, subject to the general supervision of the Trustees
of the Victory Portfolios, and in accordance with each Fund's investment
objective and restrictions, which securities are to be purchased and sold by the
Funds, and which brokers are to be eligible to execute its portfolio
transactions. Purchases from underwriters and/or broker-dealers of portfolio
securities include a commission or concession paid by the issuer to the
underwriter and/or broker-dealer and purchases from dealers serving as market
makers may include the spread between the bid and asked price. While the Adviser
(and the Sub-Adviser) generally seek competitive spreads or commissions, each
Fund may not necessarily pay the lowest spread or commission available on each
transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by the Adviser (or the
Sub-Adviser) in their best judgment and in a manner deemed fair and reasonable
to shareholders. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price. Subject to this consideration,
dealers who provide supplemental investment research to the Adviser (or the
Sub-Adviser) may receive orders for transactions by the Victory Portfolios.
Information so received is in addition to and not in lieu of services required
to be performed by the Adviser (or the Sub-Adviser) and does not reduce the
investment advisory fees payable to the Adviser by the Funds. Such information
may be useful to the Adviser (or the Sub-Adviser) in serving both the Victory
Portfolios and other
<PAGE>
clients and, conversely, such supplemental research information obtained by the
placement of orders on behalf of other clients may be useful to the Adviser (or
the Sub-Adviser) in carrying out its obligations to the Victory Portfolios. The
Trustees have authorized the allocation of brokerage to affiliated
broker-dealers on an agency basis to effect portfolio transactions. The Trustees
have adopted procedures incorporating the standards of Rule 17e- 1 of the 1940
Act, which require that the commission paid to affiliated broker-dealers must be
"reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
At times, the Funds may also purchase portfolio securities directly from dealers
acting as principals, underwriters or market makers. As these transactions are
usually conducted on a net basis, no brokerage commissions are paid by the
Funds.
ALL FUNDS. The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with the Adviser, the
Sub-Adviser, Key Trust Company of Ohio, N.A. ("Key Trust") or their affiliates,
or BISYS or its affiliates, and will not give preference to Key Trust's
correspondent banks or affiliates, or BISYS with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements.
Investment decisions for each Fund are made independently from those made for
the other Funds of the Victory Portfolios or any other investment company or
account managed by the Adviser (or the Sub-Adviser). Such other investment
companies or accounts may also invest in the securities in which the Funds
invest, and the Funds may invest in similar securities. When a purchase or sale
of the same security is made at substantially the same time on behalf of a Fund
and any other Fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser (or the Sub-Adviser) believes to be equitable to such
Funds, investment company or account. In some instances, this investment
procedure may affect the price paid or received by a Fund or the size of the
position obtained by the Fund in an adverse manner relative to the result that
would have been obtained if only that particular Fund had participated in or
been allocated such trades. To the extent permitted by law, the Adviser (or the
Sub-Adviser) may aggregate the securities to be sold or purchased for a Fund
with those to be sold or purchased for the other funds of the Victory Portfolios
or for other investment companies or accounts in order to obtain best execution.
In making investment recommendations for the Victory Portfolios, the Adviser
(and the Sub-Adviser) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
the Adviser (or the Sub-Adviser), their parents or subsidiaries or affiliates
and, in dealing with their commercial customers, the Advisers (or the
Sub-Adviser), their parents, subsidiaries, and affiliates will not inquire or
take into consideration whether securities of such customers are held by the
Victory Portfolios.
<PAGE>
Brokerage commissions paid by each of the Funds listed below were as follows for
the fiscal years ended October 31, 1996, 1995 and 1994.
1996 1995 1994
- --------------------------------------------------------------------------------
Balanced Fund 190,526.34 125,079 238,762
- --------------------------------------------------------------------------------
Diversified Stock Fund 881,427.50 615,260 550,131
- --------------------------------------------------------------------------------
Financial Reserves Fund -- -- --
- --------------------------------------------------------------------------------
Fund For Income 1,250.00 0 176,716
- --------------------------------------------------------------------------------
Government Mortgage Fund 542.84 0 469
- --------------------------------------------------------------------------------
Growth Fund 97,820.00 147,798 59,306(a)
- --------------------------------------------------------------------------------
Institutional Money Market Fund -- -- --
- --------------------------------------------------------------------------------
Intermediate Income Fund 61,811.73 1,500 3,047
- --------------------------------------------------------------------------------
International Growth Fund -- 333,609 272,288
- --------------------------------------------------------------------------------
Investment Quality Bond Fund 12,889.90 1,800 4,033
- --------------------------------------------------------------------------------
Limited Term Income Fund 8,580.94 0 938
- --------------------------------------------------------------------------------
National Municipal Bond Fund -- -- --
- --------------------------------------------------------------------------------
New York Tax-Free Fund -- 0 550,131
- --------------------------------------------------------------------------------
Ohio Municipal Bond Fund -- 0 0
- --------------------------------------------------------------------------------
Ohio Municipal Money Market Fund -- -- --
- --------------------------------------------------------------------------------
Ohio Regional Stock Fund 6,597.60 15,420 21,467
- --------------------------------------------------------------------------------
Prime Obligations Fund -- -- --
- --------------------------------------------------------------------------------
Special Growth Fund 176,980.29 99,980 92,278
- --------------------------------------------------------------------------------
Special Value Fund 431,541.97 224,350 118,986
- --------------------------------------------------------------------------------
Stock Index Fund 27,553.63 24,243 12,176(a)
- --------------------------------------------------------------------------------
Tax-Free Money Market Fund -- -- --
- --------------------------------------------------------------------------------
U.S. Government Obligations Fund -- -- --
- --------------------------------------------------------------------------------
Value Fund 225,799.21 218,770 196,716(a)
(a) 12/3/93 (commencement of operations) to 10/31/94.
PORTFOLIO TURNOVER.
The turnover rate stated in the Prospectus for a Fund's investment portfolio is
calculated by dividing the lesser of a Fund's purchases or sales of portfolio
securities for the year by the monthly average value of the portfolio
securities. The calculation excludes all securities whose maturities, at the
time of acquisition, were one year or less. The portfolio turnover rates for
each of the Funds listed below were as follows for the fiscal years ended
October 31, 1996 and 1995.
<PAGE>
Fund 1996 1995
- ---- ---- ----
Balanced Fund (a) 80%(b) 69.22%
Diversified Stock Fund (a) 94%(b) 75.05%
Fund for Income 25% 35.20%
Government Mortgage Fund 127% 59.14%
Growth Fund 27% 107.13%
Intermediate Income Fund 164% 98.07%
International Growth Fund (a) 178%(b) 68.09%
Investment Quality Bond Fund 182% 160.01%
Limited Term Income Fund 221% 97.25%
National Municipal Bond Fund (a) 143% 72.00%/
52.00%(c)
New York Tax-Free Fund (a) 0% 18.00%/
18.00%(c)
Ohio Municipal Bond Fund 81% 125.00%
Ohio Regional Stock Fund (a) 6%(b) 11.44%
Special Growth Fund (a) 152% 54.00%/
102.00%(c)
Special Value Fund (a) 55%(b) 39.00%
Stock Index Fund 4% 12.00%
Value Fund 28% 23.03%
(a) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(b) For year ended October 31, 1996 for Class A shares and for the period March
1, 1996 through October 31, 1996 for Class B shares.
(c) For six months ended October 31, 1995 and year ended April 30, 1995,
respectively.
ADMINISTRATOR.
BISYS serves as administrator (the "Administrator") to the Funds. The
Administrator assists in supervising all operations of the Funds (other than
those performed by the Adviser or the Sub-Adviser under the Investment Advisory
Agreement and Investment Sub-Advisory Agreement).
BISYS receives a fee from the Funds for its services as Administrator and
expenses assumed pursuant to the Administration Agreement, calculated daily and
paid monthly, at the annual rate of fifteen one hundredths of one percent (.15%)
of each Fund's average daily net assets. BISYS may periodically waive all or a
portion of its fee with respect to the Funds in order to increase the net income
of the Funds.
<PAGE>
Unless sooner terminated, the Administration Agreement will continue in effect
as to each Fund for a period of two years, and for consecutive one-year terms
thereafter, provided that such continuance is ratified at least annually by the
Trustees or by vote of a majority of the outstanding shares of each Fund, and in
either case by a majority of the Trustees who are not parties to the
Administration Agreement or interested persons (as defined in the 1940 Act) of
any party to the Administration Agreement, by votes cast in person at a meeting
called for such purpose.
The Administration Agreement provides that BISYS shall not be liable for any
error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, BISYS assists in each Fund's administration
and operation, including providing statistical and research data, clerical
services, internal compliance and various other administrative services,
including among other responsibilities, forwarding certain purchase and
redemption requests to the Transfer Agent, participation in the updating of the
prospectus, coordinating the preparation, filing, printing and dissemination of
reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, BISYS may delegate all or any part of its
responsibilities thereunder.
The following chart reflects the aggregate administration fees earned after fee
reductions by the Administrator in connection with the sale of shares of each
Fund for the fiscal years ended October 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
Administration Fee Administration Fee Administration Fee
Fees Reductions Fees Reductions Fees Reductions
---- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund...................... 357,125 0 246,993 303 131,378 8,644
Diversified Stock Fund............. 739,450 60,602 490,419 1,612 364,211 12,148
Financial Reserves Fund............ 1,196,089 0 1,063,114 472 278,025 0
Fund for Income.................... 33,125 19,833 27,624 9,681 224,695 8,592
Government Mortgage Fund........... 195,013 0 215,665 0 235,613 13,621
Growth Fund........................ 187,857 0 63,251 48,168 77,085 9,905(a)
Institutional Money Market
Fund (b)........................... 1,161,744 696,881 134,232 257,028 646,353 0
Intermediate Income Fund........... 314,921 0 203,344 194 134,787 8,510
International Growth Fund.......... 171,154 0 138,965 0 69,419 15,550
Investment Quality Bond Fund....... 205,210 0 157,427 0 126,903 8,436(c)
Limited Term Income Fund........... 216,263 0 220,396 0 116,696 11,483
National Municipal Bond Fund....... 56,229 35,877 1,047 6,080 (d)
New York Tax-Free Bond............. 24,711 14,823 18,436 7,104 10,357 0
Ohio Municipal Bond Fund........... 100,340 0 86,670 10 39,988 44,425
Ohio Municipal Money Market 0
Fund (e)........................... 851,457
Ohio Regional Stock Fund........... 64,609 0 53,484 21 39,095 12,592
Prime Obligations Fund............. 697,897 0 817,341 0 1,122,585 13,042
Special Growth Fund................ 112,578 0 33,202 32,831 28,373 8,447
Special Value Fund................. 356,371 0 231,340 1,000 115,967(f) 8,689(f)
Stock Index Fund................... 329,746 329,746 0 194,774 0(a) 170,986(a)
Tax-Free Money Market Fund......... 481,996 35,290 370,209 0 306,609 12,066
U.S. Government Obligations
Fund............................... 1,803,685 0 868,808 93,637 679,754 12,368
Value Fund......................... 516,120 0 387,398 0 224,695 8,592(a)
</TABLE>
<PAGE>
(a) 12/3/93 (commencement of operations) to 10/31/94.
(b) Fiscal period ended 10/31/95, fiscal year ended 4/30/95.
(c) Fiscal period 12/10/93 (commencement of operations) to 10/31/94.
(d) Until July 1, 1994 Fidelity Distributors Corporation, 82 Devonshire Street,
Boston, Massachusetts 02109, was the Administrator and Distributor to the
Predecessor Fund under separate Administration and General Distribution
Agreements. For the period February 3, 1994 through April 30, 1994,
Fidelity Distributors Corporation earned $124 from the Predecessor Fund for
services rendered to the Victory Funds pursuant to the Administration
Agreement. During the same period, Fidelity Distributors Corporation
voluntarily reimbursed $20,589 in fees and expenses to the Predecessor
Fund. For the fiscal year ended April 30, 1995, the Fund paid
administration fees of $926 of which Fidelity Distributors Corporation
received $717 and Concord Holding Corporation received $209. During the
same period, fees and expenses of $83,748 were reimbursed to the
Predecessor Fund.
(e) For the two month period ended October 31, 1995, Concord Holding
Corporation earned an administration fee of $129,644 after $0 in voluntary
fee waivers. For the period June 5, 1995 to August 31, 1995, Concord
Holding Corporation earned administration fees of $165,282 from the Fund
after voluntary fees waived of $4,709. Prior to that, from August 31, 1994
to June 4, 1995, Primary Fund Service Corporation earned $433,288 from the
Fund after voluntary fees waived of $500.
(f) Fiscal period 12/31/93 through 10/31/94.
DISTRIBUTOR.
BISYS Fund Services serves as distributor (the "Distributor") for the continuous
offering of the shares of the Funds pursuant to a Distribution Agreement between
the Distributor and the Victory Portfolios. Unless otherwise terminated, the
Distribution Agreement will remain in effect with respect to each Fund for two
years, and thereafter for consecutive one-year terms, provided that it is
approved at least annually (1) by the Trustees or by the vote of a majority of
the outstanding shares of each Fund, and (2) by the vote of a majority of the
Trustees of the Victory Portfolios who are not parties to the Distribution
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Distribution Agreement
will terminate in the event of its assignment, as defined under the 1940 Act.
The following chart reflects the total underwriting commissions earned and the
amount of those commissions retained by the Distributor in connection with the
sale of shares of each Fund for the fiscal years ended October 31, 1996, 1995
and 1994.
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
Underwriting Amount Underwriting Amount Underwriting Amount
Commissions Retained Commission Retained Commissions Retained
----------- -------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund....................... 63,000 60,000 (a) (a) (a) (a)
Diversified Stock Fund.............. 452,000 430,000 (a) (a) (a) (a)
Financial Reserves Fund............. - - (a) (a) (a) (a)
Fund for Income..................... 18,000 17,000 (a) (a) (a) (a)
Government Mortgage Fund............ 2,000 2,000 (a) (a) (a) (a)
Growth Fund......................... 1,000 1,000 (a) (a) (a) (a)
Institutional Money Market Fund..... - - (a) (a) (a) (a)
Intermediate Income Fund............ 2,000 2,000 (a) (a) (a) (a)
International Growth Fund........... 17,000 17,000 (a) (a) (a) (a)
Investment Quality Bond Fund........ 6,000 6,000 (a) (a) (a) (a)
Limited Term Income Fund............ 3,000 3,000 (a) (a) (a) (a)
National Municipal Bond Fund........ 3,000 31,000 (a) (a) (a) (a)
New York Tax-Free Bond.............. 43,000 39,000 (a) (a) (a) (a)
Ohio Municipal Bond Fund............ 20,000 20,000 (a) (a) (a) (a)
Ohio Municipal Money Market
Fund.............................. - - (a) (a) (a) (a)
Ohio Regional Stock Fund............ 21,000 21,000 (a) (a) (a) (a)
Prime Obligations Fund.............. - - (a) (a) (a) (a)
Special Growth Fund................. 2,000 2,000 (a) (a) (a) (a)
Special Value Fund.................. 22,000 11,000 (a) (a) (a) (a)
Stock Index Fund.................... 9,000 9,000 (a) (a) (a) (a)
Tax-Free Money Market Fund.......... - - (a) (a) (a) (a)
U.S. Government Obligations
Fund............................. - - (a) (a) (a) (a)
Value Fund.......................... 1,000 1,000 (a) (a) (a) (a)
</TABLE>
(a) In 1995, the amount of underwriting commissions and the amount retained
for the entire Fund Complex was $721,000 and $107,000, respectively. In
1994, the amount of underwriting commissions and the amount retained
for the entire Fund Complex was $212,021 and $15, respectively.
TRANSFER AGENT.
State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Funds. Boston Financial Data Services, Inc. ("BFDS") serves as the
dividend disbursing agent and shareholder servicing agent for the Funds,
pursuant to a Transfer Agency and Service Agreement. Under its agreement with
the Victory Portfolios, State Street has agreed (1) to issue and redeem shares
of the Victory Portfolios; (2) to address and mail all communications by the
Victory Portfolios to its shareholders, including reports to shareholders,
dividend and distribution notices, and proxy material for its meetings of
shareholders; (3) to respond to correspondence or inquiries by shareholders and
others relating to its duties; (4) to maintain shareholder accounts and certain
sub-accounts; and (5) to make periodic reports to the Trustees concerning the
Victory Portfolios' operations.
<PAGE>
SHAREHOLDER SERVICING PLAN.
Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser and Sub-Adviser) are for
administrative support services to customers who may from time to time
beneficially own shares, which services may include: (1) aggregating and
processing purchase and redemption requests for shares from customers and
transmitting promptly net purchase and redemption orders to our distributor or
transfer agent; (2) providing customers with a service that invests the assets
of their accounts in shares pursuant to specific or pre-authorized instructions;
(3) processing dividend and distribution payments on behalf of customers; (4)
providing information periodically to customers showing their positions in
shares; (5) arranging for bank wires; (6) responding to customer inquiries; (7)
providing subaccounting with respect to shares beneficially owned by customers
or providing the information to the Funds as necessary for subaccounting; (8) if
required by law, forwarding shareholder communications from us (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to customers; (9) forwarding to customers proxy
statements and proxies containing any proposals which require a shareholder
vote; and (10) providing such other similar services as we may reasonably
request to the extent you are permitted to do so under applicable statutes,
rules or regulations.
DISTRIBUTION AND SERVICE PLAN.
The Victory Portfolios, on behalf of the National Municipal Bond Fund, New York
Tax-Free Fund, Institutional Money Market Fund (Investor Class and Select
Class), Special Growth Fund, Fund for Income, Lakefront Fund, Real Estate
Investment Fund and Financial Reserves Fund, has adopted a Distribution and
Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act (the "Rule
12b-1"). Rule 12b-1 provides in substance that a mutual fund may not engage
directly or indirectly in financing any activity that is primarily intended to
result in the sale of shares of such mutual fund except pursuant to a plan
adopted by the fund under Rule 12b-1. The Board of Trustees has adopted the Plan
to allow the Adviser, the Sub-Adviser and the Distributor to incur certain
expenses that might be considered to constitute indirect payment by the Funds of
distribution expenses. Under the Plan, if a payment to the Advisers or the
Sub-Adviser of management fees or to the Distributor of administrative fees
should be deemed to be indirect financing by the Victory Portfolios of the
distribution of their shares, such payment is authorized by the Plan.
The Plan specifically recognizes that the Adviser, the Sub-Adviser or the
Distributor, directly or through an affiliate, may use its fee revenue, past
profits, or other resources, without limitation, to pay promotional and
administrative expenses in connection with the offer and sale of shares of the
Funds. In addition, the Plan provides that the Adviser, the Sub-Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Funds' shares,
or to third parties, including banks, that render shareholder support services.
The Plan has been approved by the Board of Trustees. As required by the Rule,
the Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and have determined that there
is a reasonable likelihood that the Plan will benefit the Funds and their
shareholders. In particular, the Trustees noted that the Plan does
<PAGE>
not authorize payments by the Funds other than the advisory and administrative
fees authorized under the investment advisory and administration agreements. To
the extent that the Plan gives the Adviser, the Sub-Adviser or the Distributor
greater flexibility in connection with the distribution of shares of the Funds,
additional sales of the Funds' shares may result. Additionally, certain
shareholder support services may be provided more effectively under the Plan by
local entities with whom shareholders have other relationships.
CLASS B SHARES DISTRIBUTION PLAN.
The Victory Portfolios has adopted a Distribution Plan for Class B shares of the
Balanced Fund, Diversified Stock Fund, Government Bond Fund, International
Growth Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio Regional
Stock Fund and Special Value Fund under the Rule. The Distribution Plan adopted
by the Trustees with respect to the Class B shares of the Funds provides that
each Fund will pay the Distributor a distribution fee under the Plan at the
annual rate of 0.75% of the average daily net assets of the Fund attributable to
the Class B shares. The distribution fees may be used by the Distributor for:
(a) costs of printing and distributing each Fund's prospectus, statement of
additional information and reports to prospective investors in the Funds; (b)
costs involved in preparing, printing and distributing sales literature
pertaining to the Funds; (c) an allocation of overhead and other branch office
distribution-related expenses of the Distributor; (d) payments to persons who
provide support services in connection with the distribution of each Fund's
Class B shares, including but not limited to, office space and equipment,
telephone facilities, answering routine inquiries regarding the Funds,
processing shareholder transactions and providing any other shareholder services
not otherwise provided by the Victory Portfolios' transfer agent; (e) accruals
for interest on the amount of the foregoing expenses that exceed the
distribution fee and the CDSCs received by the Distributor; and (f) any other
expense primarily intended to result in the sale of the Funds' Class B shares,
including, without limitation, payments to salesmen and selling dealers at the
time of the sale of Class B shares, if applicable, and continuing fees to each
such salesmen and selling dealers, which fee shall begin to accrue immediately
after the sale of such shares.
The amount of the Distribution Fees payable by any Fund under the Distribution
Plan is not related directly to expenses incurred by the Distributor and the
Distribution Plan does not obligate the Funds to reimburse the Distributor for
such expenses. The Distribution Fees set forth in the Distribution Plan will be
paid by each Fund to the Distributor unless and until the Plan is terminated or
not renewed with respect to such Fund; any distribution or service expenses
incurred by the Distributor on behalf of the Funds in excess of payments of the
Distribution Fees specified above which the Distributor has accrued through the
termination date are the sole responsibility and liability of the Distributor
and not an obligation of the Funds.
The Distribution Plan for the Class B shares specifically recognizes that either
the Adviser or the Distributor, directly or through an affiliate, may use its
fee revenue, past profits, or other resources, without limitation, to pay
promotional and administrative expenses in connection with the offer and sale of
shares of the Funds. In addition, the Plan provides that the Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Funds' Class B
shares, or to third parties, including banks, that render shareholder support
services.
<PAGE>
The Distribution Plan was approved by the Trustees, including the independent
Trustees, at a meeting called for that purpose. As required by Rule 12b-1, the
Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and have determined that there
is a reasonable likelihood that the Plan will benefit the Funds and their Class
B shareholders. To the extent that the Plan gives the Advisers or the
Distributor greater flexibility in connection with the distribution of Class B
shares of the Funds, additional sales of the Funds' Class B shares may result.
Additionally, certain Class B shareholder support services may be provided more
effectively under the Plan by local entities with whom shareholders have other
relationships.
FUND ACCOUNTANT.
BISYS Fund Services Ohio, Inc. ("BISYS, Inc.") serves as fund accountant for the
Funds pursuant to a fund accounting agreement with the Victory Portfolios dated
May 31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the
Victory Portfolios, BISYS, Inc. calculates each Fund's net asset value, the
dividend and capital gain distribution, if any, and the yield. BISYS, Inc. also
provides a current security position report, a summary report of transactions
and pending maturities, a current cash position report, and maintains the
general ledger accounting records for the Funds. Under the Fund Accounting
Agreement, BISYS, Inc. is entitled to receive annual fees of .03% of the first
$100 million of the Fund's daily average net assets, .02% of the next $100
million of the Fund's daily average net assets, and .01% of the Fund's remaining
daily average net assets. These annual fees are subject to a minimum monthly
assets charge of $2,500 per taxable fund, $2,917 per tax-free fund and $3,333
per international fund and does not include out-of-pocket expenses or multiple
class charges of $833 per month assessed for each class of shares after the
first class.
For the fiscal years ended October 31, 1996, 1995, and 1994 the Fund accountant
earned the following fund accounting fees of:
Fund 1996 1995 1994
- ---- ---- ---- ----
Balanced Fund 93,776 87,894 60,781
Diversified Stock Fund 159,249 141,598 152,663
Financial Reserves Fund 78,188 100,934 276,849
Fund for Income 57,144 32,288
Government Mortgage Fund 50,487 83,080 106,719
Growth Fund 35,364 49,945 36,706(a)
Institutional Money Market Fund 86,455 50,238(b) 75,245(b)
Intermediate Income Fund 61,867 71,451 62,855
International Growth Fund 90,570 121,305 84,710
Investment Quality Bond Fund 52,699 70,983 62,067
Limited Term Income Fund 39,040 89,012 28,184
National Municipal Bond Fund 62,995 24,041(c) 7,193/
33,569(c)
New York Tax-Free Fund 51,388 48,533 152,663
Ohio Municipal Bond Fund 51,845 43,204 39,520
Ohio Municipal Money Market Fund 65,058 13,370/ 140,235/
30,071(d) 259,581(e)
Ohio Regional Stock Fund 51,094 30,563 23,521
Prime Obligations Fund 85,261 260,571 454,251
Special Growth Fund 57,804 20,897 16,783
Special Value Fund 79,170 75,514 52,627
Stock Index Fund 87,027 22,715 15,844(a)
Tax-Free Money Market Fund 107,911 112,625 129,044
U.S. Government Obligation Fund 85,062 243,249 152,663
Value Fund 71,046 124,400 96,327(a)
(a) 12/3/93 (commencement of operations) to 10/31/94.
(b) Fiscal period ended 10/31/95, fiscal year ended 4/30/95.
(c) Fiscal years ended 4/30/94 and 4/30/95, fiscal period ended 10/31/95.
(d) For the period ended 10/31/95 and the period from 6/5/95 through 8/31/95.
(e) In the fiscal year ended 8/31/95, Primary Funds Service Corporation and
Federated Administrative Services earned accounting fees of $140,235 and
$259,581, respectively.
CUSTODIAN.
Cash and securities owned by each of the Victory Portfolios are held by Key
Trust as custodian pursuant to a Custodian Agreement dated August 1, 1996. Cash
and securities owned by the Funds are also held by Morgan Stanley Trust Company
("Morgan Stanley") as sub-custodian, and certain foreign sub-custodians,
pursuant to a Sub-Custody Agreement. Under these Agreements, Key Trust and
Morgan Stanley each (1) maintains a separate account or accounts in the name of
each respective fund; (2) makes receipts and disbursements of money on behalf of
each Fund; (3) collects and receives all income and other payments and
distributions on account of portfolio securities; (4) responds to correspondence
from security brokers and others relating to its duties; and (5) makes periodic
reports to the Trustees concerning The Victory Portfolios' operations. Key Trust
may, with the approval of a fund and at the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of a fund, provided that
Key Trust shall remain liable for the performance of all of its duties under the
Custodian Agreement.
INDEPENDENT ACCOUNTANTS.
The audited financial statements of the Victory Portfolios for the fiscal year
ended October 31, 1996 are incorporated by reference herein. The financial
statements for the fiscal year ended October 31, 1996 have been audited by
Coopers & Lybrand L.L.P. as set forth in their report incorporated by reference
herein, and are included in reliance upon such report and on the authority of
such firm as experts in auditing and accounting. Coopers & Lybrand L.L.P. serves
as The Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s address is 100
East Broad Street, Columbus, Ohio 43215.
LEGAL COUNSEL.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022 is
the counsel to the Victory Portfolios.
EXPENSES.
The Funds bear the following expenses relating to its operations: taxes,
interest, brokerage fees and commissions, fees of the Trustees, Commission fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to current
shareholders, outside auditing and legal expenses, advisory and administration
fees, fees and out-of-pocket expenses of the custodian and transfer agent,
certain insurance premiums, costs of maintenance of the fund's existence, costs
of shareholders' reports and meetings, and any extraordinary expenses incurred
in the Funds' operation.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES.
The Victory Portfolios (sometimes referred to as the "Trust") is a Delaware
business trust. The Delaware Trust Instrument authorizes the Trustees to issue
an unlimited number of shares, which are units of beneficial interest, without
par value. The Victory Portfolios presently has twenty-six series of shares,
which represent interests in the following funds and their respective classes,
if any:
Balanced Fund
Class A Shares
Class B Shares
Diversified Stock Fund
Class A Shares
Class B Shares
Financial Reserves Fund
Fund For Income Fund
Government Mortgage Fund
Growth Fund
Institutional Money Market Fund
Intermediate Income Fund
International Growth Fund
Class A Shares
Class B Shares
Investment Quality Bond Fund
Lakefront Fund
Limited Term Income Fund
National Municipal Bond Fund
Class A Shares
Class B Shares
<PAGE>
New York Tax-Free Fund
Class A Shares
Class B Shares
Ohio Municipal Bond Fund
Ohio Municipal Money Market Fund
Ohio Regional Stock Fund
Class A Shares
Class B Shares
Prime Obligations Fund
Real Estate Investment Fund
Special Growth Fund
Special Value Fund
Class A Shares
Class B Shares
Stock Index Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund
Select Shares
Investor Shares
Value Fund
The Victory Portfolios' Trust Instrument authorizes the Trustees to divide or
redivide any unissued shares of the Victory Portfolios into one or more
additional series by setting or changing in any one or more aspects their
respective preferences, conversion or other rights, voting power, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectus and this Statement of Additional
Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of a fund are entitled to receive the assets available for
distribution belonging to the fund, and a proportionate distribution, based upon
the relative asset values of the respective funds, of any general assets not
belonging to any particular fund which are available for distribution.
To the best knowledge of the Victory Portfolios, the names and addresses of the
holders of 5% or more of the outstanding shares of each class of the Funds'
equity securities as of January 17, 1997, and the percentage of the outstanding
shares held by such holders are set forth below:
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCED FUND- Society National Bank 96.9% -
CLASS A SHARES of Cleveland and Company
4900 Tiedeman Road
Cleveland, Ohio 44144
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES KeyCorp Plan Balanced Fund - 18.4%
127 Public Square
Cleveland, OH 44114
- ------------------------------------------------------------------------------------------------------------------
DIVERSIFIED STOCK FUND - Society National Bank 91.0% -
CLASS A SHARES of Cleveland and Company
4900 Tiedeman Road
Cleveland, Ohio 44144
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL RESERVES FUND Society National Bank 95.2% -
of Cleveland and Company
4900 Tiedeman Road
Cleveland, Ohio 44144
- ------------------------------------------------------------------------------------------------------------------
FUND FOR INCOME Key Trust of Cleveland 13.0% -
4900 Tiedeman Road
Cleveland, Ohio 44144
- ------------------------------------------------------------------------------------------------------------------
GOVERNMENT MORTGAGE Society National Bank of Cleveland 97.1% -
FUND and Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
Bombardier Corp. - 5.6%
Collective Investment Trust
Attn: S.A. Kiker
c/o Society National Bank
127 Public Square
Cleveland, Ohio 44144
- ------------------------------------------------------------------------------------------------------------------
GROWTH FUND Society National Bank of Cleveland 97.5% -
and Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
KeyCorp Cash Balance 39.8%
Mutual/Equity Fund
127 Public Square
Cleveland, OH 44114
- ------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL MONEY BISYS Fund Services Ohio Inc. 99.7% -
MARKET FUND-SELECT Attn: Iris Young
CLASS 3435 Steltzer Rd.
Columbus, Ohio 43219-3035
<PAGE>
- ------------------------------------------------------------------------------------------------------------------
Liefke & Co. - 97.6%
c/o KeyCorp Trust Services
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
INVESTOR CLASS Syracuse University Treasurers Office 16.7% 16.7%
Skytop Road - Skytop Offices
Syracuse, New York 13244-5300
- ------------------------------------------------------------------------------------------------------------------
KeyCorp 401(k) Plan 11.8% 11.8%
127 Public Square
Cleveland, Ohio 44114
- ------------------------------------------------------------------------------------------------------------------
INTERMEDIATE INCOME Society National Bank of Cleveland 99.3% -
FUND and Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
KeyCorp 401(k) Plan - 25.7%
127 Public Square
Cleveland, Ohio 44114
- ------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH Society National Bank 96.5%
FUND-CLASS A of Cleveland and Company
4900 Tiedeman Road
Cleveland, Ohio 44144
- ------------------------------------------------------------------------------------------------------------------
CLASS B IRA of Jerry L. Ufford 20.3% 20.3%
22315 Berry Drive
Rocky River, OH 44116
- ------------------------------------------------------------------------------------------------------------------
Bruce R. McBroom 6.8% 6.8%
Phyliss McBroom
7628 Collins St.
Lowville, NY 13367
- ------------------------------------------------------------------------------------------------------------------
A. Buell Arnold 9.3% 9.3%
Doris B. Arnold Trustees
Arnold Family Trust
12 Bartlett Lane
Delmar, NY 12054
- ------------------------------------------------------------------------------------------------------------------
Josephine E. Marx 6.6% 6.6%
1 Scott Place
Schenectady, NY 12309
- ------------------------------------------------------------------------------------------------------------------
Brandon Bradley 9.8% 9.8%
Box 398
Route 37
Hogansburg, NY 13655
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT QUALITY BOND Society National Bank 88.4% -
FUND of Cleveland and Company
4900 Tiedeman Road
Cleveland, OH 44144
<PAGE>
- ------------------------------------------------------------------------------------------------------------------
LIMITED TERM INCOME Society National Bank 91.1% -
FUND of Cleveland and Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
Aultman Health Services - 20.7%
2600 Sixth Street SW
Canton, OH 44710
- ------------------------------------------------------------------------------------------------------------------
NATIONAL MUNICIPAL BOND Key Trust of Cleveland 23.6% -
FUND-CLASS A SHARES 4900 Tiedeman Road
Cleveland, Ohio 44144
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES Patricia R. Deboer 5.3% 5.3%
5481 South 125 East
Ogden, UT 84405
- ------------------------------------------------------------------------------------------------------------------
El Matador Inc. 9.7% 9.7%
2564 Ogden Avenue
Ogden, UT 84401
- ------------------------------------------------------------------------------------------------------------------
Key Bank of Maine, Escrow Agent 20.1% 20.1%
for Robert, Geraldine and Janet Sylvester
and GFS ND Manufacturing Co.
1 Canal Plaza
Portland, ME 04101
- ------------------------------------------------------------------------------------------------------------------
Marden Spencer 6.2% 6.2%
958 E. Olympus Park Dr., #A102
Salt Lake City, UT 84117
- ------------------------------------------------------------------------------------------------------------------
Faye A. Smith 5.0% 5.0%
P.O. Box 5
Oxford, ME 04270
- ------------------------------------------------------------------------------------------------------------------
Ethel F. Robinson 9.8% 9.8%
2716 100th SE
Everett, WA 98208-4338
- ------------------------------------------------------------------------------------------------------------------
NEW YORK TAX-FREE Key Trust of Cleveland 16.8% -
FUND-CLASS A SHARES 4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES Leon A. Philp 7.1% 7.1%
15 Budd Avenue
Clarence, NY 14031
- ------------------------------------------------------------------------------------------------------------------
OHIO MUNICIPAL BOND Society National Bank of Cleveland and 89.5% -
FUND Company
4900 Tiedeman Road
Cleveland, OH 44144
<PAGE>
- ------------------------------------------------------------------------------------------------------------------
OHIO MUNICIPAL MONEY Society National Bank of Cleveland and 19.9% -
MARKET FUND Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 56.9% -
2025 Ontario Street
Cleveland, OH 44115
- ------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 14.4% -
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
OHIO REGIONAL STOCK Society National Bank of Cleveland and 87.6% -
FUND - CLASS A SHARES Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
IBEW Local #38 5.1%
c/o Society National Bank
127 Public Square
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES IRA of Jerry Ufford 10.4% 10.4%
22315 Berry Drive
Rocky River, OH 44116
- ------------------------------------------------------------------------------------------------------------------
IRA of Gerald Mencl 6.0% 6.0%
5899 Canal Road
Valley View, OH 44125
- ------------------------------------------------------------------------------------------------------------------
IRA of Pamela S. Sedmak 5.0% 5.0%
6832 Teasel Ct.
Solon, OH 44139
- ------------------------------------------------------------------------------------------------------------------
IRA of Stephen A. Worth 8.7% 8.7%
10064 Hunting Dr.
Brecksville, OH 44141
- ------------------------------------------------------------------------------------------------------------------
PRIME OBLIGATIONS FUND Society National Bank of Cleveland and 10.7% -
Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
Key Equity Capital Corp. 6.3% -
127 Public Square
Cleveland, OH 44114
- ------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 22.7% -
2025 Ontario Street
Cleveland, OH 44115
- ------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 37.3% -
4900 Tiedeman Road
Cleveland, OH 44144
<PAGE>
- ------------------------------------------------------------------------------------------------------------------
SPECIAL GROWTH FUND Society National Bank of Cleveland and 99.1% -
Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
KeyCorp Cash Balance Mutual - 35.5%
Equity Fund
127 Public Square
Cleveland, OH 44114
- ------------------------------------------------------------------------------------------------------------------
SPECIAL VALUE FUND-CLASS Society National Bank of Cleveland and 93.9% -
A SHARES Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
KeyCorp Cash Balance Plan - 16.2%
Human Resources
127 Public Square
Cleveland, OH 44114
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES IRA of Jeffrey L. Ufford 7.3% 7.3%
22315 Berry Drive
Rocky River, Ohio 44116
- ------------------------------------------------------------------------------------------------------------------
IRA of Frank W. Kilgore 9.1% 9.1%
30764 Pirtle Drive
Albany, OR 97321
- ------------------------------------------------------------------------------------------------------------------
IRA of Robert F. Clegg 11.5% 11.5%
5402 Bennington Woods Ct.
Columbus, OH 43220-2611
- ------------------------------------------------------------------------------------------------------------------
First Assembly of God 8.3% 8.3%
Daniel Wood, President
1370 Richmond Road
Lyndhurst, Ohio 44124
- ------------------------------------------------------------------------------------------------------------------
IRA of Joseph R. Armeric 7.4% 7.4%
295 W. 4th Street
Columbus, OH 43201
- ------------------------------------------------------------------------------------------------------------------
STOCK INDEX FUND Society National Bank and 99.3% -
Trust Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
State Industrial Stock Index - 5.1%
R.W. Lutts
Society National Bank
127 Public Square
Cleveland, OH 44101-4717
<PAGE>
- ------------------------------------------------------------------------------------------------------------------
Steris Corp. - 7.1%
Attn: M.F. Pope
Society National Bank
127 Public Square
Cleveland, OH 44101-4717
- ------------------------------------------------------------------------------------------------------------------
Eaton SPIP Victory Stock Index - 8.3%
Eaton Corporation
Eaton Center
Cleveland, OH 44114
- ------------------------------------------------------------------------------------------------------------------
TAX-FREE MONEY MARKET Society National Bank of Cleveland and 47.2%
FUND Company
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 43.6%
2025 Ontario Street
Cleveland, OH 44115
- ------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 8.0%
4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT Society National Bank of Cleveland and 38.3% -
OBLIGATIONS FUND - Company
SELECT SHARES 4900 Tiedeman Road
Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 30.1%
2025 Ontario Street
Cleveland, OH 44115
- ------------------------------------------------------------------------------------------------------------------
Bost & Co. 10.9% -
c/o Mellon Bank
3 Mellon Bank Ctr.
Pittsburgh, PA 15259
- ------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT Key Clearing Corp. 100%
OBLIGATIONS FUND - 4900 Tiedeman Road
INVESTOR SHARES Cleveland, OH 44144
- ------------------------------------------------------------------------------------------------------------------
Iron Workers Pension/Annuity - 13.3%
Charles Way
P.O. Box 398
Dayton, OH 45401
- ------------------------------------------------------------------------------------------------------------------
KeyCorp PRISM - 7.0%
127 Public Square
Cleveland, OH 44114
- ------------------------------------------------------------------------------------------------------------------
VALUE FUND KeyCorp 401(k) Plan 52.4% -
127 Public Square
Cleveland, OH 44114
==================================================================================================================
</TABLE>
<PAGE>
Shares of the Victory Portfolios are entitled to one vote per share (with
proportional voting for fractional shares) on such matters as shareholders are
entitled to vote. Shareholders vote as a single class on all matters except (1)
when required by the 1940 Act, shares shall be voted by individual series, and
(2) when the Trustees have determined that the matter affects only the interests
of one or more series, then only shareholders of such series shall be entitled
to vote thereon. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees have been elected by the shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. A meeting shall be held for such purpose upon the written request of
the holders of not less than 10% of the outstanding shares. Upon written request
by ten or more shareholders meeting the qualifications of Section 16(c) of the
1940 Act, (i.e., persons who have been shareholders for at least six months, and
who hold shares having a net asset value of at least $25,000 or constituting 1%
of the outstanding shares) stating that such shareholders wish to communicate
with the other shareholders for the purpose of obtaining the signatures
necessary to demand a meeting to consider removal of a Trustee, The Victory
Portfolios will provide a list of shareholders or disseminate appropriate
materials (at the expense of the requesting shareholders). Except as set forth
above, the Trustees shall continue to hold office and may appoint their
successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Victory Portfolios shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each fund of the Victory Portfolios affected by the matter. For
purposes of determining whether the approval of a majority of the outstanding
shares of a fund will be required in connection with a matter, a fund will be
deemed to be affected by a matter unless it is clear that the interests of each
fund in the matter are identical, or that the matter does not affect any
interest of the fund. Under Rule 18f-2, the approval of an investment advisory
agreement or any change in investment policy would be effectively acted upon
with respect to a fund only if approved by a majority of the outstanding shares
of such fund. However, Rule 18f-2 also provides that the ratification of
independent accountants, the approval of principal underwriting contracts, and
the election of Trustees may be effectively acted upon by shareholders of the
Victory Portfolios voting without regard to series.
SHAREHOLDER AND TRUSTEE LIABILITY.
The Victory Portfolios is organized as a Delaware business trust. The Delaware
Business Trust Act provides that a shareholder of a Delaware business trust
shall be entitled to the same limitation of personal liability extended to
shareholders of Delaware corporations, and the Delaware Trust Instrument
provides that shareholders of the Victory Portfolios shall not be liable for the
obligations of the Victory Portfolios. The Delaware Trust Instrument also
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his or her being or having been a
shareholder. The Delaware Trust Instrument also provides that the Victory
Portfolios shall, upon request, assume the defense of any claim made against any
shareholder for any act or
<PAGE>
obligation of the Victory Portfolios, and shall satisfy any judgment thereon.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer, or agent
of the Victory Portfolios shall be personally liable in connection with the
administration or preservation of the assets of the funds or the conduct of the
Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or the Victory Portfolios shall look solely to the
assets of the Victory Portfolios for payment.
MISCELLANEOUS.
As used in the Prospectus and in this SAI, "assets belonging to a fund" (or
"assets belonging to the Fund") means the consideration received by the Victory
Portfolios upon the issuance or sale of shares of a Fund, together with all
income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale, exchange, or liquidation of such
investments, and any funds or payments derived from any reinvestment of such
proceeds and any general assets of the Victory Portfolios, which general
liabilities and expenses are not readily identified as belonging to a particular
Fund that are allocated to that Fund by the Trustees. The Trustees may allocate
such general assets in any manner they deem fair and equitable. It is
anticipated that the factor that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of each respective fund at the time of
allocation. Assets belonging to a particular Fund are charged with the direct
liabilities and expenses in respect of that Fund, and with a share of the
general liabilities and expenses of each of the Funds not readily identified as
belonging to a particular Fund, which are allocated to each Fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees and will be in accordance with generally
accepted accounting principles. Determinations by the Trustees as to the timing
of the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular fund are
conclusive.
As used in the Prospectus and in this SAI, a "vote of a majority of the
outstanding shares" of the Fund means the affirmative vote of the lesser of (a)
67% or more of the shares of the Fund present at a meeting at which the holders
of more than 50% of the outstanding shares of the Fund are represented in person
or by proxy, or (b) more than 50% of the outstanding shares of the Fund.
The Victory Portfolios is registered with the Commission as an open-end
management investment company. Such registration does not involve supervision by
the Commission of the management or policies of the Victory Portfolios.
<PAGE>
The Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the Commission. Copies of such information may
be obtained from the Commission upon payment of the prescribed fee.
THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE NOT AN OFFERING
OF THE SECURITIES DESCRIBED IN THESE DOCUMENTS IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE. NO SALESMAN, DEALER, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE
CONTAINED IN THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION.
<PAGE>
APPENDIX
DESCRIPTION OF SECURITY RATINGS.
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Adviser or the Sub-Adviser with regard to
portfolio investments for the Funds include Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited and its
affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by the Adviser or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements - their
future cannot be considered as well assured. Often the protection of interest
and principal payments may
<PAGE>
be very moderate and thereby not well safeguarded during both good and bad times
in the future. Uncertainty of position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only slightly
more than for risk-free U.S. Treasury debt.
AA+, AA, AA-. High credit quality Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as
<PAGE>
bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic or financial conditions are unlikely to increase
investment risk significantly.
AA. Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic, or financial conditions may increase investment
risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is strong, although adverse
changes in business, economic or financial conditions may lead to increased
investment risk.
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- - Leading market positions in well-established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios,
<PAGE>
while sound, may be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3. Satisfactory liquidity and other protection factors qualify issue as to
investment grade.
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
<PAGE>
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely repayment.
A2. Obligations supported by a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in business, economic or
financial conditions.
SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
SHORT-TERM DEBT RATINGS
<PAGE>
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
BankWatch Ratings do not constitute a recommendation to buy or sell securities
of any of these companies. Further, BankWatch does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less. The TBW Short-Term Ratings specifically assess the
likelihood of an untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
DEFINITIONS OF CERTAIN MONEY MARKET INSTRUMENTS
Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.
Certificates of Deposit. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Bankers' Acceptances. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations. U.S. Treasury Obligations are obligations issued or
guaranteed as to payment of principal and interest by the full faith and credit
of the U.S. Government.
<PAGE>
These obligations may include Treasury bills, notes and bonds, and issues of
agencies and instrumentalities of the U.S. Government, provided such obligations
are guaranteed as to payment of principal and interest by the full faith and
credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations. Obligations issued by
agencies and instrumentalities of the U.S. Government include such agencies and
instrumentalities as the Government National Mortgage Association, the
Export-Import Bank of the United States, the Tennessee Valley Authority, the
Farmers Home Administration, the Federal Home Loan Banks, the Federal
Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land
Banks, the Federal Housing Administration, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
Government National Mortgage Association are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated to
do so by law. A Fund will invest in the obligations of such instrumentalities
only when the investment adviser believes that the credit risk with respect to
the instrumentality is minimal.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
GOVERNMENT BOND FUND
MARCH 1, 1997
This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Prospectus of The Victory Portfolios - Government Bond
Fund, dated the same date as the date hereof (the "Prospectus"). This Statement
of Additional Information is incorporated by reference in its entirety into the
Prospectus. Copies of the Prospectus may be obtained by writing The Victory
Portfolios at P.O. Box 8527, Boston, MA 02266-8527, or by telephoning toll free
800- KEY-FUND or 800-539-3863.
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES............................................2
INVESTMENT LIMITATIONS AND RESTRICTIONS..................................... 4
VALUATION OF PORTFOLIO SECURITIES............................................6
PERFORMANCE................................................................. 6
ADDITIONAL PURCHASE, EXCHANGE AND
REDEMPTION INFORMATION..................................................11
DIVIDENDS AND DISTRIBUTIONS.................................................14
TAXES.......................................................................15
TRUSTEES AND OFFICERS.......................................................16
ADVISORY AND OTHER CONTRACTS................................................21
ADDITIONAL INFORMATION..................................................... 29
APPENDIX................................................................... 32
INDEPENDENT AUDITORS REPORT
FINANCIAL STATEMENTS
INVESTMENT ADVISER
Key Asset Management Inc.
ADMINISTRATOR
BISYS Fund Services
DISTRIBUTOR
BISYS Fund Services
TRANSFER AGENT
State Street Bank and Trust
Company
DIVIDED DISBURSING AGENT AND
SHAREHOLDER SERVICING AGENT
Boston Financial Data Services,
Inc.
CUSTODIAN
Key Trust Company of Ohio, N.A.
INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P.
COUNSEL
Kramer, Levin, Naftalis & Frankel
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end management
investment company. The Victory Portfolios consist of twenty- six series of
units of beneficial interest ("shares"). The outstanding shares represent
interests in the twenty- six separate investment portfolios which are currently
active. This Statement of Additional Information relates to the Class A and
Class B shares of the Victory Government Bond Fund (the "Fund") only. Much of
the information contained in this Statement of Additional Information expands on
subjects discussed in the Prospectus. Capitalized terms not defined herein are
used as defined in the Prospectus. No investment in shares of the Fund should be
made without first reading the Fund's Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS.
The following policies supplement the investment policies of the Fund set forth
in the Prospectus. The Fund's investments in the following securities and other
financial instruments are subject to the other investment policies and
limitations described in the Prospectus and this Statement of Additional
Information.
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by the Fund to purchase or sell specific securities at a predetermined price or
yield, with payment and delivery taking place after the customary settlement
period for that type of security (and more than seven days in the future).
Typically, no interest accrues to the purchaser until the security is delivered.
The Fund may receive fees for entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because the Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage.
When delayed-delivery purchases are outstanding, the Fund will set aside cash
and appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When the Fund has sold a security on a delayed-delivery
basis, it does not participate in further gains or losses with respect to the
security. If the other party to a delayed-delivery transaction fails to deliver
or pay for the securities, the Fund could miss a favorable price or yield
opportunity or suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.
- 2 -
<PAGE>
ILLIQUID INVESTMENTS. Illiquid investments cannot be sold or disposed of, within
seven business days, in the ordinary course of business at approximately the
prices at which they are valued. Under the supervision of The Victory
Portfolios' Board of Trustees (the "Board of Trustees" or the "Trustees"), the
Adviser determines the liquidity of the Fund's investments and, through reports
from the Adviser, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of the Fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Investments currently considered by the Fund to be
illiquid include repurchase agreements not entitling the holder to payment of
principal and interest within seven days, over the counter options,
non-government stripped fixed-rate mortgage-backed securities, and Restricted
Securities. Also, the Adviser may determine some government-stripped fixed-rate
mortgage backed securities, loans and other direct debt instruments, and swap
agreements to be illiquid. However, with respect to over-the-counter options the
Fund writes, all or a portion of the value of the underlying instrument may be
illiquid depending on the assets held to cover the option and the nature and
terms of any agreement the Fund may have to close out the option before
expiration. In the absence of market quotations, illiquid investments are priced
at fair value as determined in good faith by a committee appointed by the
Trustees. If through a change in values, net assets, or other circumstances, the
Fund were in a position where more than 15% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the seller
to pay the agreed upon price, which obligation is in effect secured by the value
(at least equal to the amount of the agreed upon resale price and marked to
market daily) of the underlying security. The Fund may engage in a repurchase
agreement with respect to any security in which it is authorized to invest.
Since it is not possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the underlying
securities, as well as delays and costs to the Fund in connection with
bankruptcy proceedings), it is The Victory Portfolios' current policy to limit
repurchase agreements for the Fund to those parties whose creditworthiness has
been reviewed and found satisfactory by the Advisers . Repurchase agreements are
considered by the staff of the Commission to be loans by the Fund.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the Fund sells
the portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, the Fund will
maintain appropriate liquid assets in a segregated custodial account to cover
its obligation under the agreement. The Fund will enter into reverse repurchase
agreements only with parties whose creditworthiness is deemed satisfactory by
the Adviser. Such transactions may increase fluctuations in the market value of
the Fund's assets, and may be viewed as a form of leverage.
RESTRICTED SECURITIES. The Fund may sell restricted securities, which generally
can be sold in privately negotiated transactions, pursuant to an exemption from
registration under the 1933 Act, or in a registered public offering. Where
registration is required, the Fund may be obligated to pay all or part of the
- 3 -
<PAGE>
registration expense and a considerable period may elapse between the time it
decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to seek registration of the
shares.
SECURITIES LENDING. The Fund may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the Fund to
retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by the Adviser to be
of good standing. Furthermore, they will only be made if, in Society's judgment,
the consideration to be earned from such loans would justify the risk.
It is the current view of the staff of the Commission that the Fund may engage
in loan transactions only under the following conditions: (1) the Fund must
receive 100% collateral in the form of cash or cash equivalents (e.g., U.S.
Treasury bills or notes) from the borrower; (2) the borrower must increase the
collateral whenever the market value of the securities loaned (determined on a
daily basis) rises above the value of the collateral; (3) after giving notice,
the Fund must be able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan or a flat fee from the borrower, as well
as amounts equivalent to any dividends, interest, or other distributions on the
securities loaned and to any increase in market value; (5) the Fund may pay only
reasonable custodian fees in connection with the loan; and (6) the Board of
Trustees must be able to vote proxies on the securities loaned, either by
terminating the loan or by entering into an alternative arrangement with the
borrower.
Cash received through loan transactions may be invested in any security in which
the Fund is authorized to invest. Investing this cash subjects that investment,
as well as the security loaned, to market forces (i.e., capital appreciation or
depreciation).
INVESTMENT LIMITATIONS AND RESTRICTIONS
The following investment restrictions are fundamental with respect to the Fund
and may be changed only a vote of a majority of the outstanding shares of the
Fund as defined in "Additional Information -- Miscellaneous" of this Statement
of Additional Information.
The Fund may not:
1. With respect to 75% of the Fund's total assets, purchase the securities of
any issuer (other than securities issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities) if, as a result, (a) more than 5% of
the Fund's total assets would be invested in the securities of that issuer, or
(b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer.
2. Issue any senior security (as defined in the 1940 Act), except that (a) the
Fund may engage in transactions which may result in the issuance of senior
securities to the extent permissible under the applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities that may be deemed senior securities to the extent permitted
under applicable regulations or interpretations of the 1940 Act; (c) subject to
the restrictions set forth below, the Fund may borrow money as authorized by the
1940 Act.
- 4 -
<PAGE>
3. Borrow money, except that the Fund may borrow money from banks for temporary
or emergency purposes (not for leveraging or investment), and engage in reverse
repurchase agreements in an amount not exceeding 33-1/3% of its total assets,
including the amount borrowed less liabilities other than borrowings (any
borrowings exceeding this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the
33-1/3% limitation), provided that any such borrowings representing more than 5%
of the Fund's total assets must be repaid before the Fund may make additional
investments.
4. Underwrite securities issued by others, except to the extent that the Fund
may be considered an underwriter within the meaning of the Securities Act of
1933 in the disposition of restricted securities.
5. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instrument backed by real estate).
6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
7. Lend any portfolio security or make any other loan if, as a result, more than
33-1/3% of the Fund's total assets would be lent to other parties, but this
restriction does not apply to purchases of debt securities or to repurchase
agreements.
The following restrictions are nonfundamental and may be changed without
shareholder approval:
1. The Fund may not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
and provided that transactions in futures contracts and options are not deemed
to constitute selling securities short.
2. The Fund may purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of transactions and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin.
3. The Fund may not purchase any security while borrowings representing more
than 5% of the Fund's total assets are outstanding.
4. The Fund may not purchase any security or enter into a repurchase agreement
if, as a result, more than 15% of the Fund's net assets would be invested in
repurchase agreements not entitling the holder to payment of principal and
interest within seven days and in securities that are illiquid by virtue of
legal or contractual restriction on resale or the absence of a readily available
market.
5. The Fund shall not invest in the securities of other investment companies,
except that the Fund may invest in shares of money market funds that are not
"affiliated persons" of the fund and that limit their investment by the Fund,
provided investment by the Fund is limited to: (a) ten percent of the Fund's
assets; (b) five percent of the Fund's total assets in the shares of a single
money market fund; and (c) not more than three percent of the net assets of any
one acquired money market fund. The investment adviser will waive the portion of
its fee attributable to the assets of the Fund invested in such money market
funds to the extent required by the laws of any jurisdiction in which shares of
the Fund are registered for sale.
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<PAGE>
GENERAL. The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be invested
in any security or other asset, or sets forth a policy regarding quality
standards, such standard or percentage limitation will be determined immediately
after and as a result of the Fund's acquisition of such security or other asset
except in the case of borrowing (or other activities that may be deemed to
result in the issuance of a "senior security" under the 1940 Act). Accordingly,
any subsequent change in values, net assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of the Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of valuations
provided by an independent pricing service, approved by the Trustees, which uses
information with respect to transactions of a security, quotations from dealers,
market transactions in comparable securities, and various relationships between
securities, in determining value. Specific investment securities which are not
priced by the approved pricing service will be valued according to quotations
obtained from dealers who are market makers in those securities. Investment
securities with less than 60 days to maturity when purchased are valued at
amortized cost which approximates market value. Investment securities not having
readily available market quotations will be priced at fair value using a
methodology approved in good faith by the Trustees.
PERFORMANCE
From time to time the "standardized yield," "dividend yield," "average annual
total return," "total return," and "total return at net asset value" of an
investment in each class of Fund shares may be advertised. An explanation of how
yields and total returns are calculated for each class and the components of
those calculations are set forth below.
Yield and total return information may be useful to investors in reviewing the
Fund's performance. The Fund's advertisement of its performance must, under
applicable Commission rules, include the average annual total returns for each
class of shares of the Fund for the 1, 5 and 10-year period (or the life of the
class, if less) as of the most recently ended calendar quarter. This enables an
investor to compare the Fund's performance to the performance of other funds for
the same periods. However, a number of factors should be considered before using
such information as a basis for comparison with other investments. An investment
in the Fund is not insured; its yield and total return are not guaranteed and
normally will fluctuate on a daily basis. When redeemed, an investor's shares
may be worth more or less than their original cost. Yield and total return for
any given past period are not a prediction or representation by The Victory
Portfolios of future yields or rates of return on its shares. The yield and
total returns of the Class A and Class B shares of the Fund are affected by
portfolio quality, portfolio maturity, the type of investments the Fund holds
and its operating expenses.
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<PAGE>
STANDARDIZED YIELDS.
The Fund's "yield" (referred to as "standardized yield") for a given 30-day
period for a class of shares is calculated using the following formula set forth
in rules adopted by the Commission that apply to all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)6 - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense reimbursements).
c = the average daily number of shares of that class outstanding during the
30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day of
the period, adjusted for undistributed net investment income.
The standardized yield of a class of shares for a 30-day period may differ from
its yield for any other period. The Commission formula assumes that the
standardized yield for a 30-day period occurs at a constant rate for a six-month
period and is annualized at the end of the six-month period. This standardized
yield is not based on actual distributions paid by the Fund to shareholders in
the 30-day period, but is a hypothetical yield based upon the net investment
income from the Fund's portfolio investments calculated for that period. The
standardized yield may differ from the "dividend yield" of that class, described
below. Additionally, because each class of shares is subject to different
expenses, it is likely that the standardized yields of the Fund classes of
shares will differ. The yield on Class A shares and the Class B shares for the
30-day period ended October 31, 1996 was 4.96% and 4.03%, respectively.
DIVIDEND YIELD AND DISTRIBUTION RETURN.
From time to time the Fund may quote a "dividend yield" or a "distribution
return" for each class. Dividend yield is based on the Class A or Class B share
dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions for that class declared during
a stated period of one year or less (for example, 30 days) are added together,
and the sum is divided by the maximum offering price per share of that class A)
on the last day of the period. When the result is annualized for a period of
less than one year, the "dividend yield" is calculated as follows:
<TABLE>
<S> <C>
Dividend Yield of the Class = Dividends of the Class + Number of days (accrual period) x 365
-----------------------------------------------------
Max. Offering Price of the Class (last day of period)
</TABLE>
The maximum offering price for Class A shares includes the maximum front-end
sales charge. For Class B shares, the maximum offering price is the net asset
value per share, without considering the effect of contingent deferred sales
charges ("CDSC").
From time to time similar yield or distribution return calculations may also be
made using the Class A net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields on Class A shares
at maximum offering price and net asset value for the 30-day period ended
October 31, 1996 were 4.96% and 5.21%, respectively. Dividend yield on Class B
shares at maximum offering price for the 30-day period ended October 31, 1996
was 4.03%.
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<PAGE>
TOTAL RETURNS. The "average annual total return" of each class is an average
annual compounded rate of return for each year in a specified number of years.
It is the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
(ERV)1n = Average Annual Total Return
-------
(P)
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV-P = Total Return
-----
P
In calculating total returns for Class A shares, the current maximum sales
charge of 4.75% (as a percentage of the offering price) is deducted from the
initial investment ("P") (unless the return is shown at net asset value, as
discussed below). For Class B shares, the payment of the applicable CDSC (5.0%
for the first year, 4.0% for the second year, 3.0% for the third and fourth
years, 2.0% in the fifth year, 1.0% in the sixth year and none thereafter) is
applied to the investment result for the time period shown (unless the total
return is shown at net asset value, as described below). Total returns also
assume that all dividends and capital gains distributions during the period are
reinvested to buy additional shares at net asset value per share, and that the
investment is redeemed at the end of the period. The average annual total return
and cumulative total return on Class A shares for the period May 3, 1993
(commencement of operations) to October 31, 1996 (life of fund) at maximum
offering price were 3.13% and 11.39%, respectively. For the one year period
ended October 31, 1996, average annual total return for Class A shares was
(1.38)%. The average annual total return and cumulative total return on the
Class B shares for the period September 26, 1994 (commencement of operations) to
October 31, 1996 were 5.65% and 11.85%, respectively. For the one year period
ended October 31, 1996, the average annual total return for Class B shares was
(1.15)%.
From time to time the Fund may also quote an "average annual total return at net
asset value" or a cumulative "total return at net asset value" for Class A or
Class B shares. It is based on the difference in net asset value per share at
the beginning and the end of the period for a hypothetical investment in that
class of shares (without considering front-end or contingent sales charges) and
takes into consideration the reinvestment of dividends and capital gains
distributions. The average annual total return and cumulative total return on
Class A shares for the period May 3, 1993 (commencement of operations) to
October 31, 1996 (life of fund), at net asset value, was 4.58% and 11.39%,
respectively. For the one year period ended October 31, 1996, average annual
total return for Class A shares at net asset value was 3.52%. For the one year
period ended October 31, 1996, the average annual total return at net asset
value for Class B shares at net asset value was 2.77%. The average annual total
return and cumulative total return on Class B shares for the period September
26, 1994 (commencement of operations) to October 31, 1996 were 7.43% and 11.85%,
respectively.
OTHER PERFORMANCE COMPARISONS.
From time to time the Fund may publish the ranking of the performance of its
Class A or Class B shares by Lipper Analytical Services, Inc. ("Lipper"), a
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<PAGE>
widely-recognized independent mutual fund monitoring service. Lipper monitors
the performance of regulated investment companies, including the Fund, and ranks
the performance of the Fund's classes against (1) all other funds, excluding
money market funds, and (2) all other government bond funds. The Lipper
performance rankings are based on total return that includes the reinvestment of
capital gains distributions and income dividends but does not take sales charges
or taxes into consideration.
From time to time the Fund may publish the ranking of the performance of its
Class A or Class B shares by Morningstar, Inc., an independent mutual fund
monitoring service that ranks mutual funds, including the Fund, in broad
investment categories (domestic equity, international equity, taxable bond,
municipal bond, or other) monthly, based upon each fund's three, five and
ten-year average annual total returns (when available) and a risk adjustment
factor that reflects Fund performance relative to three-month U.S. Treasury bill
monthly returns. Such returns are adjusted for fees and sales loads. There are
five ranking categories with a corresponding number of stars: highest (5), above
average (4), neutral (3), below average (2) and lowest (1). Ten percent of the
funds, series or classes in an investment category receive 5 stars, 22.5%
receive 4 stars, 35% receive 3 stars, 22.5% receive 2 stars, and the bottom 10%
receive one star.
The total return on an investment made in Class A or Class B shares of the Fund
may be compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time. The
Consumer Price Index is generally considered to be a measure of inflation. The
Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgage-backed securities. The J.P. Morgan Government Bond Index
generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities that
do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not applicable to indices.
From time to time, the yields and the total returns of Class A or Class B shares
of the Fund may be quoted in and compared to other mutual funds with similar
investment objectives in advertisements, shareholder reports or other
communications to shareholders. The Fund may also include calculations in such
communications that describe hypothetical investment results. (Such performance
examples are based on an express set of assumptions and are not indicative of
the performance of any Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on a
Fund investment are reinvested by being paid in additional Fund shares, any
future income or capital appreciation of a Fund would increase the value, not
only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor (including but not limited
to tax and/or retirement planning), investment management techniques, policies
or investment suitability of the Fund, economic conditions, legislative
- 9 -
<PAGE>
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund, as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund). The Fund may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stock,
bonds and Treasury bills as compared to an investment in shares of the Fund as
well as charts or graphs which illustrate strategies such as dollar cost
averaging, and comparisons of hypothetical yields of investment in tax-exempt
versus taxable investments. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in the Fund. Such advertisements or communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. With proper authorization, the
Fund may reprint articles (or excerpts) written regarding the Fund and provide
them to prospective shareholders. Performance information with respect to the
Fund is generally available by calling 1-800-539-3863.
Investors may also judge, and the Fund may at times advertise, the performance
of Class A or Class B shares by comparing it to the performance of other mutual
funds or mutual fund portfolios with comparable investment objectives and
policies, which performance may be contained in various unmanaged mutual fund or
market indices or rankings such as those prepared by Dow Jones & Co., Inc.,
Standard & Poor's Corporation, Lehman Brothers, Merrill Lynch, and Salomon
Brothers, and in publications issued by Lipper Analytical Services, Inc. and in
the following publications: IBC's Money Fund Reports, Value Line Mutual Fund
Survey, Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The
Wall Street Journal, The New York Times, Business Week, American Banker,
Fortune, Institutional Investor, Ibbotson Associates and U.S.A. Today. In
addition to yield information, general information about the Fund that appears
in a publication such as those mentioned above may also be quoted or reproduced
in advertisements or in reports to shareholders.
Advertisements and sales literature may include discussions of specifics of the
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the investment
adviser, including, but not limited to, its status within the industry, other
services and products it makes available, total assets under management, and its
investment philosophy.
When comparing yield, total return and investment risk of an investment in Class
A or Class B shares of the Fund with other investments, investors should
understand that certain other investments have different risk characteristics
than an investment in shares of the Fund. For example, certificates of deposit
may have fixed rates of return and may be insured as to principal and interest
by the FDIC, while the Fund's returns will fluctuate and its share values and
returns are not guaranteed. Money market accounts offered by banks also may be
insured by the FDIC and may offer stability of principal. U.S. Treasury
securities are guaranteed as to principal and interest by the full faith and
credit of the U.S. government. Money market mutual funds may seek to maintain a
fixed price per share.
- 10 -
<PAGE>
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The New York Stock Exchange ("NYSE") holiday closing schedule indicated in the
Prospectus under "Share Price" are subject to change.
When the NYSE is closed, or when trading is restricted for any reason other than
its customary weekend or holiday closings, or under emergency circumstances as
determined by the Commission to warrant such action, the Fund's Transfer Agent
will determine the Fund's net asset value at Valuation Time. A Fund's net asset
value may be affected to the extent that its securities are traded on days that
are not Business Days.
The Victory Portfolios has elected, pursuant to Rule 18f-1 under the 1940 Act,
to redeem shares of each Fund solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day for any one shareholder.
The remaining portion of the redemption may be made in securities or other
property, valued for this purpose as they are valued in computing the net asset
value of each class of the Fund. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and may incur
additional costs as well as the associated inconveniences of holding and/or
disposing of such securities or other property.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Fund's exchange privilege. Under the Rule, the 60-day notification requirement
may be waived if (1) the only effect of a modification would be to reduce or
eliminate an administrative fee, redemption fee or deferred sales charge
ordinarily payable at the time of exchange or (2) the Fund temporarily suspends
the offering of shares as permitted under the 1940 Act or by the Commission or
because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
The Fund reserves the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in Key Advisers' judgment,
the Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
PURCHASING SHARES
ALTERNATIVE SALES ARRANGEMENTS - CLASS A AND CLASS B SHARES. The alternative
sales arrangements permit an investor to choose the method of purchasing shares
that is more beneficial to the investor depending on the amount of the purchase,
the length of time the investor expects to hold shares and other relevant
circumstances. Investors should understand that the purpose and function of the
deferred sales charge and asset-based sales charge with respect to Class B
shares are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Fund shares may receive different compensation with respect to one class
of shares on behalf of a single investor (not including dealer "street name" or
omnibus accounts) because generally it will be more advantageous for that
investor to purchase Class A shares of the Fund instead.
The two classes of shares each represent an interest in the same portfolio
investments of the Fund. However, each class has different shareholder
privileges and features. The net income attributable to Class B shares and the
dividends payable on Class B shares will be reduced by incremental expenses
borne solely by that class, including the asset-based sales charge to which
Class B shares are subject.
CLASS B CONVERSION FEATURE. Ninety-six months after an investor's purchase order
for Class B shares is accepted, such "Matured Class B Shares" automatically will
- 11 -
<PAGE>
convert to Class A shares, on the basis of the relative net asset value of the
two classes, without the imposition of any sales load or other charge. Each time
any Matured Class B shares convert to Class A shares, any Class B shares
acquired by the reinvestment of dividends or distributions on such Matured Class
B shares that are still held will also convert to Class A shares, on the same
basis. The conversion feature is intended to relieve holders of Matured Class B
shares of the asset-based sales charge under the Class B Distribution Plan after
such shares have been outstanding long enough that the Distributor may have been
compensated for distribution expenses related to such shares.
The conversion of Matured Class B shares to Class A shares is subject to the
continuing availability of a private letter ruling from the Internal Revenue
Service, or an opinion of counsel or tax adviser, to the effect that the
conversion of Matured Class B shares does not constitute a taxable event for the
holder under Federal income tax law. If such a revenue ruling or opinion is no
longer available, the automatic conversion feature may be suspended, in which
event no further conversion of Matured Class B shares would occur while such
suspension remained in effect. Although Matured Class B shares could then be
exchanged for Class A shares on the basis of relative net asset value of the two
classes, without the imposition of a sales charge or fee, such exchange could
constitute a taxable event for the holder, and absent such exchange, Class B
shares might continue to be subject to the asset-based sales charge for longer
than six years.
The methodology for calculating the net asset value, dividends and distributions
of the Fund's Class A and Class B shares recognizes two types of expenses.
General expenses that do not pertain specifically to either class are allocated
to the shares of each class, based upon the percentage that the net assets of
such class bears to the Fund's total net assets, and then pro rata to each
outstanding share within a given class. Such general expenses include (1)
management fees, (2) legal, bookkeeping and audit fees, (3) printing and mailing
costs of shareholder reports, prospectuses, statements of additional information
and other materials for current shareholders, (4) fees to the Trustees who are
not affiliated with Key Advisers, (5) custodian expenses, (6) share issuance
costs, (7) organization and start-up costs, (8) interest, taxes and brokerage
commissions, and (9) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (1) Rule 12b-1
distribution fees and shareholder servicing fees, (2) incremental transfer and
shareholder servicing agent fees and expenses, (3) registration fees and (4)
shareholder meeting expenses, to the extent that such expenses pertain to a
specific class rather than to the Fund as a whole.
REDUCED SALES CHARGE. Reduced sales charges are available for purchases of
$50,000 or more of Class A shares of the Fund alone or in combination with
purchases of shares of other funds of The Victory Portfolios. To obtain the
reduction of the sales charge, you or your Investment Professional must notify
the Transfer Agent at the time of purchase whenever a quantity discount is
applicable to your purchase.
In addition to investing at one time in any combination of Class A shares of The
Victory Portfolios in an amount entitling you to a reduced sales charge, you may
qualify for a reduction in the sales charge under the following programs:
COMBINED PURCHASES. When you invest in Class A shares of The Victory Portfolios
for several accounts at the same time, you may combine these investments into a
single transaction if purchased through one Investment Professional, and if the
total is $50,000 or more. The following may qualify for this privilege: an
individual, or "company" as defined in Section 2(a)(8) of the 1940 Act; an
individual, spouse, and their children under age 21 purchasing for his, her, or
their own account; a trustee, administrator or other fiduciary
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<PAGE>
purchasing for a single trust estate or single fiduciary account or for a single
or a parent- subsidiary group of "employee benefit plans" (as defined in Section
3(3) of ERISA); and tax-exempt organizations under Section 501(c)(3) of the
Internal Revenue Code.
RIGHTS OF ACCUMULATION. "Rights of Accumulation" permit reduced sales charges on
future purchases of Class A shares after you have reached a new breakpoint. You
can add the value of existing Victory Portfolios shares held by you, your
spouse, and your children under age 21, determined at the previous day's net
asset value at the close of business, to the amount of your new purchase valued
at the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of shares of the
Fund alone or in combination with Class A shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90 days
of the start of the purchases. Each investment you make after signing the Letter
will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your Investment Professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
You are not obligated to complete the additional purchases contemplated by a
letter. If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
If you purchase more than the amount specified in the Letter and qualify for a
further sales charge reduction, the sales charge will be adjusted to reflect
your total purchase at the end of 13 months. Surplus funds will be applied to
the purchase of additional shares at the then current offering price applicable
to the total purchase.
EXCHANGING SHARES
Class A shares of the Fund may be exchanged for shares of any Victory money
market fund or any other fund of The Victory Portfolios with a reduced sales
charge. Shares of any Victory money market fund or any other fund of The Victory
Portfolios with a reduced sales charge may be exchanged for shares of the Fund
upon payment of the difference in the sales charge (or, if applicable, shares of
any Victory money market fund may be used to purchase Class B shares of the
Fund.)
Class B shares of the Fund may be exchanged for shares of other Victory
Portfolios that offer Class B shares. The CDSC applicable to Class B shares is
imposed on Class B shares redeemed within six years of the initial purchase of
the exchanged Class B shares. When Class B shares are redeemed to effect an
exchange, the priorities described in "How to Invest, Exchange and Redeem -
Class B shares" in the Prospectus for the imposition of the Class B CDSC will be
followed in determining the order in which the shares are exchanged.
Shareholders should take into account the effect of any exchange on the
applicability and rate of any CDSC that might be imposed in the subsequent
redemption of remaining shares. Shareholders owning shares of both classes must
specify whether they intend to exchange Class A or Class B shares.
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<PAGE>
REDEEMING SHARES
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of (1) Class A shares, or (2)
Class B shares that were subject to the Class B CDSC when redeemed, in Class A
shares of the Fund or any of the other Victory Portfolios into which shares of
the Fund are exchangeable as described below, at the net asset value next
computed after receipt by the Transfer Agent of the reinvestment order. No
charge is currently made for reinvestment in shares of the Fund but a
reinvestment in shares of certain other Victory Portfolios is subject to a $5.00
service fee. The shareholder must ask the Distributor for such privilege at the
time of reinvestment. Any capital gain that was realized when the shares were
redeemed is taxable, and reinvestment will not alter any capital gains tax
payable on that gain. If there has been a capital loss on the redemption, some
or all of the loss may not be tax deductible, depending on the timing and amount
of the reinvestment. Under the Internal Revenue Code, as amended (the "IRS
Code"), if the redemption proceeds of Fund shares on which a sales charge was
paid are reinvested in shares of the Fund or another of The Victory Portfolios
within 90 days of payment of the sales charge, the shareholder's basis in the
shares of the Fund that were redeemed may not include the amount of the sales
charge paid. That would reduce the loss or increase the gain recognized from
redemption. The Fund may amend, suspend or cease offering this reinvestment
privilege at any time as to shares redeemed after the date of such amendment,
suspension or cessation. The reinstatement must be into an account bearing the
same registration. This privilege may be exercised only once by a shareholder
with respect to the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends separately for Class A and Class
B shares from its net investment income monthly. The Fund distributes
substantially all of its net investment income and net capital gains, if any, to
shareholders within each calendar year as well as on a fiscal year basis to the
extent required for the Fund to qualify for favorable federal tax treatment.
The amount of a class's distributions may vary from time to time depending on
market conditions, the composition of the Fund's portfolio, and expenses borne
by the Fund or borne separately by the class, as described in "Alternative Sales
Arrangements Class A and Class B," above. Dividends are calculated in the same
manner, at the same time and on the same day for shares of each class. However,
dividends on Class B shares are expected to be lower as a result of the
asset-based sales charge on Class B shares, and Class B dividends will also
differ in amount as a consequence of any difference in net asset value between
Class A and Class B shares.
For this purpose, the net income of the Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount earned, including both original issue and
market discount, on discount paper accrued ratably to the date of maturity.
Expenses, including the compensation payable to Key Advisers are accrued each
day. The expenses and liabilities of the Fund shall include those appropriately
allocable to the Fund as well as a share of the general expenses and liabilities
of The Victory Portfolios in proportion to the Fund's share of the total net
assets of The Victory Portfolios.
- 14 -
<PAGE>
TAXES
It is the policy of the Fund to seek to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the IRS
Code. By following such policy and distributing its income and gains currently
with respect to each taxable year, the Fund expects to eliminate or reduce to a
nominal amount the federal income and excise taxes to which it may otherwise be
subject.
In order to qualify as a RIC, the Fund must, among other things, (1) derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock or
securities, foreign currencies or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in stock, securities or currencies, (2) derive less than 30% of its gross income
from the sale or other disposition of stock, securities, options, futures,
forward contracts, and certain foreign currencies (or options, futures, or
forward contracts on foreign currencies) held for less than three months, and
(3) diversify its holdings so that at the end of each quarter of its taxable
year (a) at least 50% of the market value of the fund's assets is represented by
cash or cash items, U.S. Government securities, securities of other RICs and
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the fund's total assets and 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities) or of two or more issuers that the Fund controls and that
are engaged in the same, similar, or related trades or businesses. These
requirements may restrict the degree to which the Fund may engage in short-term
trading and concentrate investments. If the Fund qualifies as a RIC, it will not
be subject to federal income tax on the part of its net investment income and
net realized capital gains, if any, that it distributes to shareholders with
respect to each taxable year within the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment companies that do
not distribute in each calendar year an amount equal to 98% of their ordinary
income for the year plus 98% of their capital gain net income for the 1-year
period ending on October 31 of such calendar year. The balance of such income
must be distributed during the following calendar year. If distributions during
a calendar year are less than the required amount, the fund is subject to a
non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including transactions in
options, futures contracts, hedging transactions, forward contracts, straddles,
foreign currencies, and foreign securities, are subject to special tax rules. In
a given case, these rules may accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's securities, convert
short-term capital losses into long-term capital losses, or otherwise affect the
character of the Fund's income. These rules could therefore affect the amount,
timing and character of distributions to shareholders. The Victory Portfolios
will endeavor to make any available elections pertaining to such transactions in
a manner believed to be in the best interest of the Fund and its shareholders.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who has failed to
provide a (or has provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the Internal Revenue Service
for failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S. tax
liability.
Information set forth in the Prospectus and this Statement of Additional
Information that relates to federal taxation is only a summary of certain key
federal tax considerations generally affecting purchasers of shares of the Fund.
No attempt has been made to present a complete explanation of the federal tax
treatment of the Fund or its shareholders, and this discussion is not intended
- 15 -
<PAGE>
as a substitute for careful tax planning. Accordingly, potential purchasers of
shares of the Fund are urged to consult their tax advisers with specific
reference to their own tax circumstances. In addition, the tax discussion in the
Prospectus and this Statement of Additional Information is based on tax law in
effect on the date of the Prospectus and this Statement of Additional
Information; such laws and regulations may be changed by legislative, judicial
or administrative action, sometimes with retroactive effect.
TRUSTEES AND OFFICERS
BOARD OF TRUSTEES.
Overall responsibility for management of The Victory Portfolios rests with the
Trustees, who are elected by the shareholders of The Victory Portfolios. The
Victory Portfolios are managed by the Trustees in accordance with the laws of
the State of Delaware governing business trusts. There are currently seven
Trustees, six of whom are not "interested persons" of The Victory Portfolios
within the meaning of that term under the 1940 Act ("Independent Trustees"). The
Trustees, in turn, elect the officers of The Victory Portfolios to actively
supervise its day-to-day operations.
The Trustees of The Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------- -------------------
Leigh A. Wilson,* 52 Trustee and From 1989 to present,
Glenleigh International President Chairman and Chief
Limited Executive Officer,
53 Sylvan Road North Glenleigh International
Westport, CT 06880 Limited; from 1984 to
1989, Chief Executive
Officer, Paribas North
America and Paribas
Corporation; President
and Trustee, the
Victory Funds and the
Key Mutual Funds (the
"KeyFunds).
- ------------
* Mr. Wilson is deemed to be an "interested person" of The Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
- 16 -
<PAGE>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------- -------------------
Robert G. Brown, 73 Trustee Retired; from October
5460 N. Ocean Drive 1983 to November 1990,
Singer Island President, Cleveland
Riviera Beach, FL 33404 Advanced Manufacturing
Program (non-profit
corporation engaged in
regional economic
development).
Edward P. Campbell, 47 Trustee From July 1996 to
Nordson Corporation present, President;
28601 Clemens Road from March 1994 to
Westlake, OH 44145 present, Executive Vice
President and Chief
Operating Officer of
Nordson Corporation
(manufacturer of
application equipment)
from May 1988 to March
1994, Vice President
of Nordson Corporation
from 1987 to December
1994, member of the
Supervisory Committee
of Society's Collective
Investment Retirement
Fund; from May 1991 to
August 1994, Trustee,
Financial Reserves Fund
and from May 1993 to
August 1994, Trustee,
Ohio Municipal Money
Market Fund; Trustee,
the Victory Funds and
the KeyFunds.
Dr. Harry Gazelle, 69 Trustee Retired radiologist, Drs
17822 Lake Road Hill and Thomas Corp.;
Lakewood, Ohio 44107 Trustee, the Victory
Funds.
Stanley I. Landgraf, Trustee Retired; currently,
71 Trustee, Rensselaer
41 Traditional Lane Polytechnic Institute;
Loudonville, NY 12211 Director, Elenel
Corporation and
Mechanical Technology,
Inc.; Member, Board of
Overseers, School of
Management, Rensselaer
Polytechnic Institute;
Member, The Fifty Group
(a Capital Region
business organization);
Trustee, the Victory
Funds.
- 17 -
<PAGE>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------- -------------------
Dr. Thomas F. Morrissey, Trustee 1995 Visiting Scholar,
63 Bond University,
Weatherhead School of Queensland, Australia;
Management Professor, Weatherhead
Case Western Reserve School of Management,
University Case Western Reserve
10900 Euclid Avenue University; from 1989
Cleveland, OH 44106-7235 to 1995, Associate Dean
of Weatherhead School
of Management; from
1987 to December 1994,
Member of the
Supervisory Committee
of Society's Collective
Investment Retirement
Fund; from May 1991 to
August 1994, Trustee,
Financial Reserves Fund
and from May 1993 to
August 1994, Trustee,
Ohio Municipal Money
Market Fund; Trustee,
the Victory Funds.
Dr. H. Patrick Swygert, 53 Trustee President, Howard
Howard University University; formerly
2400 6th Street, N.W. President, State
Suite 320 University of New York
Washington, D.C. 20059 at Albany; formerly,
Executive Vice
President, Temple
University; Trustee,
the Victory Funds.
The Board presently has an Investment Policy Committee and a Business, Legal,
and Audit Committee. The members of the Investment Policy Committee are Messrs.
Landgraf (Chairman), Morrissey and Brown, who will serve until August 1997. The
function of the Investment Policy Committee is to review the existing investment
policies of The Victory Portfolios, including the levels of risk and types of
funds available to shareholders, and make recommendations to the Trustees
regarding the revision of such policies or, if necessary, the submission of such
revisions to The Victory Portfolios' shareholders for their consideration. The
members of the Business, Legal and Audit Committee are Messrs. Swygert
(Chairman), Campbell and Gazelle who will serve until August 1997. The function
of the Business, Legal and Audit Committee is to recommend independent auditors
and monitor accounting and financial matters; to nominate persons to serve as
Independent Trustees and Trustees to serve on committees of the Board; and to
review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months ended
October 31, 1996. The Business, Legal and Audit Committee met four times during
the 12 month period ended October 31, 1996.
- 18 -
<PAGE>
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.
Each Trustee (other than Leigh A. Wilson) receives an annual fee of $27,000 for
serving as Trustee of all the Funds of The Victory Portfolios, and an additional
per meeting fee ($2,400 in person and $1,200 per telephonic meeting). Leigh A.
Wilson receives an annual fee of $33,000 for serving as President and Trustee
for all of the funds of The Victory Portfolios, and an additional per meeting
fee ($3,000 in person and $1,500 per telephonic meeting).
The following table indicates the compensation received by each Trustee from the
Victory "Fund Complex"(1) for the 12 month period ended October 31, 1996.
<TABLE>
<CAPTION>
Estimated Annual Total Total Compensation
Pension or Retirement Benefits Benefits Compensation from Victory
Accrued as Portfolio Expenses Upon Retirement from Fund "Fund Complex" (1)
<S> <C> <C> <C> <C>
Leigh A. Wilson, Trustee....... -0- -0- $217.73 $62,250
Robert G. Brown, Trustee....... -0- -0- 176.72 41,400
Edward P. Campbell, Trustee.... -0- -0- 167.51 50,250
Harry Gazelle, Trustee......... -0- -0- 167.51 39,000
Stanley I. Landgraf, Trustee... -0- -0- 167.51 39,000
Thomas F. Morrissey, Trustee... -0- -0- 167.51 39,000
H. Patrick Swygert, Trustee.... -0- -0- 157.28 36,600
</TABLE>
(1) There are presently 33 mutual funds from which the above-named Trustees
are compensated in the Victory "Fund Complex," but not all of the
above-named Trustees serve on the boards of each fund in the "Fund
Complex."
OFFICERS.
The officers of The Victory Portfolios, their ages, addresses and principal
occupations during the past five years, are as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH THE PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS VICTORY PORTFOLIOS DURING PAST 5 YEARS
- ------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
Leigh A. Wilson, 52 President and Trustee From 1989 to present,
Glenleigh International Chairman and Chief
Ltd. Executive Officer,
53 Sylvan Road North Glenleigh International
Westport, CT 06880 Limited; from 1984 to
1989, Chief Executive
Officer, Paribas North
America and Paribas
Corporation; President
and Trustee of the
Victory Funds and the
KeyFunds.
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH THE PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS VICTORY PORTFOLIOS DURING PAST 5 YEARS
- ------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
William B. Blundin, 58 Vice President Senior Vice President of
BISYS Fund Services BISYS Fund Services
125 West 55th Street ("BISYS"); officer of
New York, New York 10019 other investment
companies administered by
BISYS Fund Services;
President and Chief
Executive Officer of
Vista Broker-Dealer
Services, Inc., Emerald
Asset Management, Inc.
and BNY Hamilton
Distributors, Inc.,
registered broker/
dealers.
J. David Huber, 51 Vice President Executive Vice President,
BISYS Fund Services BISYS .
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 34 Secretary From October 1990 to
BISYS Fund Services present, employee of
3435 Stelzer Road BISYS .
Columbus, OH 43219-3035
George O. Martinez, 38 Assistant Secretary From March 1995 to
BISYS Fund Services present, Senior Vice
3435 Stelzer Road President and Director of
Columbus, OH 43219-3035 Legal and Compliance
Services, BISYS ; from
June 1989 to March 1995,
Vice President and
Associate General
Counsel, Alliance Capital
Management.
Kevin L. Martin , 36 Treasurer From February 1996 to
BISYS Fund Services present, employee of
3435 Stelzer Road BISYS ; from 1994 to
Columbus, OH 43219-3035 February 1996, Senior
Manager, Ernst & Young.
</TABLE>
The mailing address of each of the officers of The Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of The Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from The Victory Portfolios for performing the duties of
their offices. BISYS receives fees from The Victory Portfolios for acting as
Administrator.
As of January 17, 1997, the Trustees and officers as a group owned beneficially
less than 1% of the Fund.
- 20 -
<PAGE>
ADVISORY AND OTHER CONTRACTS
INVESTMENT ADVISER .
One of the Fund's most important contracts is with its investment adviser, Key
Asset Management Inc. ("KAM" or the "Adviser"), a New York corporation
registered as an investment adviser with the Securities and Exchange Commission.
KAM is a wholly owned subsidiary of KeyBank National Association ("KeyBank"), a
wholly-owned subsidiary of KeyCorp. Effective February 28, 1997, KAM became the
surviving corporation of the reorganization of four indirect investment adviser
subsidiaries of KeyCorp--KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers"),
Society Asset Management, Inc. ("SAM"), Spears, Benzak, Salomon & Farrell, Inc.
("SBSF") and Applied Technologies, Inc. ("ATI"), each registered with the
Securities and Exchange Commission as an investment adviser. Key Advisers, SAM
and ATI were merged with and into SBSF, a New York corporation organized on
February 22, 1972. Pursuant to the terms of the reorganization, SBSF changed its
name to Key Asset Management Inc. SAM, SBSF and ATI will continue to operate
under their existing names as separate divisions of KAM. Affiliates of the
Adviser manage approximately $50 billion for numerous clients including large
corporate and public retirement plans, Taft-Hartley plans, foundations and
endowments, high net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127 Public
Square, Cleveland, Ohio 44114. As of September 30, 1996, KeyCorp had an asset
base of $65 billion, with banking offices in 26 states from Maine to Alaska, and
trust and investment offices in 16 states. KeyCorp is the resulting entity of a
merger in 1994 of Society Corporation, the bank holding company of which KeyBank
was a wholly-owned subsidiary, and KeyCorp, the former bank holding company.
KeyCorp's major business activities include providing traditional banking and
associated financial services to consumer, business and commercial markets. Its
non-bank subsidiaries include investment advisory, securities brokerage,
insurance, bank credit card processing, and leasing companies.
KeyBank is the lead affiliate bank of KeyCorp.
The following schedule lists the advisory fees for each mutual fund that is
advised by the Adviser.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund
Victory U.S. Government Obligations Fund
Victory Tax-Free Money Market Fund
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund
Victory Limited Term Income Fund
Victory Government Mortgage Fund
Victory Financial Reserves Fund
Victory Fund for Income
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund
Victory Government Bond Fund
Victory New York Tax-Free Fund
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund
Victory Stock Index Fund
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund
- 21 -
<PAGE>
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund
Victory Investment Quality Bond Fund
Victory Ohio Regional Stock Fund
1.00% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund
Victory Value Fund
Victory Growth Fund
Victory Special Value Fund
Victory Special Growth Fund
Victory Lakefront Fund (1)
Victory Real Estate Investment Fund
1.10% OF AVERAGE DAILY NET ASSETS
Victory International Growth Fund
- ------------
(1) Lakefront Capital Investors, Inc. serves as sub-adviser to the Lakefront
Fund. For its services as sub-adviser, KAM pays them sub-advisory fees at
.50% of the Lakefront Fund's average daily net assets.
THE INVESTMENT ADVISORY AGREEMENT.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and The Victory Portfolios on behalf of the Fund (the "Investment Advisory
Agreement") provides that it will continue in effect as to the Fund for an
initial two-year term and for consecutive one-year terms thereafter, provided
that such continuance is approved at least annually by The Victory Portfolios'
Trustees or by vote of a majority of the outstanding shares of the Fund (as
defined under "Additional Information - Miscellaneous"), and, in either case, by
a majority of the Trustees who are not parties to the Investment Advisory
Agreement or interested persons (as defined in the 1940 Act) of any party to the
Investment Advisory Agreement, by votes cast in person at a meeting called for
such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any time on 60
days' written notice without penalty by the Trustees, by vote of a majority of
the outstanding shares of the Fund, or by the Adviser. The Investment Advisory
Agreement also terminates automatically in the event of any assignment, as
defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the performance of services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of Key Advisers
in the performance of its duties, or from reckless disregard by it of its duties
and obligations thereunder.
Key Trust Company, an affiliate of Society, served as the investment adviser of
the Predecessor Fund. For the period May 3, 1993 to April 30, 1994, Key Trust
Company earned fees of $380,730, all of which was voluntarily waived by Key
Trust Company. For the fiscal year ended April 30, 1995, Key Trust Company
received fees of $608,134 before voluntary waiver of $317,598. For the fiscal
period ended October 31, 1995, the Adviser earned investment advisory fees of
$120,425 after fee reductions of $35,976. For the fiscal year ended October 31,
1996, the Adviser earned investment advisory fees of $85,384 after fee
reductions of $65,095.
- 22 -
<PAGE>
Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a sub-adviser. In addition, the Investment Advisory
Agreement provides that the Advisers may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of the Adviser.
GLASS-STEAGALL ACT.
In 1971 the United States Supreme Court held in Investment Company Institute v.
Camp that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board") issued a regulation and interpretation to the
effect that the Glass-Steagall Act and such decision: (a) forbid a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective shareholders of the Fund may include
descriptions of Key Trust Company of Ohio, N.A., the Adviser including, but not
limited to, (1) descriptions of the operations of Key Trust Company of Ohio,
N.A., the Adviser; (2) descriptions of certain personnel and their functions;
and (3) statistics and rankings related to the operations of the Trust Company
of Ohio, N.A., the Adviser.
PORTFOLIO TRANSACTIONS.
Pursuant to the Investment Advisory Agreement , the Adviser determines, subject
to the general supervision of the Trustees of The Victory Portfolios, and in
accordance with each Fund's investment objective and restrictions, which
securities are to be purchased and sold by the Fund, and which brokers are to be
eligible to execute its portfolio transactions. Purchases from underwriters
and/or broker-dealers of portfolio securities include a commission or concession
paid by the issuer to the underwriter and/or broker-dealer and purchases from
dealers serving as market makers may include the spread between the bid and
asked price. While the Adviser generally seek competitive spreads or
commissions, the Fund may not necessarily pay the lowest spread or commissions,
available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by the Adviser in its best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the Adviser may receive orders for transactions by The
Victory Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by the Adviser and does not reduce the
investment advisory fees payable to the Adviser by the Fund. Such information
may be useful to the Adviser in serving both The Victory Portfolios and other
clients and, conversely, such supplemental research
- 23 -
<PAGE>
information obtained by the placement of orders on behalf of other clients may
be useful to the Adviser in carrying out its obligations to The Victory
Portfolios. In the future, the Trustees may also authorize the allocation of
brokerage to affiliated broker-dealers on an agency basis to effect portfolio
transactions. In such event, the Trustees will adopt procedures incorporating
the standards of Rule 17e-1 of the 1940 Act, which require that the commission
paid to affiliated broker-dealers must be reasonable and fair compared to the
commission, fee or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time. At times, the Fund may also purchase
portfolio securities directly from dealers acting as principals, underwriters or
market makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with the Adviser, Key Trust Company
of Ohio, N.A. ("Key Trust") or their affiliates or BISYS or its affiliates, and
will not give preference to Key Trust Company of Ohio, N.A.'s correspondent
banks or affiliates, or BISYS with respect to such transactions, securities,
savings deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those made for the
other funds of The Victory Portfolios or any other investment company or account
managed by the Adviser. Such other funds, investment companies or accounts may
also invest in the securities in which the Fund invests. When a purchase or sale
of the same security is made at substantially the same time on behalf of the
Fund and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to the Fund and such other
fund, investment company or account. In some instances, this investment
procedure may affect the price paid or received by the Fund or the size of the
position obtained by the Fund in an adverse manner relative to the result that
would have been obtained if only the Fund had participated in or been allocated
such trades. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for the other funds of The Victory Portfolios or for other investment
companies or accounts in order to obtain best execution. In making investment
recommendations for The Victory Portfolios, the Adviser will not inquire or take
into consideration whether an issuer of securities proposed for purchase or sale
by the Fund is a customer of the Adviser, its parents or subsidiaries or
affiliates and, in dealing with their commercial customers, the
Adviser, its parents, subsidiaries, and affiliates will not inquire or take
into consideration whether securities of such customers are held by The Victory
Portfolios.
In the year ended April 30, 1995, the fiscal period ended October 31, 1995 and
the fiscal year ended October 31, 1996, the Fund paid $0, $0 and $0,
respectively, in brokerage commissions.
PORTFOLIO TURNOVER.
The turnover rate stated in the Prospectus for the Fund's investment portfolio
is calculated by dividing the lesser of the Fund's purchases or sales of
portfolio securities for the year by the monthly average value of the portfolio
securities. The calculation excludes all securities whose maturities, at the
time of acquisition, were one year or less. In the fiscal year ended October 31,
1996, the six months ended October 31, 1995 and the year ended April 30, 1995,
the Fund's portfolio turnover rates were 378%, 69% and 127%, respectively.
- 24 -
<PAGE>
ADMINISTRATOR.
BISYS serves as administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by the Adviser under the Investment Advisory Agreement ).
BISYS receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily and
paid monthly, at the annual rate of fifteen one hundredths of one percent (.15%)
of the Fund's average daily net assets. BISYS may periodically waive all or a
portion of its fee with respect to the Fund in order to increase the net income
of the Fund.
Unless sooner terminated, the Administration Agreement will continue in effect
as to the Fund for a period of two years, and for consecutive one-year terms
thereafter, provided that such continuance is ratified at least annually by the
Trustees or by vote of a majority of the outstanding shares of the Fund, and in
either case by a majority of the Trustees who are not parties to the
Administration Agreement or interested persons (as defined in the 1940 Act) of
any party to the Administration Agreement, by votes cast in person at a meeting
called for such purpose.
The Administration Agreement provides that BISYS shall not be liable for any
error of judgment or mistake of law or any loss suffered by The Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, BISYS assists in the Fund's administration
and operation, including providing statistical and research data, clerical
services, internal compliance and various other administrative services,
including among other responsibilities, forwarding certain purchase and
redemption requests to the Transfer Agent, participation in the updating of the
prospectus, coordinating the preparation, filing, printing and dissemination of
reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, BISYS may delegate all or any part of its
responsibilities thereunder. Until July 1, 1994 Fidelity Distributors
Corporation, 82 Devonshire Street, Boston, Massachusetts 02109, was the
Administrator and Distributor to the Predecessor Fund under separate
Administration and General Distribution Agreements. For the period May 3, 1993
to April 30, 1994, Fidelity Distributors Corporation earned $103,835 from the
Predecessor Fund for services rendered to the Victory Funds pursuant to the
Administration Agreement. During the same period, Fidelity Distributors
Corporation voluntarily reimbursed $17,404 in fees and expenses to the
Predecessor Fund. For the fiscal year ended April 30, 1995, the Fund paid
$165,855 in administration fees of which Fidelity Distributors Corporation
earned $30,762 and Concord Holding Corp. ("CHC") (the predecessor of BISYS)
earned $135,093. During the same period, fees and expenses of $0 were reimbursed
to the Fund. In the fiscal period ended October 31, 1995 and the fiscal year
ended October 31, 1996, the Administrator earned aggregate administration fees
of $39,816 and $41,078 after fee reductions of $2,839 and $0, respectively.
DISTRIBUTOR.
BISYS Fund Services serves as distributor (the "Distributor") for the
continuous offering of the shares of the Fund pursuant to a Distribution
Agreement between the Distributor and The Victory Portfolios. Unless otherwise
terminated, the Distribution Agreement will remain in effect with respect to the
Fund for two years, and thereafter for consecutive one-year terms, provided that
it is approved at least annually (1) by the Trustees or by the vote of a
majority of the outstanding shares of the Fund, and (2) by the vote
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of a majority of the Trustees of The Victory Portfolios who are not parties to
the Distribution Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement will terminate in the event of its assignment, as defined
under the 1940 Act. For The Victory Portfolios' fiscal period ended October 31,
1994 Winsbury earned $212,021, in underwriting commissions, and retained $15;
for the fiscal period ended October 31, 1995 and the fiscal year ended October
31, 1996, the Distributor earned $721,000 and $719,000 in underwriting
commissions, and retained $107,000 and 42,000, respectively.
TRANSFER AGENT.
State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Fund. Boston Financial Data Services, Inc. ("BFDS") serves as dividend
disbursing agent and shareholder servicing agent for the Fund, pursuant to a
Transfer Agency and Service Agreement. Under its agreement with The Victory
Portfolios, State Street has agreed (1) to issue and redeem shares of The
Victory Portfolios; (2) to address and mail all communications by The Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders; (3)
to respond to correspondence or inquiries by shareholders and others relating to
its duties; (4) to maintain shareholder accounts and certain sub-accounts; and
(5) to make periodic reports to the Trustees concerning The Victory Portfolios'
operations.
SHAREHOLDER SERVICING PLAN.
Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser) are for administrative
support services to customers who may from time to time beneficially own shares,
which services may include: (1) aggregating and processing purchase and
redemption requests for shares from customers and transmitting promptly net
purchase and redemption orders to our distributor or transfer agent; (2)
providing customers with a service that invests the assets of their accounts in
shares pursuant to specific or pre-authorized instructions; (3) processing
dividend and distribution payments on behalf of customers; (4) providing
information periodically to customers showing their positions in shares; (5)
arranging for bank wires; (6) responding to customer inquiries; (7) providing
subaccounting with respect to shares beneficially owned by customers or
providing the information to the Fund as necessary for subaccounting; (8) if
required by law, forwarding shareholder communications from us (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to customers; (9) forwarding to customers proxy
statements and proxies containing any proposals regarding this Plan; and (10)
providing such other similar services as we may reasonably request to the extent
you are permitted to do so under applicable statutes, rules or regulations.
CLASS A SHARES DISTRIBUTION PLAN.
The Victory Portfolios, on behalf of the Class A shares of the Fund, has adopted
a Distribution and Service Plan ("Plan") for the Fund under Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act"). No separate payments are
authorized to be made by the Fund under the Plan. Rather, the Plan recognizes
that the Adviser or the Distributor may use of its fee revenues, or other
resources to pay expenses associated with activities primarily intended to
result in the sale of the shares of the Fund. The Plan also provides that the
Adviser or the Distributor may make payments from these sources to third
parties, including affiliates, such as banks or broker-dealers, that engage in
the sale of the shares of a Fund. See "Investment Adviser" with respect to
certain prohibitions under the Glass-Steagall Act.
The Plan specifically recognizes that the Adviser or the Distributor, directly
or through an affiliate, may use its fee revenue, past profits, or other
resources, without limitation, to pay promotional and administrative expenses in
connection with the offer and sale of shares of the Funds. In addition, the Plan
provides that the Adviser and the Distributor may use their respective
resources,
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including fee revenues, to make payments to third parties that provide
assistance in selling the Funds' shares, or to third parties, including banks,
that render shareholder support services.
CLASS B SHARES DISTRIBUTION PLAN.
The Victory Portfolios has adopted a Distribution Plan for Class B shares of the
Fund under Rule 12b-1 of the 1940 Act.
The Distribution Plan adopted by the Trustees with respect to the Class B shares
of the Fund provides that the Fund will pay the Distributor a distribution fee
under the Plan at the annual rate of 0.75% of the average daily net assets of
the Fund attributable to the Class B shares. The distribution fees may be used
by the Distributor for: (a) costs of printing and distributing the Fund's
prospectus, statement of additional information and reports to prospective
investors in the Fund; (b) costs involved in preparing, printing and
distributing sales literature pertaining to the Fund; (c) an allocation of
overhead and other branch office distribution-related expenses of the
Distributor; (d) payments to persons who provide support services in connection
with the distribution of the Fund's Class B shares, including but not limited
to, office space and equipment, telephone facilities, answering routine
inquiries regarding the Fund, processing shareholder transactions and providing
any other shareholder services not otherwise provided by The Victory Portfolios'
transfer agent; (e) accruals for interest on the amount of the foregoing
expenses that exceed the distribution fee and the CDSCs received by the
Distributor; and (f) any other expense primarily intended to result in the sale
of the Fund's Class B shares, including, without limitation, payments to
salesmen and selling dealers at the time of the sale of Class B shares, if
applicable, and continuing fees to each such salesmen and selling dealers, which
fee shall begin to accrue immediately after the sale of such shares.
The amount of the Distribution Fees payable by any Fund under the Distribution
Plan is not related directly to expenses incurred by the Distributor and the
Distribution Plan does not obligate the Fund to reimburse the Distributor for
such expenses. The Distribution Fees set forth in the Distribution Plan will be
paid by the Fund to the Distributor unless and until the Plan is terminated or
not renewed with respect to the Fund; any distribution or service expenses
incurred by the Distributor on behalf of the Fund in excess of payments of the
Distribution Fees specified above which the Distributor has accrued through the
termination date are the sole responsibility and liability of the Distributor
and not an obligation of the Fund.
The Distribution Plan for the Class B shares specifically recognizes that either
the Adviser or the Distributor, directly or through an affiliate, may use its
fee revenue, past profits, or other resources, without limitation, to pay
promotional and administrative expenses in connection with the offer and sale of
shares of the Fund. In addition, the Plan provides that the Adviser and the
Distributor may use its respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Fund's Class B
shares, or to third parties, including banks, that render shareholder support
services.
The Distribution Plan was approved by the Trustees, including the Independent
Trustees, at a meeting called for that purpose. As required by Rule 12b-1, the
Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and have determined that there
is a reasonable likelihood that the Plan will benefit the Fund and its Class B
shareholders. To the extent that the Plan gives the Adviser or the Distributor
greater flexibility in connection with the distribution of Class B shares of the
Fund, additional sales of the Fund's Class B shares may result. Additionally,
certain Class B shareholder support services may be provided more effectively
under the Plan by local entities with whom shareholders have other
relationships.
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FUND ACCOUNTANT.
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund pursuant
to a fund accounting agreement with The Victory Portfolios dated May 31, 1995
(the "Fund Accounting Agreement"). As fund accountant for The Victory
Portfolios, BISYS , Inc. ("BISYS, Inc.") calculates the Fund's net asset value,
the dividend and capital gain distribution, if any, and the yield. BISYS , Inc.
also provides a current security position report, a summary report of
transactions and pending maturities, a current cash position report, and
maintains the general ledger accounting records for the Fund. Under the Fund
Accounting Agreement, BISYS , Inc. is entitled to receive annual fees of .03% of
the first $100 million of the Fund's daily average net assets, .02% of the next
$100 million of the Fund's daily average net assets, and .01% of the Fund's
remaining daily average net assets. These annual fees are subject to a minimum
monthly assets charge of $2,500 per taxable fund, and does not include
out-of-pocket expenses or multiple class charges of $833 per month assessed for
each class of shares after the first class. For the period ended April 30, 1994
and the fiscal year ended April 30, 1995, the Fund paid fees of $40,881 and
$41,053, respectively. For the period ended October 31, 1995 and the fiscal year
ended October 31, 1996 , the Fund Accountant earned fund accounting fees of
$29,165 and $33, 184.
CUSTODIAN.
Cash and securities owned by the Fund are held by Key Trust Company of Ohio,
N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian to the
Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this Agreement,
Key Trust Company of Ohio, N.A. (1) maintains a separate account or accounts in
the name of the Fund; (2) makes receipts and disbursements of money on behalf of
the Fund; (3) collects and receives all income and other payments and
distributions on account of portfolio securities; (4) responds to correspondence
from security brokers and others relating to its duties; and (5) makes periodic
reports to the Trustees concerning The Victory Portfolios' operations. Key Trust
Company of Ohio, N.A. may, with the approval of The Victory Portfolios and at
the custodian's own expense, open and maintain a sub-custody account or accounts
on behalf of the Fund, provided that Key Trust Company of Ohio, N.A. shall
remain liable for the performance of all of its duties under the Custodian
Agreement.
INDEPENDENT ACCOUNTANTS.
The audited financial statements of The Victory Portfolios for the fiscal year
and October 31, 1996 are incorporated by reference herein. The audited financial
statements for the fiscal year ended October 31, 1996 have been audited by
Coopers and Lybrand, L.L.P. as set forth in their report incorporated by
reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Coopers & Lybrand
L.L.P. serves as The Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s
address is 100 East Broad Street, Columbus, Ohio 43215.
LEGAL COUNSEL.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022 is
the counsel to The Victory Portfolios.
EXPENSES.
The Fund bears the following expenses relating to its operations: taxes,
interest, brokerage fees and commissions, fees of the Trustees, Commission fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to current
shareholders, outside auditing and legal expenses, advisory and administration
fees, fees and out-of-pocket expenses of the custodian and transfer agent,
certain insurance premiums, costs of maintenance of the fund's existence, costs
of shareholders' reports and meetings, and any extraordinary expenses incurred
in the Fund's operation.
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If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, the Adviser or
the Administrator will waive its fees to the extent such excess expenses exceed
such expense limitation in proportion to its respective fees. As of the date of
this Statement of Additional Information, the most restrictive expense
limitation applicable to the Fund limits its aggregate annual expenses,
including management and advisory fees but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2.5% of the first $30 million of its
average net assets, 2.0% of the next $70 million of its average net assets, and
1.5% of its remaining average net assets. Any expenses to be borne by Key
Adviser or the Administrator will be estimated daily and reconciled and paid on
a monthly basis. Fees imposed upon customer accounts by the Adviser, Key Trust
Company of Ohio, N.A. or its correspondents, affiliated banks and other non-bank
affiliates for cash management services are not fund expenses for purposes of
any such expense limitation.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES.
The Victory Portfolios (sometimes referred to as the "Trust") is a Delaware
business trust. The Delaware Trust Instrument and Declaration of Trust authorize
the Trustees to issue an unlimited number of shares, which are units of
beneficial interest, without par value. The Victory Portfolios presently has
twenty- six series of shares, which represent interests in the U.S. Government
Obligations Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund,
the Balanced Fund, the Stock Index Fund, the Value Fund, the Diversified Stock
Fund, the Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio
Regional Stock Fund, the International Growth Fund, the Limited Term Income
Fund, the Government Mortgage Fund, the Ohio Municipal Bond Fund, the
Intermediate Income Fund, the Investment Quality Bond Fund, the Government Bond
Fund, the Fund for Income, the National Municipal Bond Fund, the New York
Tax-Free Fund, the Institutional Money Market Fund, the Financial Reserves Fund
, the Ohio Municipal Money Market Fund, the Lakefront Fund, and the Real Estate
Investment Fund, respectively. The Victory Portfolios' Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of The Victory
Portfolios into one or more additional series by setting or changing in any one
or more aspects their respective preferences, conversion or other rights, voting
power, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectus and this Statement of Additional
Information, The Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of The Victory
Portfolios, shares of a fund are entitled to receive the assets available for
distribution belonging to the fund, and a proportionate distribution, based upon
the relative asset values of the respective funds of The Victory Portfolios, of
any general assets not belonging to any particular fund which are available for
distribution.
As of January 17, 1997, the Fund believes that Key Trust of Cleveland was
shareholder of record of 91.9% of the outstanding Class A shares of the Fund,
but did not hold such shares beneficially.
The following shareholders beneficially owned 5% or more of the outstanding
Class B shares of the Fund as of January 17, 1997:
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<PAGE>
Number of Shares Outstanding % of Shares Outstanding
---------------------------- -----------------------
JC Rhodes 26,179.997 16.6%
c/o Indiana Masonic
Home
690 State Street
Franklin, IN 46131
Jessica Lattimore TTEE 16,739.364 10.6%
Jennifer Lattimore TR
152 Rear Brunswick Rd
Troy, NY 12180
Shares of The Victory Portfolios are entitled to one vote per share (with
proportional voting for fractional shares) on such matters as shareholders are
entitled to vote. Shareholders vote as a single class on all matters except (1)
when required by the 1940 Act, shares shall be voted by individual series, and
(2) when the Trustees have determined that the matter affects only the interests
of one or more series, then only shareholders of such series shall be entitled
to vote thereon. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees have been elected by the shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. In addition, Trustees may be removed from office by a vote of the
holders of at least two-thirds of the outstanding shares of The Victory
Portfolios. A meeting shall be held for such purpose upon the written request of
the holders of not less than 10% of the outstanding shares. Upon written request
by ten or more shareholders meeting the qualifications of Section 16(c) of the
1940 Act, (i.e., persons who have been shareholders for at least six months, and
who hold shares having a net asset value of at least $25,000 or constituting 1%
of the outstanding shares) stating that such shareholders wish to communicate
with the other shareholders for the purpose of obtaining the signatures
necessary to demand a meeting to consider removal of a Trustee, The Victory
Portfolios will provide a list of shareholders or disseminate appropriate
materials (at the expense of the requesting shareholders). Except as set forth
above, the Trustees shall continue to hold office and may appoint their
successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as The Victory Portfolios shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each fund of The Victory Portfolios affected by the matter. For
purposes of determining whether the approval of a majority of the outstanding
shares of a fund will be required in connection with a matter, a fund will be
deemed to be affected by a matter unless it is clear that the interests of each
fund in the matter are identical, or that the matter does not affect any
interest of the fund. Under Rule 18f-2, the approval of an investment advisory
agreement or any change in investment policy would be effectively acted upon
with respect to a fund only if approved by a majority of the outstanding shares
of such fund. However, Rule 18f-2 also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
shareholders of all of The Victory Portfolios voting without regard to series.
SHAREHOLDER AND TRUSTEE LIABILITY.
The Victory Portfolios is organized as a Delaware business trust. The Delaware
Business Trust Act provides that a shareholder of a Delaware business trust
shall be entitled to the same limitation of personal liability extended to
shareholders of Delaware corporations and the Delaware Trust Instrument provides
that shareholders of The Victory Portfolios shall not be liable for the
obligations of The Victory Portfolios. The Delaware Trust Instrument also
provides for
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indemnification out of the trust property of any shareholder held personally
liable solely by reason of his or her being or having been a shareholder. The
Delaware Trust Instrument also provides that The Victory Portfolios shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of The Victory Portfolios, and shall satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer, or agent
of The Victory Portfolios shall be personally liable in connection with the
administration or preservation of the assets of the funds or the conduct of The
Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or The Victory Portfolios shall look solely to the
assets of The Victory Portfolios for payment.
MISCELLANEOUS.
As used in the Prospectus and in this Statement of Additional Information,
"assets belonging to a fund" (or "assets belonging to the Fund") means the
consideration received by The Victory Portfolios upon the issuance or sale of
shares of a fund (or the Fund), together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of The
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated to
that fund (or the Fund) by the Trustees. The Trustees may allocate such general
assets in any manner they deem fair and equitable. It is anticipated that the
factor that will be used by the Trustees in making allocations of general assets
to a particular fund of The Victory Portfolios will be the relative net asset
value of each respective fund at the time of allocation. Assets belonging to a
particular fund are charged with the direct liabilities and expenses in respect
of that fund, and with a share of the general liabilities and expenses of each
of the funds not readily identified as belonging to a particular fund, which are
allocated to each fund in accordance with its proportionate share of the net
asset values of The Victory Portfolios at the time of allocation. The timing of
allocations of general assets and general liabilities and expenses of The
Victory Portfolios to a particular fund will be determined by the Trustees and
will be in accordance with generally accepted accounting principles.
Determinations by the Trustees as to the timing of the allocation of general
liabilities and expenses and as to the timing and allocable portion of any
general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional Information, a
"vote of a majority of the outstanding shares" of the Fund means the affirmative
vote of the lesser of (a) 67% or more of the shares of the Fund present at a
meeting at which the holders of more than 50% of the outstanding shares of The
Victory Portfolios or such fund are represented in person or by proxy, or (b)
more than 50% of the outstanding shares of the Fund.
The Victory Portfolios is registered with the Commission as an open-end
management investment company. Such registration does not involve supervision by
the Commission of the management or policies of The Victory Portfolios.
The Prospectus and this Statement of Additional Information omit certain of the
information contained in the Registration Statement filed with the Commission.
Copies of such information may be obtained from the Commission upon payment of
the prescribed fee.
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THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE NOT AN OFFERING
OF THE SECURITIES HEREIN DESCRIBED IN ANY STATE IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. NO SALESMAN, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION.
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APPENDIX
DESCRIPTION OF SECURITY RATINGS.
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by Key Adviser with regard to portfolio
investments for the Funds include Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch
Investors Service, Inc. ("Fitch"), IBCA Limited and its affiliate, IBCA Inc.
(collectively, "IBCA"), and Thomson BankWatch, Inc. ("Thomson"). Set forth below
is a description of the relevant ratings of each such NRSRO. The NRSROs that may
be utilized by Key Adviser and the description of each NRSRO's ratings is as of
the date of this Statement of Additional Information, and may subsequently
change.
LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements - their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
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<PAGE>
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-. High credit quality Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic or financial conditions are unlikely to increase
investment risk significantly.
AA. Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic, or financial conditions may increase investment
risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is strong, although adverse
changes in business, economic or financial conditions may lead to increased
investment risk.
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<PAGE>
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- - Leading market positions in well-established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
- 35 -
<PAGE>
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3. Satisfactory liquidity and other protection factors qualify issue as to
investment grade.
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely repayment.
A2. Obligations supported by a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in business, economic or
financial conditions.
SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
SHORT-TERM DEBT RATINGS
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
- 36 -
<PAGE>
BankWatch Ratings do not constitute a recommendation to buy or sell securities
of any of these companies. Further, BankWatch does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less. The TBW Short-Term Ratings specifically assess the
likelihood of an untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
DEFINITIONS OF CERTAIN MONEY MARKET INSTRUMENTS
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by corporations.
Issues of commercial paper normally have maturities of less than nine months and
fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to payment of
principal and interest by the full faith and credit of the U.S. Government.
These obligations may include Treasury bills, notes and bonds, and issues of
agencies and instrumentalities of the U.S. Government, provided such obligations
are guaranteed as to payment of principal and interest by the full faith and
credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S. Government
include such agencies and instrumentalities as the Government National Mortgage
Association, the Export-Import Bank of the United States, the Tennessee Valley
Authority, the Farmers Home Administration, the Federal Home Loan Banks, the
Federal Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal
- 37 -
<PAGE>
Land Banks, the Federal Housing Administration, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
Government National Mortgage Association are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated to
do so by law. A Fund will invest in the obligations of such instrumentalities
only when the investment adviser believes that the credit risk with respect to
the instrumentality is minimal.
- 38 -
THE VICTORY PORTFOLIOS
Registration Statement
of
THE VICTORY PORTFOLIOS
on
Form N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
-- Condensed Financial Information.
Included in Part B:
-- Audited financial reports for the period ended October 31, 1996
are incorporated by reference in Part B and filed herewith as Exhibit
99.B12.
(b) Exhibits:
EX-99.B1 (a) Delaware Trust Instrument dated December 6, 1995 is
incorporated herein by reference to Exhibit 99B.1(a) to
Post-Effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-1A filed on December 28,
1995.
EX-99.B2 By-Laws adopted December 6, 1995 are incorporated herein by reference
to Exhibit 99.B2 to Post-Effective Amendment No. 26 to the
Registrant's Registration Statement
on Form N-1A filed on December 28, 1995.
EX-99.B3 None.
EX-99.B4 None.
EX-99.B5 (a) Investment Advisory Agreement dated as of January 1, 1996,
between the Registrant and KeyCorp Mutual Fund Advisers, Inc. is
incorporated herein by reference to Exhibit 99.B5(a) to
Post-Effective Amendment No. 27 to the Registrant's Registration
Statement on Form N-1A filed on January 31, 1996.
(b) Investment Sub-Advisory Agreement between KeyCorp Mutual Fund
Advisers, Inc. and Society Asset Management, Inc. dated as of
January 1, 1996, is incorporated herein by reference to Exhibit
99.B5(b) to Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A filed on January 31, 1996.
<PAGE>
THE VICTORY PORTFOLIOS
EX-99.B5 (c) Form of Investment Advisory Agreement between the Registrant and
Key Asset Management Inc. regarding Lakefront Fund and Real
Estate Investment Fund is filed herewith.
(d) Form of Investment Sub-Advisory Agreement between KeyCorp Mutual
Fund Advisers, Inc. and Lakefront Capital Investors, Inc.
regarding the Lakefront Fund is filed herewith.
EX-99.B6 (a) Distribution Agreement dated June 1, 1996 between the Registrant
and BISYS Fund Services Limited Partnership is incorporated
herein by reference to Exhibit 99.B6(a) to Post-Effective
Amendment No. 30 to the Registrant's Registration Statement on
Form N-1A filed on July 30, 1996.
(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 on
January 31, 1996.
EX-99.B7 None.
EX-99.B8 (a) Amended and Restated Mutual Fund Custody Agreement dated May 24,
1995 by and between the Registrant and Key Trust Custody of Ohio,
N.A. is incorporated herein by reference to Exhibit 8(a) to
Post-Effective Amendment No. 22 to the Registrant's Registration
Statement on Form N-1A filed on August 28, 1995.
(b) Institutional Custody and Clearance Agreement dated October 30,
1995 by and between The Bank of New York and Key Services
Corporation is incorporated herein by reference to Exhibit
99.B8(b) to Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A filed on January 31, 1996.
(c) Custody Agreement dated May 31, 1996 between Morgan Stanley Trust
Company and Key Trust Company of Ohio is incorporated herein by
reference to Exhibit 99.B8(c) to Post-Effective Amendment No. 30
to the Registrant's Registration Statement on Form N-1A filed on
July 30, 1996.
EX-99.B9 (a) Administration Agreement dated June 1, 1996 between the
Registrant and BISYS Fund Services Limited Partnership is
incorporated herein by reference to Exhibit 99.B9(a) to
Post-Effective Amendment No. 30 to the Registrant's Registration
Statement on Form N-1A filed on July 30, 1996.
(b) Transfer Agency and Service Agreement dated July 12, 1996 between
the Registrant and State Street Bank and Trust Company is
incorporated herein by reference to Exhibit 99.B9(b) to
Post-Effective Amendment No. 30 to the Registrant's Registration
Statement on Form N-1A filed on July 30, 1996.
C-2
<PAGE>
THE VICTORY PORTFOLIOS
(c) Fund Accounting Agreement dated May 31, 1995 between the
Registrant and BISYS Fund Services Ohio, Inc., and Schedule A
thereto, are incorporated herein by reference to Exhibit 9(d) to
Post-Effective Amendment No. 22 to the Registrant's Registration
Statement on Form N-1A filed on August 28, 1995.
(d) Shareholder Servicing Plan dated June 5, 1995 with an amended
Schedule I dated March 1, 1997 is filed herewith.
(e) Form of Shareholder Servicing Agreement is incorporated herein by
reference to Exhibit 99.B8(e) to Post-Effective Amendment No. 26
to the Registrant's Registration Statement on Form N-1A filed on
December 28, 1995.
(f) Business Management Agreement dated January 1, 1996 between
KeyCorp Mutual Fund Advisers, Inc. and Society Asset Management,
Inc. is incorporated herein by reference to Exhibit 99.B9(f) to
Post-Effective Amendment No. 30 to the Registrant's Registration
Statement on Form N-1A filed on July 30, 1996.
EX-99.B10 (a) Opinion of Counsel was filed with Registrant's Rule 24f-2 Notice
in respect of the period ending October 31, 1996, submitted on
December 23, 1996.
EX-99.B11 (a) Consent of Kramer, Levin, Naftalis & Frankel is filed herewith.
(b) Consent of Coopers & Lybrand L.L.P. is filed herewith.
EX-99.B12 Audited financial reports for the period ended October 31, 1996
arefiled herewith.
EX-99.B13 (a) Purchase Agreement dated November 12, 1986 between
Registrant and Physicians Insurance Company of Ohio is
incorporated herein by reference to Exhibit 13 to
Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A filed on November 13,
1986.
(b) Purchase Agreement dated October 15, 1989 is incorporated herein
by reference to Exhibit 13(b) to Post-Effective Amendment No. 7
to the Registrant's Registration Statement on Form N-1A filed on
December 1, 1989.
(c) Purchase Agreement is incorporated herein by reference to Exhibit
13(c) to Post-Effective Amendment No. 7 to the Registrant's
Registration Statement on Form N-1A filed on December 1, 1989.
EX-99.B14 None.
C-3
<PAGE>
THE VICTORY PORTFOLIOS
EX-99.B15 (a) Distribution and Service Plan dated June 5, 1995 for The
Victory Portfolios Class A Shares of Government Bond Fund,
National Municipal Bond Fund, New York Tax-Free Fund, Fund
for Income, Financial Reserves Fund, Institutional Money
Market Fund , Ohio Municipal Money Market Fund Lakefront
Fund and Real Estate Investment Fund with amended Schedule I
dated March 1, 1997 is filed herewith.
(b) Distribution Plan dated June 5, 1995 for Class B Shares of
National Municipal Bond Fund, Government Bond Fund and New York
Tax-Free Fund and adopted December 6, 1995 for Class B Shares of
Balanced Fund, Diversified Stock Fund, International Growth Fund,
Ohio Regional Stock Fund, Special Value Fund, Institutional Money
Market Fund and U.S. Government Obligations Fund is incorporated
by reference to Exhibit 99.B15(b) to Post-Effective Amendment No.
22 to the Registrant's Registration Statement on Form N-1A filed
on August 28, 1995, and the updated schedule thereto dated
December 6, 1995 is incorporated by reference to Exhibit 99B(b)
to Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A filed on January 31, 1996.
EX-99.B16 (a) Forms of computation of performance quotation are
incorporated herein by reference to Exhibit 16 to
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement on Form N-1A filed on December 23,
1994.
(b) Forms of computation of performance quotation for the Balanced
Fund, Diversified Stock Fund, International Growth Fund, Ohio
Regional Stock Fund and Special Value Fund are incorporated
herein by reference to Exhibit 99.B16(b) to Post-Effective
Amendment No. 30 to the Registrant's Registration Statement on
Form N-1A filed on July 30, 1996.
EX-99.B17 Financial Data Schedules for the period ended October 31,
1996 are filed herewith as Exhibit 27.
EX-99.B18 (a) Rule 18f-3 Multi-Class Plan adopted effective June 5, 1995 is
incorporated by reference to Exhibit 17 to Post-Effective
Amendment No. 22 to the Registrant's Registration Statement on
Form N-1A filed on August 28, 1995.
(b) Amended and Restated Rule 18f-3 Multi-Class Plan effective as of
December 6, 1995 is incorporated herein by reference to Exhibit
99.B18(b) to Post-Effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-1A filed on December 28, 1995.
(c) Amended and Restated Rule 18f-3 Multi-Class Plan effective as of
February 14, 1996 is incorporated herein by reference to Exhibit
99.B18(c) to Post-Effective Amendment No. 28 to the Registrant's
Registration Statement on Form N-1A filed February 28, 1996.
C-4
<PAGE>
THE VICTORY PORTFOLIOS
EX-99.B19 (a) Power of Attorney of Leigh A. Wilson is incorporated herein by
reference to Exhibit 99.B P of A to Post-Effective Amendment No.
27 to Registrant's Registration Statement on Form N-1A and Powers
of Attorney of Robert G. Brown, Edward P. Campbell, Harry
Gazelle, Stanley I. Landgraf, Thomas F. Morrissey and H. Patrick
Swygert are incorporated herein by reference to Exhibit 99.B P of
A to Post-Effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-1A filed on January 31, 1996 and
December 28, 1995, respectively.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of January 17, 1997 the number of record holders of each Fund of the
Registrant were as follows:
Number of
Title of Fund Record Holders
------------- ---------------
U.S. Government Obligations Fund
Select Class Shares 281
Investor Class Shares 15
Prime Obligations Fund 1,048
Tax Free Money Market Fund 68
Balanced Fund
Class A Shares 1,130
Class B Shares 149
Key Shares 0
Stock Index Fund 227
Value Fund 95
Diversified Stock Fund
Class A Shares 7,826
Class B Shares 1,124
Growth Fund 325
Special Value Fund
Class A Shares 1,925
Class B Shares 69
C-5
<PAGE>
THE VICTORY PORTFOLIOS
Special Growth Fund 151
Ohio Regional Stock Fund
Class A Shares 1,081
Class B Shares 79
International Growth Fund
Class A Shares 1,206
Class B Shares 37
Limited Term Income Fund 421
Government Mortgage Fund 259
Ohio Municipal Bond Fund 264
Intermediate Income Fund 140
Investment Quality Bond Fund 639
Financial Reserves Fund 91
Fund For Income 1,259
Government Bond Fund
Class A Shares 135
Class B Shares 71
Institutional Money Market Fund
Investor Class Shares 23
Select Class Shares 10
National Municipal Bond Fund
Class A Shares 831
Class B Shares 57
New York Tax-Free Fund
Class A Shares 438
Class B Shares 90
Ohio Municipal Money Market Fund 127
Lakefront Fund 0
Real Estate Investment Fund 0
C-6
<PAGE>
THE VICTORY PORTFOLIOS
Item 27. Indemnification
Article X, Section 10.02 of the Registrant's Delaware Trust
Instrument, incorporated herein as Exhibit 99.B1(a) hereto, provides
for the indemnification of Registrant's Trustees and officers, as
follows:
"SECTION 10.02 INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in Subsection
10.02(b):
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust to the fullest extent permitted by law
against liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and
against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while
in office or thereafter, and the words "liability" and "expenses"
shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or
its Shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of his office or (B) not to have acted in good faith
in the reasonable belief that his action was in the best interest
of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office,
(A) by the court or other body approving the settlement; (B) by
at least a majority of those Trustees who are neither Interested
Persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full
trial-type inquiry); or (C) by written opinion of independent
legal counsel based upon a review of readily available facts (as
opposed to a full trial-type inquiry).
(c) 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
C-7
<PAGE>
THE VICTORY PORTFOLIOS
rights to indemnification to which Trust personnel, other than
Covered Persons, and other persons may be entitled by contract or
otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character
described in Subsection (a) of this Section 10.02 may be paid by the
Trust or Series from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such Covered Person
that such amount will be paid over by him to the Trust or Series if
it is ultimately determined that he is not entitled to
indemnification under this Section 10.02; provided, however, that
either (i) such Covered Person shall have provided appropriate
security for such undertaking, (ii) the Trust is insured against
losses arising out of any such advance payments or (iii) either a
majority of the Trustees who are neither Interested Persons of the
Trust nor parties to the matter, or independent legal counsel in a
written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Section
10.02."
Indemnification of the Fund's principal underwriter, custodian, fund
accountant, and transfer agent is provided for, respectively, in
Section V of the Distribution Agreement incorporated by reference as
Exhibit 6(a) hereto, Section 28 of the Custody Agreement incorporated
by reference as Exhibit 8(a) hereto, Section 5 of the Fund Accounting
Agreement incorporated by reference as Exhibit 9(c) hereto, and
Section 7 of the Transfer Agency Agreement incorporated by reference
as Exhibit 9(b) hereto. Registrant has obtained from a major
insurance carrier a trustees' and officers' liability policy covering
certain types of errors and omissions. In no event will Registrant
indemnify any of its trustees, officers, employees or agents against
any liability to which such person would otherwise be subject by
reason of his willful misfeasance, bad faith, or gross negligence in
the performance of his duties, or by reason of his reckless disregard
of the duties involved in the conduct of his office or under his
agreement with Registrant. Registrant will comply with Rule 484 under
the Securities Act of 1933 and Release 11330 under the Investment
Company Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling
persons or Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Investment Company Act of 1940, as
amended, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such trustee, officer, or
controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
C-8
<PAGE>
THE VICTORY PORTFOLIOS
Item 28. Business and Other Connections of Investment Adviser
KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers") is the investment
adviser to each fund of the Victory Portfolios. Key Advisers is a
wholly-owned indirect subsidiary of KeyCorp, a bank holding company
which had total assets of approximately $65 billion as of
September 30, 1996. KeyCorp is a leading financial institution doing
business in 26 states from Maine to Alaska, providing a full array of
trust, commercial, and retail banking services. Its non-bank
subsidiaries include investment advisory, securities brokerage,
insurance, bank credit card processing, mortgage and leasing
companies. Society Asset Management, Inc. ("Society"), an affiliate of
Key Advisers, is the sub-adviser of each of the funds. Key Advisers,
Society and their affiliates have over $50 billion in assets under
management, and provide a full range of investment management services
to personal and corporate clients.
Effective February 28, 1997, KeyCorp Mutual Fund Advisers, Inc.,
Society and a third affiliate will merge into another affiliate, Key
Asset Management Inc. ("KAM") (formerly known as Spears, Benzak,
Salomon and Farrell, Inc. ("SBSF")). As of that date, KAM will become
the investment adviser to each of the Victory Portfolios and Society
will no longer serve as fund sub-adviser.
Lakefront Capital Investors, Inc. ("Lakefront"), sub-adviser of the
Lakefront Fund, The Hanna Building, 1422 Euclid Avenue, Suite 840,
Cleveland, Ohio 44115, was incorporated in 1991.
To the knowledge of Registrant, none of the directors or officers of
Key Advisers , Society, or Lakefront, except those set forth below, is
or has been at any time during the past two calendar years engaged in
any other business, profession, vocation or employment of a
substantial nature, except that certain directors and officers of Key
Advisers and Society also hold positions with KeyCorp or its
subsidiaries.
The principal executive officers and directors of Key Advisers are as
follows:
W. Christopher Maxwell, Director, Chairman and Chief Executive
Officer. Also Executive Vice President of KeyCorp Management Company
("KMC"), and Director of KAM.
Kathleen A. Dennis, Director and President. Also Senior Vice President
of KMC.
William G. Spears, Director. Also Chairman, Director and Managing
Director of SBSF; Director and Chairman of Society; and Group
Executive for Asset Management of KeyCorp; Director, Chairman and
Chief Executive Officer of KAM.
Annette L. Geddes, Senior Vice President and Senior Managing Director.
Also Managing Director of SBSF.
John M. Keane, Vice President and Treasurer. Also Vice President, KMC.
C-9
<PAGE>
THE VICTORY PORTFOLIOS
William J. Blake, Secretary. Also Senior Vice President and Senior
Managing Counsel of KMC.
Steven N. Bulloch, Assistant Secretary. Also Senior Vice President and
Senior Counsel of KMC.
Charles G. Crane, Senior Vice President and Senior Managing Director.
Also Senior Vice President and Managing Director of SBSF.
Dennis M. Grapo, Senior Vice President and Senior Managing Director.
Also Senior Vice President and Senior Managing Director of Society.
Frank J. Riccardi, Senior Vice President and Senior Managing Director.
Also Senior Vice President and Senior Managing Director of Society.
Anthony Aveni, Senior Vice President and Senior Managing Director.
Also Director, Chief Investment Officer, and Senior Managing Director
of Society; Director and Chief Investment Officer of KAM.
Eric P. Rasmussen, Senior Vice President and Senior Managing Director.
Also Director, Chief Investment Officer and Chairman, Applied
Technology Investments, Inc.
The business address of each of the foregoing individuals is 127
Public Square, Cleveland, Ohio 44114.
The principal executive officers and directors of Society are as
follows:
Directors:
William G. Spears, Director and Chairman. Also Chairman, Director, and
Managing Director of SBSF; Director and Chairman of Society; and Group
Executive for Asset Management of KeyCorp; Director, Chairman and
Chief Executive Officer of KAM.
Richard J. Buoncore, Director, CEO and President. Also COO, Treasurer
and Managing Director of SBSF; Director, President and COO of KAM.
Richard A. Janus, also Senior Vice President and Senior Managing
Director of Society.
Dennis M. Grapo, also Senior Vice President and Senior Managing
Director of Society.
Frank J. Riccardi, also Senior Vice President and Senior Managing
Director of Society.
Anthony Aveni, also Chief Investment Officer and Senior Managing
Director of Society; Director of KAM.
C-10
<PAGE>
THE VICTORY PORTFOLIOS
Other Officers:
James D. Kacic, Vice President and CFO of Society. Also Treasurer and
Chief Financial Officer, KAM.
William J. Blake, Secretary. Also Senior Vice President and Senior
Managing Counsel of KMC. Also Secretary, KAM.
Steven N. Bulloch, Assistant Secretary. Also Senior Vice President and
Senior Counsel of KMC. Also Assistant Secretary, KAM.
Robert M. Siewert, Assistant Vice President and Compliance Officer.
Also Chief Compliance Officer, KAM.
The principal officers and directors of KAM are as follows:
Officers:
William G. Spears, Chief Executive Officer and Chairman.
Richard J. Buoncore, President and COO.
Directors:
William G. Spears
Vincent de P. Farrell, Director and Chief Investment Officer for SBSF.
Anthony Aveni
Gary R. Martzolf
W. Christopher Maxwell
Richard J. Buoncore
The business address of each of the foregoing individuals is 127
Public Square, Cleveland, Ohio 44114.
The principal executive officers and directors of Lakefront are as
follows:
Nathaniel E. Carter, President. Also Chief Investment Officer of
Lakefront.
Kenneth A. Louard, Chief Operating Officer.
The business address of each of the foregoing individuals is The Hanna
Building, 1422 Euclid Avenue, Suite 840, Cleveland, Ohio 44115.
C-11
<PAGE>
THE VICTORY PORTFOLIOS
Item 29. Principal Underwriter
(a) BISYS Fund Services acts as distributor and serves as administrator
for the Registrant.
(b) Directors, officers and partners of BISYS Fund Services , Inc., the
General Partner of BISYS Fund Services, as of January 23, 1997 were
as follows:
<TABLE>
<CAPTION>
Name and Principal Positions and Officers with Positions and Offices
Business Addresses BISYS Fund Services with the Registrant
- ------------------ --------------------------- ----------------------
<S> <C> <C>
Lynn J. Mangum Chairman/CEO None
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43215
J. David Huber
BISYS Fund Services, Inc.
3435 Stelzer Road President None
Columbus, Ohio 43215
Robert J. McMullan
BISYS Fund Services, Inc. Executive Vice
3435 Stelzer Road President/CFO/Treasurer None
Columbus, Ohio 43215
Kevin J. Dell
BISYS Fund Services, Inc. Vice President/General
3435 Stelzer Road Counsel/Secretary None
Columbus, Ohio 43215
Michael D. Burns
BISYS Fund Services, Inc.
3435 Stelzer Road Vice President None
Columbus, Ohio 43215
Annamaria Porcaro
BISYS Fund Services, Inc.
3435 Stelzer Road Assistant Secretary None
Columbus, Ohio 43215
Robert Tuch
BISYS Fund Services, Inc.
3435 Stelzer Road Assistant Secretary None
Columbus, Ohio 43215
Stephen Mintos
BISYS Fund Services, Inc.
3435 Stelzer Road Executive Vice President None
Columbus, Ohio 43215
</TABLE>
C-12
<PAGE>
THE VICTORY PORTFOLIOS
<TABLE>
<S> <C> <C>
George O. Martinez
BISYS Fund Services, Inc.
3435 Stelzer Road Senior Vice President Assistant Secretary
Columbus, Ohio 43215
Mark J. Rybarczyk
BISYS Fund Services, Inc.
3435 Stelzer Road Senior Vice President None
Columbus, Ohio 43215
Paul H. Bourke
BISYS Fund Services, Inc.
3435 Stelzer Road Vice Chairman None
Columbus, Ohio 43215
</TABLE>
Item 30. Location of Accounts and Records
(1) Key Asset Management Inc., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as investment adviser).
(2) Society Asset Management, Inc., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as investment
sub-adviser).
(3) Lakefront Capital Investors, Inc., Suite 840, The Hanna Building, 1422
Euclid Avenue, Cleveland, Ohio 44115 (records relating to its
functions as investment sub-adviser for the Lakefront Fund only).
(4) KeyBank National Association, 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as shareholder servicing
agent).
(5) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219 (records
relating to its functions as administrator and distributor).
(6) State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110- 3875 (records relating to its functions as
transfer agent).
(7) Boston Financial Data Services, Inc. Two Heritage Drive, Quincy,
Massachusetts 02171 (records relating to its functions as dividend
disbursing agent and shareholder servicing agent).
(8) Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as custodian).
(9) Morgan Stanley Trust Company, 1585 Broadway, New York, New York 10036
(records relating to its functions as sub-custodian of Balanced Fund
and International Growth Fund).
C-13
<PAGE>
THE VICTORY PORTFOLIOS
Item 31. Management Services
None.
Item 32. Undertakings
(a) Registrant undertakes to call a meeting of shareholders, at the
request of holders of 10% of the Registrant's outstanding shares, for
the purpose of voting upon the question of removal of a trustee or
trustees and undertakes to assist in communications with other
shareholders as required by Section 16(c) of the Investment Company
Act of 1940.
(b) Registrant, on behalf of Lakefront Fund and Real Estate Investment
Fund, undertakes to file a Post-Effective amendment containing
reasonably current financial statements, which need not be certified,
within four to six months from the later of the effective date of
this Registration Statement or the commencement of the public
offering under the Securities Act of 1933.
(c) Registrant undertakes to furnish to each person to whom a prospectus
is delivered a copy of the Registrant's latest Annual Report to
Shareholders upon request and without charge.
NOTICE
A copy of the Delaware Trust Instrument of The Victory Portfolios is on file
with the Secretary of State of Delaware and notice is hereby given that this
Post-Effective Amendment to the Registrant's Registration Statement has been
executed on behalf of the Registrant by officers of, and Trustees of, the
Registrant as officers and as Trustees, respectively, and not individually, and
that the obligations of or arising out of this instrument are not binding upon
any of the Trustees, officers or shareholders of The Victory Portfolios
individually but are binding only upon the assets and property of the
Registrant.
C-14
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has duly caused this Post-Effective Amendment No. 31 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York and State of New York, on the 7th day
of February 1997.
THE VICTORY PORTFOLIOS
By: /s/ LEIGH A. WILSON
--------------------------------------
Leigh A. Wilson, President and Trustee
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on the 7th day of
February, 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. Morrissey
* Trustee
- ---------------------------------
H. Patrick Swygert
*By: /s/ CARL FRISCHLING
----------------------------
Carl Frischling
Attorney-in-Fact
Attorney-in-Fact pursuant to powers of attorney, dated December 18, 1995
filed with Post-Effective Amendments 27 and 26 to Registrant's Registration
Statement on January 31, 1996 and December 28, 1995, respectively.
C-15
<PAGE>
THE VICTORY PORTFOLIO
THE VICTORY PORTFOLIOS
INDEX TO EXHIBITS
Exhibit Number
EX- 99.B5(c) Form of Investment Advisory Agreement between The Registrant and
Key Asset Management Inc. regarding the Lakefront Fund and the
Real Estate Investment Fund
EX-99.B5(d) Form of Investment Sub-Advisory Agreement between KeyCorp Mutual
Fund Advisers, Inc. and Lakefront Capital Investors, Inc.
regarding the Lakefront Fund
EX-99.B9(d)
EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
EX-99.B11(b) Consent of Coopers & Lybrand L.L.P.
EX-99.B12 Audited financial reports for the period ended October 31, 1996
EX-99.B15(a) Distribution and Service Plan dated June 5, 1995 for
The Victory Portfolios Class A Shares of Government
Bond Fund, National Municipal Bond Fund, New York
Tax-Free Fund, Fund for Income, Financial Reserves
Fund, Institutional Money Market Fund, Ohio Municipal
Money Market Fund, Lakefront Fund and Real Estate
Investment Fund with amended Schedule I dated March 1,
1997
EX-27 Financial Data Schedules
FORM OF
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE VICTORY PORTFOLIOS
AND
KEY ASSET MANAGEMENT, INC.
AGREEMENT made as of the ___ day of _____, 199_, by and between The Victory
Portfolios, a Delaware business trust which may issue one or more series of
shares of beneficial interest (the "Company"), and Key Asset Management, Inc.,
an Ohio corporation (the "Adviser").
WHEREAS, the Company is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Company desires to retain the Adviser to furnish investment
advisory services to the funds listed on Schedule A (each, a "Fund" and
collectively, the "Funds"), and the Adviser represents that it is willing and
possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
(a) General. The Company hereby appoints the Adviser to act as investment
adviser to the Funds for the period and on the terms set forth in this
Agreement. The Adviser accepts such appointment and agrees to furnish
the services herein set forth for the compensation herein provided.
(b) Employees of Affiliates. The Adviser may, in its discretion, provide
such services through its own employees or the employees of one or
more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the control
of KeyCorp, the indirect parent of the Adviser; provided that (i) all
persons, when providing services hereunder, are functioning as part of
an organized group of persons, and (ii) such organized group of
persons is managed at all times by authorized officers of the Adviser.
(c) Sub-Advisers. It is understood and agreed that the Adviser may from
time to time employ or associate with such other entities or persons
as the Adviser believes appropriate to assist in the performance of
this Agreement with respect to a particular Fund or Funds (each a
"Sub-Adviser"), and that any such Sub-Adviser shall have all of the
rights and powers of the Adviser set forth in this Agreement; provided
that a Fund shall not pay any additional compensation for any Sub-
Adviser and the Adviser shall be as fully responsible to the Company
for the acts and omissions of the Sub-Adviser as it is for its own
acts and omissions; and
<PAGE>
provided further that the retention of any Sub-Adviser shall be
approved in advance by (i) the Board of Trustees of the Company and
(ii) the shareholders of the relevant Fund if required under any
applicable provisions of the 1940 Act or any exemptive relief granted
thereunder. The Adviser will review, monitor and report to the
Company's Board of Trustees regarding the performance and investment
procedures of any Sub-Adviser. In the event that the services of any
Sub-Adviser are terminated, the Adviser may provide investment
advisory services pursuant to this Agreement to the Fund without a
Sub-Adviser or employ another Sub-Adviser without further shareholder
approval, to the extent consistent with the 1940 Act or any exemptive
relief granted thereunder. A Sub-Adviser may be an affiliate of the
Adviser.
2. DELIVERY OF DOCUMENTS. The Company has delivered to the Adviser copies
of each of the following documents along with all amendments thereto through the
date hereof, and will promptly deliver to it all future amendments and
supplements thereto, if any:
(a) the Company's Trust Instrument;
(b) the By-Laws of the Company;
(c) resolutions of the Board of Trustees of the Company authorizing the
execution and delivery of this Agreement;
(d) the most recent Post-Effective Amendment to the Company's Registration
Statement under the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act, on Form N-1A as filed with the Securities and
Exchange Commission (the "Commission");
(e) Notification of Registration of the Company under the 1940 Act on Form
N-8A as filed with the Commission; and
(f) the currently effective Prospectuses and Statements of Additional
Information of the Funds.
3. INVESTMENT ADVISORY SERVICES.
(a) Management of the Funds. The Adviser hereby undertakes to act as
investment adviser to the Funds. The Adviser shall regularly provide
investment advice to the Funds and continuously supervise the
investment and reinvestment of cash, securities and other property
composing the assets of the Funds and, in furtherance thereof, shall:
(i) supervise all aspects of the operations of the Company and each
Fund;
2
<PAGE>
(ii) obtain and evaluate pertinent economic, statistical and financial
data, as well as other significant events and developments, which
affect the economy generally, the Funds' investment programs, and
the issuers of securities included in the Funds' portfolios and
the industries in which they engage, or which may relate to
securities or other investments which the Adviser may deem
desirable for inclusion in a Fund's portfolio;
(iii)determine which issuers and securities shall be included in the
portfolio of each Fund;
(iv) furnish a continuous investment program for each Fund;
(v) in its discretion and without prior consultation with the
Company, buy, sell, lend and otherwise trade any stocks, bonds
and other securities and investment instruments on behalf of each
Fund; and
(vi) take, on behalf of each Fund, all actions the Adviser may deem
necessary in order to carry into effect such investment program
and the Adviser's functions as provided above, including the
making of appropriate periodic reports to the Company's Board of
Trustees.
(b) Covenants. The Adviser shall carry out its investment advisory and
supervisory responsibilities in a manner consistent with the
investment objectives, policies, and restrictions provided in: (i)
each Fund's Prospectus and Statement of Additional Information as
revised and in effect from time to time; (ii) the Company's Trust
Instrument, By-Laws or other governing instruments, as amended from
time to time; (iii) the 1940 Act; (iv) other applicable laws; and (v)
such other investment policies, procedures and/or limitations as may
be adopted by the Company with respect to a Fund and provided to the
Adviser in writing. The Adviser agrees to use reasonable efforts to
manage each Fund so that it will qualify, and continue to qualify, as
a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended, and regulations issued thereunder
(the "Code"), except as may be authorized to the contrary by the
Company's Board of Trustees. The management of the Funds by the
Adviser shall at all times be subject to the review of the Company's
Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Adviser shall keep
each Fund's books and records required to be maintained by, or on
behalf of, the Funds with respect to advisory services rendered
hereunder. The Adviser agrees that all records which it maintains for
a Fund are the property of the Fund and it will promptly surrender any
of such records to the Fund upon the Fund's request. The Adviser
further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any such records of the Fund required to be
preserved by such Rule.
(d) Reports, Evaluations and other Services. The Adviser shall furnish
reports, evaluations, information or analyses to the Company with
respect to the Funds and
3
<PAGE>
in connection with the Adviser's services hereunder as the Company's
Board of Trustees may request from time to time or as the Adviser may
otherwise deem to be desirable. The Adviser shall make recommendations
to the Company's Board of Trustees with respect to Company policies,
and shall carry out such policies as are adopted by the Board of
Trustees. The Adviser shall, subject to review by the Board of
Trustees, furnish such other services as the Adviser shall from time
to time determine to be necessary or useful to perform its obligations
under this Agreement.
(e) Purchase and Sale of Securities. The Adviser shall place all orders
for the purchase and sale of portfolio securities for each Fund with
brokers or dealers selected by the Adviser, which may include brokers
or dealers affiliated with the Adviser to the extent permitted by the
1940 Act and the Company's policies and procedures applicable to the
Funds. The Adviser shall use its best efforts to seek to execute
portfolio transactions at prices which, under the circumstances,
result in total costs or proceeds being the most favorable to the
Funds. In assessing the best overall terms available for any
transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the
broker or dealer, research services provided to the Adviser, and the
reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. In no event shall the Adviser
be under any duty to obtain the lowest commission or the best net
price for any Fund on any particular transaction, nor shall the
Adviser be under any duty to execute any order in a fashion either
preferential to any Fund relative to other accounts managed by the
Adviser or otherwise materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. Selection of Brokers or Dealers. In
selecting brokers or dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Adviser and/or
the other accounts over which the Adviser exercises investment
discretion. The Adviser is authorized to pay a broker or dealer who
provides such brokerage and research services a commission for
executing a portfolio transaction for the Fund which is in excess of
the amount of commission another broker or dealer would have charged
for effecting that transaction if the Adviser determines in good faith
that the total commission is reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser with respect to accounts over which it
exercises investment discretion. The Adviser shall report to the Board
of Trustees of the Company regarding overall commissions paid by the
Fund and their reasonableness in relation to their benefits to the
Fund. Any transactions for the Fund that are effected through an
affiliated broker-dealer on a national securities exchange of which
such broker- dealer is a member will be effected in accordance with
Section 11(a) of the Securities Exchange Act of 1934, as amended, and
the regulations promulgated
4
<PAGE>
thereunder. The Fund hereby authorizes any such broker or dealer to
retain commissions for effecting such transactions and to pay out of
such retained commissions any compensation due to others in connection
with effectuating those transactions.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for a Fund, the Adviser may, to the extent permitted by
applicable laws and regulations, but shall not be obligated to,
aggregate the securities to be sold or purchased with those of other
Funds or its other clients if, in the Adviser's reasonable judgment,
such aggregation (i) will result in an overall economic benefit to the
Fund, taking into consideration the advantageous selling or purchase
price, brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies set forth
in the Company's registration statement and the Fund's Prospectus and
Statement of Additional Information. In such event, the Adviser will
allocate the securities so purchased or sold, and the expenses
incurred in the transaction, in an equitable manner, consistent with
its fiduciary obligations to the Fund and such other clients.
4. REPRESENTATIONS AND WARRANTIES.
(a) The Adviser hereby represents and warrants to the Company as follows:
(i) The Adviser is a corporation duly organized and in good standing
under the laws of the State of Ohio and is fully authorized to
enter into this Agreement and carry out its duties and
obligations hereunder.
(ii) The Adviser is registered as an investment adviser with the
Commission under the Investment Advisers Act of 1940, as amended
(the "Advisers Act"), and is registered or licensed as an
investment adviser under the laws of all applicable
jurisdictions. The Adviser shall maintain such registrations or
licenses in effect at all times during the term of this
Agreement.
(iii)The Adviser at all times shall provide its best judgment and
effort to the Company in carrying out the Adviser's obligations
hereunder.
(b) The Company hereby represents and warrants to the Adviser as follows:
(i) The Company has been duly organized as a business trust under the
laws of the State of Delaware and is authorized to enter into
this Agreement and carry out its terms.
5
<PAGE>
(ii) The Company is registered as an investment company with the
Commission under the 1940 Act and shares of each Fund are
registered for offer and sale to the public under the 1933 Act
and all applicable state securities laws where currently sold.
Such registrations will be kept in effect during the term of this
Agreement.
5. COMPENSATION. As compensation for the services which the Adviser is to
provide or cause to be provided pursuant to Paragraph 3, each Fund shall pay to
the Adviser out of Fund assets an annual fee, computed and accrued daily and
paid in arrears on the first business day of every month, at the rate set forth
opposite each Fund's name on Schedule A, which shall be a percentage of the
average daily net assets of the Fund (computed in the manner set forth in the
Fund's most recent Prospectus and Statement of Additional Information)
determined as of the close of business on each business day throughout the
month. At the request of the Adviser, some or all of such fee shall be paid
directly to a Sub-Adviser. The fee for any partial month under this Agreement
shall be calculated on a proportionate basis. In the event that the total
expenses of a Fund exceed the limits on investment company expenses imposed by
any statute or any regulatory authority of any jurisdiction in which shares of
such Fund are qualified for offer and sale, the Adviser will bear the amount of
such excess, except: (i) the Adviser shall not be required to bear such excess
to an extent greater than the compensation due to the Adviser for the period for
which such expense limitation is required to be calculated unless such statute
or regulatory authority shall so require, and (ii) the Adviser shall not be
required to bear the expenses of the Fund to an extent which would result in the
Fund's or Company's inability to qualify as a regulated investment company under
the provisions of Subchapter M of the Code.
6. INTERESTED PERSONS. It is understood that, to the extent consistent with
applicable laws, the Trustees, officers and shareholders of the Company are or
may be or become interested in the Adviser as directors, officers or otherwise
and that directors, officers and shareholders of the Adviser are or may be or
become similarly interested in the Company.
7. EXPENSES. As between the Adviser and the Funds, the Funds will pay for
all their expenses other than those expressly stated to be payable by the
Adviser hereunder, which expenses payable by the Funds shall include, without
limitation, (i) interest and taxes; (ii) brokerage commissions and other costs
in connection with the purchase or sale of securities and other investment
instruments, which the parties acknowledge might be higher than other brokers
would charge when a Fund utilizes a broker which provides brokerage and research
services to the Adviser as contemplated under Paragraph 3 above; (iii) fees and
expenses of the Company's Trustees that are not employees of the Adviser; (iv)
legal and audit expenses; (v) administrator, custodian, pricing and bookkeeping,
registrar and transfer agent fees and expenses; (vi) fees and expenses related
to the registration and qualification of the Funds' shares for distribution
under state and federal securities laws; (vii) expenses of printing and mailing
reports and notices and proxy material to shareholders, unless otherwise
required; (viii) all other expenses incidental to holding meetings of
shareholders, including proxy solicitations therefor, unless otherwise required;
(ix) expenses of typesetting for printing Prospectuses and Statements of
Additional Information and supplements thereto; (x) expenses of printing and
mailing Prospectuses and Statements of
6
<PAGE>
Additional Information and supplements thereto sent to existing shareholders;
(xi) insurance premiums for fidelity bonds and other coverage to the extent
approved by the Company's Board of Trustees; (xii) association membership dues
authorized by the Company's Board of Trustees; and (xiii) such non-recurring or
extraordinary expenses as may arise, including those relating to actions, suits
or proceedings to which the Company is a party (or to which the Funds' assets
are subject) and any legal obligation for which the Company may have to provide
indemnification to the Company's Trustees and officers.
8. NON-EXCLUSIVE SERVICES; LIMITATION OF ADVISER'S LIABILITY. The services
of the Adviser to the Funds are not to be deemed exclusive and the Adviser may
render similar services to others and engage in other activities. The Adviser
and its affiliates may enter into other agreements with the Funds and the
Company for providing additional services to the Funds and the Company which are
not covered by this Agreement, and to receive additional compensation for such
services. In the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of obligations or duties hereunder on the part of the
Adviser, or a breach of fiduciary duty with respect to receipt of compensation,
neither the Adviser nor any of its directors, officers, shareholders, agents, or
employees shall be liable or responsible to the Company, the Funds or to any
shareholder of the Funds for any error of judgment or mistake of law or for any
act or omission in the course of, or connected with, rendering services
hereunder or for any loss suffered by the Company, a Fund or any shareholder of
a Fund in connection with the performance of this Agreement.
9. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall become
effective on ___________, 199_, provided that it shall have been approved by a
majority of the outstanding voting securities of each Fund, in accordance with
the requirements of the 1940 Act, or such later date as may be agreed by the
parties following such shareholder approval.
(a) This Agreement shall continue in force until _________, 199_.
Thereafter, this Agreement shall continue in effect as to each Fund
for successive annual periods, provided such continuance is
specifically approved at least annually (i) by a vote of the majority
of the Trustees of the Company who are not parties to this Agreement
or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval and (ii) by a vote
of the Board of Trustees of the Company or a majority of the
outstanding voting shares of the Fund.
(b) The modification of any of the non-material terms of this Agreement
may be approved by a vote of a majority of those Trustees of the
Company who are not interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such
approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9, either
party hereto may terminate this Agreement at any time on sixty (60)
days' prior written notice to the other, without payment of any
penalty. Such a termination by the Company
7
<PAGE>
may be effected severally as to any particular Fund, and shall be
effected as to any Fund by vote of the Company's Board of Trustees or
by vote of a majority of the outstanding voting securities of the
Fund. This Agreement shall terminate automatically in the event of its
assignment.
10. LIMITATION OF LIABILITY OF TRUSTEES AND SHAREHOLDERS. The Adviser
acknowledges the following limitation of liability:
The terms "The Victory Portfolios" and "Trustees" refer, respectively, to
the trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under the Trust Instrument, to which
reference is hereby made and a copy of which is on file at the office of the
Secretary of State of the State of Delaware, such reference being inclusive of
any and all amendments thereto so filed or hereafter filed. The obligations of
"The Victory Portfolios" entered into in the name or on behalf thereof by any of
the Trustees, representatives or agents are made not individually, but in such
capacities and are not binding upon any of the Trustees, shareholders or
representatives of the Company personally, but bind only the assets of the
Company, and all persons dealing with the Company or a Fund must look solely to
the assets of the Company or Fund for the enforcement of any claims against the
Company or Fund.
11. SERVICE MARK. The service mark of the Company and the name "Victory"
(and derivatives thereof) have been licensed to the Company by KeyCorp, through
its subsidiary Key Trust Company ("Key Trust"), an affiliate of the Adviser,
pursuant to a License Agreement dated June 21, 1993, and their continued use is
subject to the right of Key Trust to withdraw this permission under the License
Agreement in the event the Adviser or another subsidiary of KeyCorp is not the
investment adviser to the Company.
12. CERTAIN DEFINITIONS. The terms "vote of a majority of the outstanding
voting securities," "assignment," "control," and "interested persons," when used
herein, shall have the respective meanings specified in the 1940 Act. References
in this Agreement to the 1940 Act and the Advisers Act shall be construed as
references to such laws as now in effect or as hereafter amended, and shall be
understood as inclusive of any applicable rules, interpretations and/or orders
adopted or issued thereunder by the Commission.
13. INDEPENDENT CONTRACTOR. The Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees of the Company from time
to time, have no authority to act for or represent a Fund in any way or
otherwise be deemed an agent of a Fund.
14. STRUCTURE OF AGREEMENT. The Company is entering into this Agreement on
behalf of the respective Funds severally and not jointly. The responsibilities
and benefits set forth in this Agreement shall refer to each Fund severally and
not jointly. No Fund shall have any responsibility for any obligation of any
other Fund arising out of this Agreement. Without otherwise limiting the
generality of the foregoing:
8
<PAGE>
(a) any breach of any term of this Agreement regarding the Company with
respect to any one Fund shall not create a right or obligation with
respect to any other Fund;
(b) under no circumstances shall the Adviser have the right to set off
claims relating to a Fund by applying property of any other Fund; and
(c) the business and contractual relationships created by this Agreement,
consideration for entering into this Agreement, and the consequences
of such relationship and consideration relate solely to the Company
and the particular Fund to which such relationship and consideration
applies.
This Agreement is intended to govern only the relationships between the
Adviser, on the one hand, and the Company and the Funds, on the other hand, and
(except as specifically provided above in this Paragraph 14) is not intended to
and shall not govern (i) the relationship between the Company and any Fund or
(ii) the relationships among the respective Funds.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Ohio, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
16. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby and, to this extent, the provisions of
this Agreement shall be deemed to be severable.
17. NOTICES. Notices of any kind to be given to the Company hereunder by
the Adviser shall be in writing and shall be duly given if mailed or delivered
to 3435 Stelzer Road, Columbus, Ohio 43219-3035, Attention: George O. Martinez,
Esq.; with a copy to Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third
Avenue, New York, New York, 10022, Attention: Carl Frischling, Esq., or at such
other address or to such individual as shall be so specified by the Company to
the Adviser. Notices of any kind to be given to the Adviser hereunder by the
Company shall be in writing and shall be duly given if mailed or delivered to
the Adviser at 127 Public Square, Cleveland, Ohio 44114-1306, Attention: W.
Christopher Maxwell with a copy to Ann Kowal Smith, Esq., or at such other
address or to such individual as shall be so specified by the Adviser to the
Company. Notices shall be effective upon delivery.
9
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized as of the date written
above.
THE VICTORY PORTFOLIOS KEY ASSET MANAGEMENT, INC.
By: By:
------------------------------- ------------------------------------
Name: Scott A. Englehart Name:Christopher W. Maxwell
Title: Secretary Title: CEA and Chairman of the Board
10
<PAGE>
Schedule A
Name of Fund Fee*
- ------------ ------
1. The Victory Lakefront Fund 1.00%
2. The Victory Real Estate Investment Fund .65%
- --------------
* As a percentage of average daily net assets. Note, however, that the
Adviser shall have the right, but not the obligation, to voluntarily waive
any portion of the advisory fee from time to time. Any such voluntary
waiver will be irrevocable and determined in advance of rendering
investment advisory services by the Adviser, and shall be in writing and
signed by the parties hereto.
FORM OF
INVESTMENT SUBADVISORY AGREEMENT
BETWEEN
KEY ASSET MANAGEMENT, INC.
AND
LAKEFRONT CAPITAL INVESTORS, INC.
AGREEMENT made as of the ___ day of _____, 199_ by and between Key Asset
Management, Inc., an Ohio corporation (the "Adviser"), and Lakefront Capital
Investors, Inc., an Ohio corporation (the "Sub-Adviser").
WHEREAS, the Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Adviser provides investment advisory services to the series of
The Victory Portfolios, a Delaware business trust (the "Company"), which is
registered as an open-end, management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), pursuant to an Investment
Advisory Agreement dated _______, 199_ (the "Advisory Agreement"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish
investment subadvisory services in connection with the Victory Lakefront Fund
(the "Fund"), a series of the Company, and the Sub-Adviser represents that it is
willing and possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Adviser hereby appoints the Sub-Adviser to act as
investment subadviser to the Fund for the period and on the terms set forth in
this Agreement. The Sub- Adviser accepts such appointment and agrees to furnish
the services herein set forth for the compensation herein provided.
2. DELIVERY OF DOCUMENTS. The Adviser has delivered to the Sub-Adviser
copies of each of the following documents along with all amendments thereto
through the date hereof, and will promptly deliver to it all future amendments
and supplements thereto, if any:
(a) the Company's Trust Instrument;
(b) the By-Laws of the Company;
(c) resolutions of the Board of Trustees of the Company authorizing the
execution and delivery of the Advisory Agreement and this Agreement;
<PAGE>
(d) the most recent Post-Effective Amendment to the Company's Registration
Statement under the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act, on Form N-1A as filed with the Securities and
Exchange Commission (the "Commission");
(e) Notification of Registration of the Company under the 1940 Act on Form
N-8A as filed with the Commission; and
(f) the currently effective Prospectus and Statement of Additional
Information of the Fund.
3. INVESTMENT ADVISORY SERVICES.
(a) Management of the Fund. The Sub-Adviser hereby undertakes to act as
investment subadviser to the Fund. The Sub-Adviser shall regularly
provide investment advice to the Fund and continuously supervise the
investment and reinvestment of cash, securities and other property
composing the assets of the Fund and, in furtherance thereof, shall:
(i) obtain and evaluate pertinent economic, statistical and financial
data, as well as other significant events and developments, which
affect the economy generally, the Fund's investment programs, and
the issuers of securities included in the Fund's portfolios and
the industries in which they engage, or which may relate to
securities or other investments which the Sub-Adviser may deem
desirable for inclusion in a Fund's portfolio;
(ii) determine which issuers and securities shall be included in the
portfolio of the Fund;
(iii) furnish a continuous investment program for the Fund;
(iv) in its discretion, and without prior consultation, buy, sell,
lend and otherwise trade any stocks, bonds and other securities
and investment instruments on behalf of the Fund; and
(v) take, on behalf of the Fund, all actions the Sub-Adviser may deem
necessary in order to carry into effect such investment program
and the Sub-Adviser's functions as provided above, including the
making of appropriate periodic reports to the Adviser and the
Company's Board of Trustees.
(b) Covenants. The Sub-Adviser shall carry out its investment subadvisory
responsibilities in a manner consistent with the investment
objectives, policies, and restrictions provided in: (i) the Fund's
Prospectus and Statement of Additional Information as revised and in
effect from time to time; (ii) the Company's Trust Instrument, By-Laws
or other governing instruments, as amended from time to
-2-
<PAGE>
time; (iii) the 1940 Act; (iv) other applicable laws; and (v) such
other investment policies, procedures and/or limitations as may be
adopted by the Company or the Adviser with respect to a Fund and
provided to the Sub-Adviser in writing. The Sub-Adviser agrees to use
reasonable efforts to manage each Fund so that it will qualify, and
continue to qualify, as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder (the "Code"), except as may be
authorized to the contrary by the Company's Board of Trustees. The
management of the Fund by the Sub-Adviser shall at all times be
subject to the review of the Adviser and the Company's Board of
Trustees.
(c) Books and Records. Pursuant to applicable law, the Sub-Adviser shall
keep the Fund's books and records required to be maintained by, or on
behalf of, the Fund with respect to subadvisory services rendered
hereunder. The Sub-Adviser agrees that all records which it maintains
for the Fund are the property of the Fund and it will promptly
surrender any of such records to the Fund upon the Fund's request. The
Sub-Adviser further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act any such records of the Fund required to
be preserved by such Rule.
(d) Reports, Evaluations and other Services. The Sub-Adviser shall furnish
reports, evaluations, information or analyses to the Adviser and the
Company with respect to the Fund and in connection with the
Sub-Adviser's services hereunder as the Adviser and/or the Company's
Board of Trustees may request from time to time or as the Sub-Adviser
may otherwise deem to be reasonably necessary. The Sub- Adviser shall
make recommendations to the Adviser and the Company's Board of
Trustees with respect to the Company's policies, and shall carry out
such policies as are adopted by the Board of Trustees. The Sub-Adviser
may, subject to review by the Adviser, furnish such other services as
the Sub-Adviser shall from time to time determine to be necessary or
useful to perform its obligations under this Agreement.
(e) Purchase and Sale of Securities. The Sub-Adviser shall place all
orders for the purchase and sale of portfolio securities for the Fund
with brokers or dealers selected by the Sub-Adviser, which may include
brokers or dealers affiliated with the Adviser or the Sub-Adviser to
the extent permitted by the 1940 Act and the Company's policies and
procedures applicable to the Fund. The Sub-Adviser shall use its best
efforts to seek to execute portfolio transactions at prices which,
under the circumstances, result in total costs or proceeds being the
most favorable to the Fund. In assessing the best overall terms
available for any transaction, the Sub- Adviser shall consider all
factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and
execution capability of the broker or dealer, research services
provided to the Sub- Adviser, and the reasonableness of the
commission, if any, both for the specific transaction and on a
continuing basis. In no event shall the Sub-Adviser be under any duty
to obtain the lowest commission or the best net price for the Fund on
any
-3-
<PAGE>
particular transaction, nor shall the Sub-Adviser be under any duty to
execute any order in a fashion either preferential to the Fund
relative to other accounts managed by the Sub-Adviser or otherwise
materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or dealers
qualified to execute a particular transaction, brokers or dealers may
be selected who also provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of
1934) to the Sub-Adviser and/or the other accounts over which the
Sub-Adviser exercises investment discretion. The Sub- Adviser is
authorized to pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio transaction
for the Fund which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if
the Sub-Adviser determines in good faith that the total commission is
reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either
that particular transaction or the overall responsibilities of the
Sub- Adviser with respect to accounts over which it exercises
investment discretion. The Sub-Adviser shall report to the Board of
Trustees of the Company regarding overall commissions paid by the Fund
and their reasonableness in relation to their benefits to the Fund.
Any transactions for the Fund that are effected through an affiliated
broker-dealer on a national securities exchange of which such broker-
dealer is a member will be effected in accordance with Section 11(a)
of the Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder. The Fund hereby authorizes any
such broker or dealer to retain commissions for effecting such
transactions and to pay out of such retained commissions any
compensation due to others in connection with effectuating those
transactions.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for the Fund, the Sub-Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased with
those of other Funds or its other clients if, in the Sub-Adviser's
reasonable judgment, such aggregation (i) will result in an overall
economic benefit to the Fund, taking into consideration the
advantageous selling or purchase price, brokerage commission and other
expenses, and trading requirements, and (ii) is not inconsistent with
the policies set forth in the Company's registration statement and the
Fund's Prospectus and Statement of Additional Information. In such
event, the Sub-Adviser will allocate the securities so purchased or
sold, and the expenses incurred in the transaction, in an equitable
manner, consistent with its fiduciary obligations to the Fund and such
other clients.
-4-
<PAGE>
4. REPRESENTATIONS AND WARRANTIES.
(a) The Sub-Adviser hereby represents and warrants to the Adviser as
follows:
(i) The Sub-Adviser is a corporation duly organized and in good
standing under the laws of the State of [Ohio] and is fully
authorized to enter into this Agreement and carry out its duties
and obligations hereunder.
(ii) The Sub-Adviser is registered as an investment adviser with the
Commission under the Investment Advisers Act of 1940 as amended
(the "Advisers Act"), and is registered or licensed as an
investment adviser under the laws of all applicable
jurisdictions. The Sub-Adviser shall maintain such registrations
or licenses in effect at all times during the term of this
Agreement.
(iii) The Sub-Adviser at all times shall provide its best
judgment and effort to the Adviser in carrying out
the Sub-Adviser's obligations hereunder.
(b) The Adviser hereby represents and warrants to the Sub-Adviser as
follows:
(i) The Adviser is a corporation duly organized and in good standing
under the laws of the State of Ohio and is fully authorized to
enter into this Agreement and carry out its duties and
obligations hereunder.
(ii) The Adviser is registered as an investment adviser with the
Commission under the Advisers Act, and is registered or licensed
as an investment adviser under the laws of all applicable
jurisdictions. The Adviser shall maintain such registrations or
licenses in effect at all times during the term of this
Agreement.
(iii)The Company has been duly organized as a business trust under
the laws of the State of Delaware.
(iv) The Company is registered as an investment company with the
Commission under the 1940 Act, and shares of each Fund are
registered for offer and sale to the public under the 1933 Act
and all applicable state securities laws where currently sold.
Such registrations will be kept in effect during the term of this
Agreement.
5. COMPENSATION. As compensation for the services which the Sub-Adviser is
to provide or cause to be provided pursuant to Paragraph 3, the Adviser shall
pay to the Sub-Adviser (or cause to be paid by the Company directly to the
Sub-Adviser) an annual fee equal to XX% of the Fund's average daily net assets
during the preceding month (computed in the manner set forth in the Fund's most
recent Prospectus and Statement of Additional Information)
-5-
<PAGE>
up to XXXX ($XX) and XX% of the Fund's average daily net assets in excess of
such amount, which shall be accrued daily and paid in arrears on the first
business day of each month. Average daily net assets shall be based upon
determinations of net assets made as of the close of business on each business
day throughout such month. The fee for any partial month under this Agreement
shall be calculated on a proportionate basis, based upon average daily net
assets for such partial month. In the event that the total expenses of the Fund
exceed the limits on investment company expenses imposed by any statute or any
regulatory authority of any jurisdiction in which shares of such Fund are
qualified for offer and sale, the Sub-Adviser will bear such excess in an amount
which bears the same ratio to the amount of such excess that the Adviser bears
as the amount of subadvisory fees payable pursuant hereto bears to the amount of
advisory fees payable to the Adviser by the Company under the Advisory
Agreement, except: (i) the Sub-Adviser shall not be required to bear such excess
to an extent greater than the compensation due to the Sub-Adviser for the period
for which such expense limitation is required to be calculated unless such
statute or regulatory authority shall so require, and (ii) the Sub-Adviser shall
not be required to bear the expenses of the Fund to an extent which would result
in the Fund's or Company's inability to qualify as a regulated investment
company under the provisions of the Code. The Sub-Adviser shall have the right,
but not the obligation, to voluntarily waive any portion of the sub-advisory fee
from time to time. Any such voluntary waiver will be irrevocable and determined
in advance of rendering sub-investment advisory services by the Sub-Adviser, and
shall be in writing and signed by the parties hereto.
6. INTERESTED PERSONS. It is understood that, to the extent consistent with
applicable laws, the Trustees, officers and shareholders of the Company or the
Adviser are or may be or become interested in the Sub-Adviser as directors,
officers or otherwise and that directors, officers and shareholders of the
Sub-Adviser are or may be or become similarly interested in the Company or the
Adviser.
7. EXPENSES. The Sub-Adviser will pay all expenses incurred by it in
connection with its activities under this Agreement other than the cost of
securities (including brokerage commissions) purchased for or sold by the Fund.
8. NON-EXCLUSIVE SERVICES; LIMITATION OF SUB-ADVISER'S LIABILITY. The
services of the Sub-Adviser hereunder are not to be deemed exclusive, and the
Sub-Adviser may render similar services to others and engage in other
activities. The Sub-Adviser and its affiliates may enter into other agreements
with the Fund, the Company or the Adviser for providing additional services to
the Fund, the Company or the Adviser which are not covered by this Agreement,
and to receive additional compensation for such services. In the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties hereunder on the part of the Sub-Adviser, or a breach of
fiduciary duty with respect to receipt of compensation, neither the Sub-Adviser
nor any of its directors, officers, shareholders, agents, or employees shall be
liable or responsible to the Adviser, the Company, the Fund or to any
shareholder of the Fund for any error of judgment or mistake of law or for any
act or omission in the course of, or connected with, rendering services
hereunder or for any loss suffered by the Adviser, the Company, the Fund, or any
shareholder of the Fund in connection with the performance of this Agreement.
-6-
<PAGE>
9. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall become
effective on ______________, 199_, provided that it shall have been approved by
a majority of the outstanding voting securities of each Fund, in accordance with
the requirements of the 1940 Act, or such later date as may be agreed by the
parties following such shareholder approval.
(a) This Agreement shall continue in force until _____________, 199_.
Thereafter, this Agreement shall continue in effect as to each Fund
for successive annual periods, provided such continuance is
specifically approved at least annually (i) by a vote of the majority
of the Trustees of the Company who are not parties to this Agreement
or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (ii) by a vote
of the Board of Trustees of the Company or a majority of the
outstanding voting securities of the Fund.
(b) The modification of any of the non-material terms of this Agreement
may be approved by a vote of a majority of those Trustees of the
Company who are not interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such
approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9, either
party hereto may terminate this Agreement as to any Fund at any time
on sixty (60) days' prior written notice to the other, without payment
of any penalty. A termination of the Sub-Adviser may be effected as to
any particular Fund by the Adviser, by a vote of the Company's Board
of Trustees, or by vote of a majority of the outstanding voting
securities of the Fund. This Agreement shall terminate automatically
in the event of its assignment.
10. LIMITATION OF LIABILITY OF TRUSTEES AND SHAREHOLDERS. The Sub-Adviser
acknowledges the following limitation of liability:
The terms "The Victory Portfolios" and "Trustees of The Victory Portfolios"
refer, respectively, to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under the Trust Instrument,
to which reference is hereby made and a copy of which is on file at the office
of the Secretary of State of the State of Delaware, such reference being
inclusive of any and all amendments thereto so filed or hereafter filed. The
obligations of "The Victory Portfolios" entered into in the name or on behalf
thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities and are not binding upon any of the
Trustees, shareholders or representatives of the Company personally, but bind
only the assets of the Company, and all persons dealing with the Company or a
Fund must look solely to the assets of the Company or Fund for the enforcement
of any claims against the Company or Fund.
11. CERTAIN DEFINITIONS. The terms "vote of a majority of the outstanding
voting securities," "assignment," "control," and "interested persons," when used
herein, shall have the
-7-
<PAGE>
respective meanings specified in the 1940 Act. References in this Agreement to
the 1940 Act and the Advisers Act shall be construed as references to such laws
as now in effect or as hereafter amended, and shall be understood as inclusive
of any applicable rules, interpretations and/or orders adopted or issued
thereunder by the Commission.
12. INDEPENDENT CONTRACTOR. The Sub-Adviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees of the Company from time
to time, have no authority to act for or represent a Fund in any way or
otherwise be deemed an agent of the Fund.
13. STRUCTURE OF AGREEMENT. This Agreement is intended to govern only the
relationship between the Adviser, on the one hand, and the Sub-Adviser, on the
other hand, and is not intended to and shall not govern (i) the relationship
between the Adviser or Sub-Adviser and the Fund or any series of the Company, or
(ii) the relationships among the respective series of the Company.
14. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Ohio, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
15. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby and, to this extent, the provisions of
this Agreement shall be deemed to be severable.
16. NOTICES. Notices of any kind to be given to the Adviser hereunder by
the Sub-Adviser shall be in writing and shall be duly given if mailed or
delivered to the Adviser at 127 Public Square, Cleveland, Ohio 44114-1306,
Attention: W. Christopher Maxwell; with a copy to William Blake, Esq., or at
such other address or to such individual as shall be so specified by the Adviser
to the Sub-Adviser. Notices of any kind to be given to the Sub-Adviser hereunder
by the Adviser shall be in writing and shall be duly given if mailed or
delivered to the Sub-Adviser at The Hanna Building, 1422 Euclid Avenue, Suite
840, Cleveland, Ohio 44115, Attention: Nate Carter, or at such other address or
to such individual as shall be so specified by the Sub-Adviser to the Adviser.
Notices shall be effective upon delivery.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized as of the date written
above.
LAKEFRONT CAPITAL INVESTORS, INC. KEY ASSET MANAGEMENT, INC.
By: By:
---------------------------------- -----------------------------------
Name: Name: Christopher W. Maxwell
Title: Title: CEO and Chairman of the Board
-9-
THE VICTORY PORTFOLIOS
SHAREHOLDER SERVICING PLAN
This Shareholder Servicing Plan (the "Plan") is adopted by The Victory
Portfolios, a business trust organized under the laws of the Commonwealth of
Massachusetts (the "Company"), on behalf of each of its Funds (individually, a
"Fund," and collectively, the "Funds") as set forth in Schedule I, as amended
from time to time, subject to the following terms and conditions:
SECTION 1. ANNUAL FEES.
Shareholder Services Fee. Each Fund (or Class thereof, as the case may be)
may pay to the distributor of its shares (the "Distributor") or financial
institutions that provide certain services to the Funds, a shareholder services
fee under the Plan at an annual rate not to exceed 0.25% of the average daily
net assets of the Fund or Class attributable to the Distributor or financial
institution thereof (the "Services Fee").
Adjustment to Fees. Any Fund may pay a Services Fee to the Distributor or
financial institution at a lesser rate than the fees specified in Section 1
hereof as agreed upon by the Board of Trustees and the Distributor or financial
institution and approved in the manner specified in Section 3 of this Plan.
Payment of Fees. The Services Fees will be calculated daily and paid
monthly by each Fund at the annual rates indicated above.
SECTION 2. EXPENSES COVERED BY THE PLAN.
Services Fees may be used by the Distributor or financial institution for
payments to financial institutions and persons who provide administrative and
support services to their customers who may from time to time beneficially own
shares, which may include (i) establishing and maintaining accounts and records
relating to shareholders; (ii) processing dividend and distribution payments
from the Fund on behalf of shareholders; (iii) providing information
periodically to shareholders showing their positions in shares and integrating
such statements with those of other transactions and balances in shareholders'
other accounts serviced by such financial institution; (iv) arranging for bank
wires; (v) responding to shareholder inquiries relating to the services
performed; (vi) responding to routine inquiries from shareholders concerning
their investments; (vii) providing subaccounting with respect to shares
beneficially owned by shareholders, or the information to the Fund necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from the Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to
shareholders; (ix) assisting in processing purchase, exchange and redemption
requests from shareholders and in placing such orders with our
<PAGE>
service contractors; (x) assisting shareholders in changing dividend options,
account designations and addresses; (xi) providing shareholders with a service
that invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; and (xii) providing such other similar services as
the Fund may reasonably request to the extent the Distributor or financial
institution is permitted to do so under applicable statutes, rules and
regulations.
SECTION 3. APPROVAL OF TRUSTEES.
Neither the Plan nor any related agreements will take effect until approved
by a majority of both (a) the full Board of Trustees of the Company and (b)
those Trustees who are not interested persons of the Company and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to it (the "Qualified Trustees"), cast in person at a meeting
called for the purpose of voting on the Plan and the related agreements.
SECTION 4. CONTINUANCE OF THE PLAN.
The Plan will continue in effect until June 5, 1996, and thereafter for
successive twelve-month periods: provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by a
majority of the Qualified Trustees.
SECTION 5. TERMINATION.
The Plan may be terminated at any time with respect to a Fund (i) by the
Company without the payment of any penalty, by the vote of a majority of the
outstanding voting securities of the Fund (or, the shareholders of a particular
class, if applicable) or (ii) by a vote of the Qualified Trustees. The Plan may
remain in effect with respect to a Fund even if the Plan has been terminated in
accordance with this Section 5 with respect to any other Fund.
SECTION 6. AMENDMENTS.
No material amendment to the Plan may be made unless approved by the
Company's Board of Trustees in the manner described in Section 3 above.
SECTION 7. SELECTION OF CERTAIN TRUSTEES.
While the Plan is in effect, the selection and nomination of the Company's
Trustees who are not interested persons of the Fund will be committed to the
discretion of the Trustees then in office who are not interested persons of the
Company.
2
<PAGE>
SECTION 8. WRITTEN REPORTS.
In each year during which the Plan remains in effect, a person authorized
to direct the disposition of monies paid or payable by a Fund pursuant to the
Plan or any related agreement will prepare and furnish to the Company's Board of
Trustees, and the Board will review, at least quarterly, written reports
complying with the requirements of the Rule which set out the amounts expended
under the Plan and the purposes for which those expenditures were made.
SECTION 9. PRESERVATION OF MATERIALS.
The Company will preserve copies of the Plan, any agreement relating to the
Plan and any report made pursuant to Section 8 above, for a period of not less
than six years (the first two years in an easily accessible place) from the date
of the Plan, agreement or report.
SECTION 10. LIMIT OF LIABILITY.
The limitation of shareholder liability set forth in the Company's
Declaration of Trust is hereby acknowledged. The obligations of the Company
under this Plan, if any, shall not be binding upon the Trustees individually or
upon holders of shares of the Company individually but shall be binding only
upon the assets and property of the Company, and upon the Trustees insofar as
they hold title thereto.
SECTION 11. MEANINGS OF CERTAIN TERMS.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act by the Securities and Exchange Commission.
IN WITNESS WHEREOF, the Company executed this Plan as of June 5, 1995.
The Victory Portfolios
By: /s/ LEIGH A. WILSON
----------------------------------
President
3
<PAGE>
SCHEDULE I
Amended as of March 1, 1997
This Shareholder Servicing Plan shall be adopted with respect to the
following Funds (and Classes) of The Victory Portfolios:
Name of Fund Class
- ------------ ------
1. The Victory Balanced Fund A/B
2. The Victory Diversified Stock Fund A/B
3. The Victory Government Mortgage Fund A
4. The Victory Growth Fund A
5. The Victory Intermediate Income Fund A
6. The Victory International Growth Fund A/B
7. The Victory Investment Quality Bond Fund A
8. The Victory Limited Term Income Fund A
9. The Victory Ohio Municipal Bond Fund A
10. The Victory Ohio Regional Stock Fund A/B
11. The Victory Prime Obligations Fund A
12. The Victory Special Value Fund A/B
13. The Victory Tax-Free Money Market Fund A
14. The Victory U.S. Government Obligations Fund A/B
15. The Victory Value Fund A
16. The Victory Stock Index Fund A
17. The Victory Fund for Income A
18. The Victory Government Bond Fund A/B
19. The Victory National Municipal Bond Fund A/B
20. The Victory New York Tax-Free Fund A/B
21. The Victory Ohio Municipal Money Market Fund A
22. The Victory Special Growth Fund A
23. The Victory Institutional Money Market Fund -
Service Shares A
24. The Victory Financial Reserves Fund A
25. The Victory Lakefront Fund A
26. The Victory Real Estate Investment Fund A
Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
Arthur H. Aufses III Monica C. Lord Sherwin Kamin
Thomas D. Balliett Richard Marlin Arthur B. Kramer
Jay G. Baris Thomas E. Molner Maurice N. Nessen
Philip Bentley Thomas H. Moreland Founding Partners
Saul E. Burian Ellen R. Nadler Counsel
Barry Michael Cass Gary P. Naftalis _____
Thomas E. Constance Michael J. Nassau
Michael J. Dell Michael S. Nelson Martin Balsam
Kenneth H. Eckstein Jay A. Neveloff Joshua M. Berman
Charlotte M. Fischman Michael S. Oberman Jules Buchwald
David S. Frankel Paul S. Pearlman Rudolph de Winter
Marvin E. Frankel Susan J. Penry-Williams Meyer Eisenberg
Alan R. Friedman Bruce Rabb Arthur D. Emil
Carl Frischling Allan E. Reznick Maxwell M. Rabb
Mark J. Headley Scott S. Rosenblum James Schreiber
Robert M. Heller Michele D. Ross Counsel
Philip S. Kaufman Max J. Schwartz _____
Peter S. Kolevzon Mark B. Segall
Kenneth P. Kopelman Judith Singer M. Frances Buchinsky
Michael Paul Korotkin Howard A. Sobel Abbe L. Dienstag
Shari K. Krouner Jeffrey S. Trachtman Ronald S. Greenberg
Kevin B. Leblang Jonathan M. Wagner Debora K. Grobman
David P. Levin Harold P. Weinberger Christian S. Herzeca
Ezra G. Levin E. Lisk Wyckoff, Jr. Jane lee
Larry M. Loeb Pinchas Mendelson
Lynn R. Saidenberg
Special Counsel
-----
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
February 5, 1997
The Victory Portfolios
3435 Stelzer Road
Columbus, Ohio 43219
Re: The Victory Portfolios
File No. 33-8982
Post-Effective Amendment
to Registration Statement on Form N-1A
--------------------------------------
Gentlemen:
We hereby consent to the reference of our firm as counsel in Post-Effective
Amendment No. 31 to the Registration Statement on Form N-1A.
Very truly yours,
/s/ KRAMER, LEVIN, NAFTALIS & FRANKEL
------------------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 31 to the Registration Statement on Form N-1A (File No. 33-8982) of The
Victory Portfolios of our report dated December 13, 1996 on our audits of the
financial statements and financial highlights of The Victory Portfolios
(comprising, respectively , the U.S. Government Obligations Fund, Prime
Obligations Fund, Financial Reserves Fund, Tax-Free Money Market Fund, Ohio
Municipal Money Market Fund, Institutional Money Market Fund, Limited Term
Income Fund, Intermediate Income Fund, Investment Quality Bond Fund, Government
Bond Fund, Government Mortgage Fund, Fund for Income, National Municipal Bond
Fund , New York Tax-Free Fund, Ohio Municipal Bond Fund, Balanced Fund, Stock
Index Fund, Diversified Stock Fund, Value Fund, Growth Fund, Special Value Fund,
Special Growth Fund, Ohio Regional Stock Fund, and International Growth Fund) as
of October 31, 1996 and for the periods then ended. We also consent to the
reference to our Firm under the captions "Financial Highlights" and "Independent
Accountants" in the prospectuses and under the caption "Independent Accountants"
in the Statements of Additional Information relating to The Victory Portfolios
in the Post-Effective Amendment No. 31 to the Registration Statement on Form N-
1A (File No. 33-8982).
/s/ COOPERS & LYBRAND L.L.P.
----------------------------------------
Columbus, Ohio
February 4, 1996
ANNUAL REPORT
[graphic]
OCTOBER 31,
1996
[logo]
Victory Funds
<PAGE>
[photo of a woman and her dog]
Only one other thing makes you feel this good...a well-managed mutual fund
portfolio.
Investing in mutual funds can provide you with many opportunities to meet your
financial goals and objectives. If you'd like to learn more about a fund complex
that can help you do that, consider the Victory Funds. Get to know us. We
promise you it won't just be a case of puppy love.
The Victory Funds are distrubuted by BISYS Fund Services which is not affiliated
with KeyCorp. Certain subsidiaries of KeyCorp provide services to the Victory
Funds, including advisory services, and recieve fees from the funds for their
services, as set forth in the prospectus.
For more information about the Victory Funds, including charges and expenses,
request a prospectus by calling 1-800-KEY-FUND (1-800-539-3863). Please read the
prospectus carefully before investing or sending money.
o Not FDIC Insured
o No Bank Guarantee
o May Lose Value
[logo]
Victory Funds
<PAGE>
TABLE OF CONTENTS
Shareholder Letter 2
Investment Review and Outlook 3
Fund Review and Commentary
- --------------------------
Introduction to Victory Money Market Funds 4
Introduction to Victory Taxable Fixed Income Funds 8
Introduction to Victory Municipal Income Funds 16
Introduction to Victory Equity Funds 20
(Diversified)
Introduction to Victory Equity Funds 26
(Value)
Introduction to Victory Equity Funds 31
(Growth)
Questions and Answers 37
Glossary of Terms 38
How to Read Your Statement 39
- ----------------
NOT FDIC INSURED
Shares of the Victory Funds are not deposits or other obligations of, or
guaranteed by, any KeyCorp bank, KeyCorp Mutual Fund Advisers, Inc., or
their affiliates, and are subject to investment risks, including possible
loss of the principal amount invested.
- ----------------
KeyCorp Mutual Fund Advisers, Inc. (KMFA) a subsidiary of KeyCorp, is the
investment adviser to The Victory Portfolios (The Victory Funds). The Victory
Funds are sponsored and distributed by BISYS Fund Services, which is not
affiliated with KeyCorp or its subsidiaries. KMFA receives a fee for its
services from the Victory Funds.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus for the Victory Funds.
Financial Statements
- --------------------
Schedules of Investments 41
Statements of Asset and Liabilities 114
Statements of Operations 120
Statements of Changes in Net Assets 126
Notes to Financial Statements 134
Financial Highlights 143
Report of Independent Accountants 163
Special Shareholder Meeting 164
1
<PAGE>
LETTER TO OUR SHAREHOLDERS
[photo]
We are pleased to provide you with this annual report for the Funds' fiscal
year ended October 31, 1996. During this period, investors enjoyed substantial
investment returns as the market maintained its upward momentum and a new
record was witnessed as the Dow Jones Industrial Average surpassed the 6,000
mark. In the pages that follow, your fund managers discuss the investment
strategies and performance results of the portfolios they manage. These
commentaries, along with the related financial data, provide comprehensive
information about your Victory Fund investments.
We take great pleasure in announcing the impressive increase of assets in the
Victory Funds. At approximately $7.7 billion, the current asset level
represents a 30.6% increase in assets over the past twelve months. This growth
is testimony of your confidence in Victory.
We encourage you to read the annual report carefully and share any comments
you may have. Thank you for choosing to invest in the Victory Funds and best
wishes for a healthy and prosperous New Year.
/s/Leigh A. Wilson
Leigh A. Wilson, President
The Victory Funds
2
<PAGE>
[graphic]
INVESTMENT REVIEW AND OUTLOOK
In our opinion, as of November 12, 1996
The stock market offered something for every investor in the Funds' fiscal year
ended October 31, 1996: for the bears, a heart-stopping correction in July,
the sharpest such setback in two and a half years; for the bulls, a spirited
rebound that sent most market averages to record highs as the Funds' fiscal
year drew to a close; and for the uncommitted, total returns that were neither
good nor bad, roughly equaling the long-term average of the past seventy
years.
Aided by a favorable bond market, equities enjoyed good performance over the
last twelve months ended October 31, 1996, with the Standard & Poor's 500
rising by slightly more than 24%. Looking ahead, stock market conditions may
not be quite so hospitable, as a much anticipated economic slowdown appears
to be underway.
Outlook for 1997
* The Labor Market
Job growth was one of the brightest stars in the economy this past year
helping to drive unemployment to a seven-year low of 5.1%. Reflecting
the tight market, hourly earnings nudged to their highest rate of
increase in the current expansion. This has helped boost consumer
confidence in the final months of 1996.
* Corporate Profitability
Competitive forces prevented most companies from passing on these higher wage
costs to consumers in the form of higher prices, thereby squeezing profit
margins. Margin deterioration has been aggravated by rising commodity
costs, most notably energy. As a result, profit growth has decelerated
sharply through 1996 and some blue chip companies have warned analysts of
disappointing earnings.
* Our Economic Forecast
We think the sluggish profit growth of 1996 could lead to fewer new jobs and
higher unemployment in 1997 which, in turn, could depress income growth and
limit consumption. As a result, we think real GDP growth is likely to slow
to 1.0%-2.0%, with a bias towards the lower end of the range. Despite higher
labor costs, inflation should moderate a bit, and we believe the Consumer
Price Index will stand at 2.5%, give or take a few basis points, throughout
the next 12-18 months.
* Interest Rates
Should our economic scenario prove correct, long-term interest rates are
likely to move lower in 1997, establishing a new range of 6.25% to 7.0%.
Short rates have room to move lower as well, and we think that the Federal
Reserve may lower interest rates sometime in the first half of the year.
Given the current pressure on corporate profits, these lower rates may not
necessarily lead to sustainably higher stock prices. Moreover, lower rates
do little to mitigate the heightened risks businesses face in a decelerating
economic climate. All in all, we expect continued market volatility in 1997
and recommend investors bear this in mind when constructing their equity
and fixed income portfolios.
3
<PAGE>
INTRODUCTION TO MONEY MARKET FUNDS
THE INVESTMENT PROCESS
As with longer-term fixed income portfolios, each portfolio manager seeks to
enhance portfolio yields by identifying opportunities in the financial
markets for incremental returns and by seeking relative value. Portfolio
managers for the Victory Funds follow the shape and movement of the yield
curve closely. This process helps the portfolios to take advantage of
anticipated movements in short-term interest rates.
CREDIT REVIEW
INTEREST RATE ENVIRONMENT
SECTOR SCREEN
GOVERNMENT FUND DIVERSIFIED FUNDS TAX-EXEMPT FUNDS
The Victory U.S. Governemnt The Victory Financial The Victory Ohio Municipal
Obligations Fund Reserves Fund Money Market Fund
The Victory Prime The Victory Tax-Free
Obligations Fund Money Market Fund
Victory Money Market Funds and their respective portfolio managers are as
follows:
[photo]
The Victory Ohio Municipal Money Market Fund
The Victory Tax-Free Money Market Fund
Robin Hudson (right)
Robin Hudson is a Senior Investment Officer with Society Asset Management,
Inc. ("SAM") and a Municipal Research Analyst. She has been with SAM and/or
its affiliates since 1981. Ms. Hudson received her MBA from Baldwin Wallace
College.
The Victory Prime Obligations Fund
The Victory Financial Reserves Fund
Michael Gabriel (left)
Michael Gabriel joined Society Asset Management, Inc. ("SAM") in March, 1995
as a Vice President of Fixed Income Management. Previously, he was with
Boston Safe Deposit & Trust Company.
Mr. Gabriel received his B.S. in Marketing and an MBA from Fordham University.
The Victory U.S. Government Obligations Fund
Ellyn Morgan (center)
Ellyn M. Morgan is an Assistant Vice President with Society Asset Management,
Inc. ("SAM"). She has been with SAM and/or its affiliates since 1987.
4
<PAGE>
VICTORY MONEY MARKET FUNDS
AS MANAGERS OF MONEY MARKET FUNDS, CAN YOU TELL US IF THE ECONOMY PERFORMED
IN LINE WITH MARKET EXPECTATIONS AND WHAT THE INTEREST RATE ENVIRONMENT
DID FOR THE FUNDS THIS PAST YEAR?
Robin: Well, from my perspective the economy did not perform in line with
market expectations. Initially, the perception was that the economy was
going to slow down and the Fed would lower interest rates. As it turned
out, the economy began to show signs of stronger than expected growth as
1996 progressed. The market thought the Fed would tighten policy, rather
than the other way around.
Michael: I agree with Robin's assessment of the market. There was a dramatic
turnaround in expectations as the year progressed. While the Federal Reserve
was engaged in an easy money policy in 1995, the first three quarters of 1996
saw the mood change to expectations of Fed tightening and higher interest
rates. The fact that the Fed refrained from such a move as of the third
quarter of '96 can be attributed to the relatively quiet behavior of various
inflation indicators.
Ellyn: I'd just like to add to what Mike said. Some of the economic strength
was evidenced by stronger consumer confidence levels, tight labor market
conditions, housing market activity and industrial production. Since, in
general, inflationary pressure did not appear in consumer or producer indices
or prices, monetary policy remained stable.
ROBIN, YOU MUST HAVE SOME SPECIAL CONCERNS WORKING WITH TAX-EXEMPT SECURITIES.
CAN YOU SHARE SOME OF THEM WITH US?
Robin: Supply and demand factors play a vital part in the tax exempt money
market area. Let me give you an example. When the yield curve steepened late
in the second quarter of 1996, part of the reason was because municipalities
began flooding the market with new debt issues to support their financing
needs.
The Victory Prime Obligations Fund & The Victory Financial Reserves Fund
Portfolio Manager
Michael Gabriel
<TABLE>
As of October 31, 1996
<CAPTION>
PRIME FINANCIAL
OBLIGATIONS RESERVES
<S> <C> <C>
Seven-Day Yield 4.54% 4.79%
Seven-Day Effective Yield 4.64% 4.90%
One Year Total Return 4.81% 5.00%
</TABLE>
<TABLE>
Maturity Schedule (1)
As of 10/31/96
<CAPTION>
Days to PRIME FINANCIAL
Maturity OBLIGATIONS RESERVES
<S> <C> <C>
Less than 30 Days 58.6% 61.7%
31 to 60 Days 24.5% 19.9%
61 to 90 Days 5.2% 3.1%
Greater than 90 Days 11.7% 15.3%
</TABLE>
The performance data quoted represent past performance and are not
indicative of future results. Yields will fluctuate with market
conditions. The Victory Financial Reserves Fund yield reflects
the waiver of a portion of fees for various periods. Without such
waiver of fees, the current 7-day yield would have been 4.72%, and
the 7-day effective yield would have been 4.83%, respectively. There
can be no assurance that any of the Victory Money Market Funds will
be able to maintain a stable net asset value of $1.00 per share. An
investment in a Victory Money Market Fund is neither insured nor
guaranteed by the U.S. Government.
(1) The funds' Maturity Schedules presented may not be representative
of current or future investment strategies. Fund strategies may
change at any time.
5
<PAGE>
VICTORY MONEY MARKET FUNDS
DO YOU MANAGE BOTH FUNDS IN THE SAME MANNER?
Robin: Yes, I do, except that the Ohio Fund only purchases Ohio muni debt
while the Tax-Free Fund can buy any state's paper. Other than that, the
strategy and structure of the Funds are very similar.
ELLYN AND MICHAEL, WHAT ABOUT THE FUNDS YOU MANAGE? HOW DID YOUR FUNDS
RESPOND TO THE ECONOMIC CONDITIONS OF 1996?
Ellyn: Well, at the beginning of the year, the expectation was for slower
growth so our efforts were directed at extending the average maturity of
the fund to lock in higher fixed rates. As expectations changed, we moved
to a more neutral position and finally, we closed out the Fund's fiscal
year with shorter average weighted maturities for the Funds.
MICHAEL?
Michael: I chose to shorten average weighted maturities in anticipation of a
possible firming in monetary policy. As you may know, any change in
monetary policy can have an immediate and substantial impact on a money
market portfolio, depending on the direction and magnitude of the change
and the portfolio's average weighted maturity. A portfolio with a shorter
average weighted maturity would be able to capture higher interest rates
more quickly than if the maturity was extended.
WELL, DESPITE THE WEIGHT IN SHORTER MATURITIES, THE FUNDS STILL OFFERED YIELDS
THAT WERE COMPETITIVE. HOW DID YOU DO THAT?
Michael: To some extent, this was due to floating rate securities owned by the
Fund. As interest rates increased, so did the rates on these relatively
short-term investments. I also made some timely purchases of relatively
longer term securities and avoided purchasing high priced securities earlier
in the year.
The Victory Tax-Free Money Market Fund &
The Victory Ohio Municipal Money Market Fund
Portfolio Manager
Robin Hudson
<TABLE>
As of October 31, 1996
<CAPTION>
TAX-FREE OHIO MMMKT
<S> <C> <C>
Seven-Day Yield 2.99% 2.97%
Tax Equivalent Yield (1) 4.67% 5.19%
Seven-Day Effective Yield 3.03% 3.01%
Seven-Day Tax Equivalent
Effective Yield (1) 4.74% 5.21%
One Year Total Return 3.04% 3.11%
</TABLE>
<TABLE>
Maturity Schedule (2)
As of 10/31/96
<CAPTION>
Days to Maturity TAX-FREE OHIO MMMKT
<S> <C> <C>
Less than 30 Days 63.4% 60.9%
31 to 60 Days 13.0% 16.7%
61 to 90 Days 9.4% 3.1%
Greater than 90 Days 14.2% 19.3%
</TABLE>
The performance data quoted is past performance and are not indicative of
future results. Yields will fluctuate with market conditions. The Victory
Ohio MMMKT yields reflect the waiver of a portion of certain fees for
various periods. In such instances and without such waivers, the current
7-day yield and Tax-Equivalent Yield would have been 2.79% and 5.01%, and
the 7-day effective yield and 7-day effective tax equivalent yield would
have been 2.83% and 5.03% respectively. There can be no assurance that any
of the Victory Money Market Funds will be able to maintain a stable net
asset value of $1.00 per share. An investment in a Victory Money Market
Fund is neither insured nor guaranteed by the U.S. Government. Certain
investors may be subject to the Federal Alternative Minimum Tax and to
certain state and local taxes.
(1) The tax equivalent yield is for illustrative purposes only. The tax rate
used to calculate the tax equivalent yield was based on the 36% Federal
regular income rate, and the rate used for the Ohio MMMKT is the combined
36% federal and 6.9% Ohio state income tax rate and are for illustrative
purposes only. The tax bracket does not reflect the effects of the Federal
AMT.
(2) The Maturity Schedules presented may not be representative of current or
future investment strategies. Fund strategies may change at any time.
6
<PAGE>
VICTORY MONEY MARKET FUNDS
ELLYN, HOW DID YOUR FUND RESPOND TO THE ECONOMIC ENVIRONMENT OF '96?
Ellyn: I'd like to start out by saying that I agree with both Michael and
Robin's assessment of the market. And individuals and professionals who are
in the investment arena know that any change in monetary policy can have an
immediate impact on a money market portfolio. A shorter average weighted
maturity portfolio would be able to capture higher interest rates more
quickly than if the maturity was extended. I believe our ability to do so
was a direct result of actively managing the Fund's average weighted maturity.
WHAT ARE YOUR COLLECTIVE EXPECTATIONS, GOING FORWARD?
Ellyn: I believe the Fed will keep monetary policy unchanged into early 1997
and I'll continue to position the Fund based on an assessment of current
market sentiment and the release of economic data.
Robin: There seems to be no clear direction for the economy or short-term
interest rates; therefore, I'm beginning to lengthen the portfolios' average
weighted maturity.
Michael: Going forward, I intend to increase maturities in line with the
peer group averages. The fact that the Fed has not raised rates so far
should provide a firm "tone" to the market and permit the selective
purchase of higher yielding securities in a positive yield curve environment.
As long as the reported inflation numbers remain at 3% or less, monetary
policy should remain constant, since it is not economic growth as
such, that prompts Fed action, as much as related fears of inflation.
The Victory U.S. Government Obligations Fund
Portfolio Manager
Ellyn Morgan
<TABLE>
As of October 31, 1996
<CAPTION>
<S> <C>
Seven-Day Yield 4.79%
Seven-Day Effective Yield 4.90%
One Year Total Return 4.96%
</TABLE>
<TABLE>
Maturity Schedule (1)
As of 10/31/96
<CAPTION>
Days to Maturity
<S> <C>
Less than 30 Days 77.9%
Greater than 90 Days 22.1%
</TABLE>
The performance and ranking data quoted represent past performance and
therefore are not indicative of future results. Yields will fluctuate
with market conditions. There can be no assurance that any of the Victory
Money Market Funds will be able to maintain a stable net asset value of
$1.00 per share. An investment in a Victory Money Market Fund is neither
insured nor guaranteed by the U.S. Government.
(1) The funds' Maturity Schedule presented may not be representative of
current or future investment strategies. Fund strategies may change at any time.
7
<PAGE>
INTRODUCTION TO TAXABLE FIXED INCOME FUNDS
THE INVESTMENT PROCESS
Selecting fixed income securities involves on-going analysis not only of the
bonds available in the marketplace, but of interest rates, yield curves,
relative values and sector weightings. To conduct their security selection,
the experienced fixed income management team follows a disciplined and
tested process.
The investment advisor assigns a relative value to each economic sector by
utilizing its in-house analytical capabilities as well as a wide range of
outside research. It considers the broad economic environment in making
duration decisions for each of the Victory Funds. The portfolio managers
have developed a proprietary process to identify those securities
that have strong potential for income and total return. They are active
managers, continually monitoring portfolio holdings for shifts in value that
will affect buy and sell decisions.
FIXED INCOME SECURITIES UNIVERSE
CREDIT SCREENING PROCESS
DURATION AND MATURITY SCREEN
------------------------------------------------------------------
SHORT-TERM POOL INTERMEDIATE-TERM POOL LONG-TERM POOL
Yield Curve Shape and RELATIVE VALUE ANALYSIS
Movement Analysis Supply and Demand Scarcity; Regulatory Changes;
New Products or Securities; New Issues;
Technical Innovation; Sector Analysis;
Investor Sentiment
------------------------------------------------------------------
SHORT-TERM FUND INTERMEDIATE-TERM FUNDS LONG-TERM FUNDS
The Victory Limited The Victory Intermediate The Victory Investment
Term Income Fund Income Fund Quality Bond Fund
The Victory Fund for Income The Victory Government
Bond Fund
The Victory Government
Mortgage Fund
8
<PAGE>
VICTORY TAXABLE FIXED INCOME FUNDS
Victory Taxable Fixed Income Funds and their respective portfolio managers are
as follows:
The Victory Limited Term Income Fund
The Victory Government Bond Fund
The Victory Government Mortgage Fund
The Victory Fund for Income
Robert Fernald (center)
Robert (Rob) Fernald, is a Vice President for Fixed Income Securities. He has
also been a Fund Manager with Society Asset Management, Inc. ("SAM") since
1993. Previously, Rob was a Fund Manager with Ameritrust Company National
Association.
The Intermediate Income Fund
David Bacille (right)
David M. Bacille has been a Portfolio Manager with Society Asset Management,
Inc. ("SAM") since 1994. He joined KeyCorp in 1990. Mr. Bacille received a
BBA degree in Accounting from Siena College and is currently a CFA candidate
for the Association of Investment Management and Research.
The Victory Investment Quality Bond Fund
Richard Heine (left)
Richard (Rick) Heine is a Chartered Financial Analyst and a Vice President for
Society Asset Management, Inc. ("SAM"). Rick has managed the Fund since its
inception. He has been with SAM and/or its affiliates since 1974. Rick
received his MBA from Case Western Reserve University.
The portfolio managers of the Victory Funds utilize a three-dimensional
approach to managing taxable fixed income portfolios.
1. Superior Research.
Before any fixed income security can be considered for purchase by a portfolio
manager, it must pass a stringent internal credit review process. As part of
this process, credit analysts review the structure and credit ratings of the
individual securities as well as the financial statements of the
organizations that issue them.
2. No large duration bets are taken.
To keep the interest rate sensitivity of the Victory Funds' fixed income
portfolios consistent with the market, a security benchmark is chosen that
is appropriate for a given portfolio. The portfolio is then managed to keep
its duration as close as possible to that of the given benchmark. By not
taking large "duration bets," interest rate risk of the portfolio is
dramatically reduced relative to the benchmark.
3. Relative Value.
The portfolio managers for the Victory Funds combine both technical research
and market experience to identify inefficiencies and anomalies in the
marketplace. Inefficiencies give the portfolio manager the opportunity to
purchase securities for the portfolio that may provide higher yields or
total returns. Differences in relative value are a function of securities'
yield differentials (e.g. between corporate, government and mortgage/asset
backed securities), caused by regulatory changes, forces of supply and
demand, and investor sentiments.
9
<PAGE>
VICORY TAXABLE FIXED INCOME FUNDS
AS PORTFOLIO MANAGERS FOR THE VICTORY TAXABLE FIXED INCOME FUNDS, CAN YOU
TELL US WHAT ECONOMIC CONDITIONS AFFECTED YOUR MARKET THE MOST THIS PAST YEAR?
Rob: Well, we know that bond markets and interest rates are very sensitive
to economic activity. Throughout most of the year, the markets were
concerned with conflicting economic indicators that were reported. For
example, at one point during the year, unemployment reached a seven year
low (5.1%) while inflation remained fairly subdued.
It was really an endless guessing game as to whether the Fed would raise
interest rates or not. Since its goal is to keep inflation in check, Fed
members might be inclined to raise interest rates when they see increased
activity in the economy. Investors might remember that the Fed lowered
interest rates earlier this year, but rates were left unchanged in the
remaining months despite on-going concerns about a strong economy.
David: Rob made a good point before when he talked about conflicting economic
indicators. I'd like to add that while employment figures seemed to point to
a strong economy, both the consumer and producer price indices seemed to
indicate the economy would remain stable. But toward the end of the year,
we started to see higher consumer debt and an increase in personal
bankruptcies which suggested to us that an economic slowdown was underway.
The Victory Limited Term Income Fund
Portfolio Manager
Robert Fernald
<TABLE>
Total Return
As of 10/31/96
<CAPTION>
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 4.94% 2.81%
Annualized Return
Three Years 4.28% 3.59%
Five Years 5.39% 4.97%
Since Inception
10/20/89 6.51% 6.21%
</TABLE>
<TABLE>
Victory Limited Term Income Fund
vs. Merrill Lynch 1-3 Yr Treas
(Dollars in thousands)
<CAPTION>
Limited Term Income Limited Term @ NAV Merill Lynch 1-3yr Treas
<S> <C> <C> <C>
10/89 9,805 10,000 10,000
5/90 10,140 10,342 10,396
12/90 10,790 11,005 11,114
7/91 11,308 11,533 11,683
2/92 12,000 12,239 12,436
9/92 12,715 12,968 13,170
4/93 13,088 13,348 13,569
11/93 13,389 13,656 13,857
6/94 13,244 13,507 13,850
1/95 13,446 13,714 14,182
8/95 14,323 14,609 15,071
3/96 14,741 15,035 15,577
10/96 15,222 15,525 16,174
Graph reflects investment growth from end of month of fund commencement.
The Merrill Lynch 1-3 Year Treasury Index (Merrill Lynch 1-3 Yr Treas) is a
broad-based unmanaged index that represents the general performance of
short-term (1-3 year) U.S. Treasury securities.
</TABLE>
The performance data quoted represent past performance and therefore, are not
indicative of future results. Total returns are historical and include the
change in share price and reinvestment of dividends and capital gains
distributions, and unless indicated, show the effect of the maximum 2.00%
sales charge. Investment returns and principal values will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. The total return figures set forth above may reflect the
waiver of a portion of certain fees for various periods since the Fund's
inception date. In such instances and without such waiver of fees, the total
returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
10
<PAGE>
VICTORY TAXABLE FIXED INCOME FUNDS
Rick: Investors may also remember that in the first quarter of 1996 there was
a dramatic shift in market sentiment when signs of an improving economy
began to surface. When the February employment report was announced, the
total number of jobs created in the economy was almost double what had been
expected. As far as the Fed is concerned, its decision not to change the
discount or the Fed Funds Rate after Labor Day or in a presidential election
year has historical precedence, so I don't think many people were surprised.
SOUNDS LIKE THERE WAS PLENTY OF VOLATILITY IN THE FIXED INCOME MARKETS IN
'96. HOW DID YOU RESPOND TO THOSE CHANGES AS YOU MANAGED THE PORTFOLIOS?
Rob: Well, I manage four Funds with different average weighted maturities, so
each responds in a slightly different way to any particular piece of
economic news. With the Limited Term Income Fund, I took a slightly
defensive position--which means I shortened the duration of the
maturities--earlier in the year. As rates rose, I invested in overnight
securities, repositioning the portfolio and enabling it to respond to a stable
interest rate environment.
The interest rate environment posed some interesting challenges with the two
intermediate maturity funds (Government
The Victory Government Bond Fund
Portfolio Manager
Robert Fernald
<TABLE>
Total Return
As of 10/31/96
<CAPTION>
GOVERNMENT BOND Class A
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 3.52% -1.38%
Annualized Returns
Three Years 3.94% 2.27%
Since Inception
5/3/93 4.58% 3.13%
</TABLE>
<TABLE>
GOVERNMENT BOND Class B
Contingent
Net Asset Deferred
Value Charge
<S> <C> <C>
One Year 2.77% -1.15%
Since Inception Annualized
9/26/94 7.43% 5.65%
</TABLE>
<TABLE>
Victory Government Bond Fund
vs. Lehman Government
(Dollars in thousands)
<CAPTION>
Victory Government Bond Victory Government Lehman Government
Class A Class A @ NAV
<S> <C> <C> <C>
5/93 9,528 10,000 10,000
10/93 9,997 10,492 10,594
3/94 9,608 10,084 10,201
8/94 9,649 10,127 10,272
1/95 9,652 10,129 10,352
6/95 10,534 11,055 11,302
11/95 11,010 11,555 11,858
4/96 10,764 11,297 11,679
10/96 11,228 11,784 12,274
Graph reflects investment growth from end of month of fund commencement.
The Lehman Government Bond Index (Lehman Government) is a broad-based
unmanaged index that represents the general performance of U.S. Treasury
and U.S. Government agency debt securities.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and reinvestment of dividends and capital gain distributions.
Performance of the different classes of shares will vary based on the
differences in sales charges and class specific expenses paid by
shareholders. Class A performance with sales charge shows the effect of
the maximum 4.75% sales charge applied at the beginning of the period.
Class B performance with sales charge shows the effect of the applicable
contingent deferred sales charge, assuming a complete redemption as of
October 31, 1996. Investment returns and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. The total return figures set forth above may
reflect the waiver of a portion of certain fees for various periods since
the Fund's inception. In such instances and without such waiver of fees,
the total returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
11
<PAGE>
VICTORY TAXABLE FIXED INCOME FUNDS
Mortgage and Fund for Income) because the mortgage-backed sector is more
vulnerable to interest rate volatility than other sectors of the bond market.
When rates rose during the second half of the year, weak bond price
performance was evident across all fixed income sectors. My strategy with
the Government Mortgage Fund was to be fully invested in a mix of Treasury
and government agency mortgage-backed securities. I used Treasury securities
for both liquidity needs and to adjust the Fund's duration. I also did some
swapping from Ginnie Maes to the Fannie Mae sector to take advantage of
relatively better value.
The Fund for Income is less price sensitive than many of the mortgage funds
because its emphasis is on income. The Fund has a higher average coupon and
yield than most funds, so what we call "price erosion" is largely reduced.
In other words, coupon income is a larger contributor to performance than
the price component.
I also pursued a defensive duration strategy in the Victory Government Bond
Fund last spring, but by mid-summer, I established what we call a "bullet
structure," because I anticipated a market rally which did occur, but not
until the fall. Aside from this, the strategy for the Fund has been to pick
attractive sectors along the yield curve and securities I consider promising.
The Victory Government Mortgage Fund
Portfolio Manager
Robert Fernald
<TABLE>
Total Return
As of 10/31/96
<CAPTION>
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 5.54% 0.54%
Annualized Return
Three Years 5.14% 3.44%
Five Years 6.94% 5.89%
Since Inception
5/18/90 8.33% 7.51%
</TABLE>
<TABLE>
Victory Government Mortgage
vs. Lehman Mortgage
(Dollars in thousands)
<CAPTION>
Government Mortgage Government Mortgage @ NAV Lehman Mortgage
<S> <C> <C> <C>
5/90 9,528 10,000 10,000
12/90 10,269 10,778 10,823
7/91 10,743 11,276 11,559
2/92 11,643 12,220 12,496
9/92 12,706 13,336 13,300
4/93 13,211 13,866 13,862
11/93 13,549 14,221 14,195
6/94 13,171 13,823 13,899
1/95 13,548 14,220 14,381
8/95 14,742 15,472 15,778
3/96 15,199 15,952 16,372
10/96 15,833 16,617 17,171
Graph reflects investment growth from end of month of fund commencement.
The Lehman Brothers Mortgage-Backed Securities Index (Lehman Mortgage) is a
broad-based unmanaged index that represents the general performance of
fixed rate mortgage bonds.
</TABLE>
The performance data quoted represent past performance and therefore, are not
indicative of future results. Total returns are historical and include the
change in share price and reinvestment of dividends and capital gains
distributions, and unless indicated, show the effect of the maximum 4.75%
sales charge. Investment returns and principal values will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than
their original cost. The total return figures set forth above may reflect the
waiver of a portion of certain fees for various periods since the Fund's
inception date. In such instances and without such waiver of fees, the
total returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
12
<PAGE>
VICTORY TAXABLE FIXED INCOME FUNDS
DAVID AND RICK HOW ABOUT THE INTERMEDIATE INCOME FUND AND THE INVESTMENT
QUALITY BOND FUND?
David: Well as we mentioned earlier, the bond market received many
conflicting economic signals, so as the year progressed I repositioned
the Fund to respond to an environment where market yields would either remain
unchanged or fall. The Fund was heavily weighted in the five year sector by
fall to take advantage of higher average yields in the market.
Rick: The Investment Quality Bond Fund was heavily weighted in
mortgage-backed securities. I use a relative value sector approach, so
I'm always looking for sectors or issues I think have good value.
AS A RESULT OF THIS POSITIONING, HOW DID YOUR FUNDS PERFORM?
Rob: Well, as you might expect, each fund performed differently because of the
markets and policies of each Fund. The Limited Term Fund invested cash,
previously held in overnight securities, in two year Treasury notes as their
rates peaked, repositioning it for a stable interest rate environment. The rally
that followed in the fall provided an opportunity for price appreciation. The
Fund's performance was a one-year total return of 4.94%, which does not reflect
the affects of the 2.00% maximum sales charge, compared to the Merrill Lynch 1-3
Year Treasury Index which returned 5.91% as of October 31, 1996.
And, as I mentioned, mortgages distinguished themselves as a strong
performing
The Victory Fund for Income
Portfolio Manager
Robert Fernald
<TABLE>
Total Return
As of 10/31/96
<CAPTION>
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 6.35% 4.25%
Annualized Return
Three Years 5.85% 5.13%
Five Years 6.28% 5.86%
Since Inception
5/8/87 8.42% 8.19%
</TABLE>
<TABLE>
Victory Fund for Income
vs. Lehman Mortgage
(Dollars in thousands)
<CAPTION>
Victory Fund for Income Victory Fund for Income @ NAV Lehman Mortgage
<S> <C> <C> <C>
5/87 9,801 10,000 10,000
4/88 10,683 10,900 10,933
3/89 11,283 11,512 11,584
2/90 12,806 13,066 13,182
1/91 14,298 14,588 14,835
12/91 16,335 16,666 16,909
11/92 17,037 17,383 17,854
10/93 17,930 18,294 19,204
9/94 17,795 18,156 18,929
8/95 19,584 19,981 21,303
7/96 20,614 21,031 22,364
10/96 21,262 21,693 23,184
Graph reflects investment growth from end of month of fund commencement.
The Lehman Brothers Mortgage-Backed Securities Index (Lehman Mortgage) is a
broad-based unmanaged index that represents the general performance of
fixed rate mortgage bonds.
</TABLE>
The performance data quoted represent past performance and therefore, are not
indicative of future results. Total returns are historical and include the
change in share price and reinvestment of dividends and capital gains
distributions, and unless indicated, show the effect of the maximum 2.00%
sales charge. Investment returns and principal values will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than
their original cost. The total return figures set forth above may reflect the
waiver of a portion of certain fees for various periods since the Fund's
inception date. In such instances and without such waiver of fees, the
total returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
13
<PAGE>
VICTORY TAXABLE FIXED INCOME FUNDS
sector, and the performance of these securities strengthened the
performance of The Victory Government Mortgage Fund which finished the year
with a return of 5.54%, which does not reflect the maximum sales charge of
4.75%, compared to the Lehman Government Mortgage Bond Index return of 6.92%
as of October 31, 1996.
Fund for Income returned 6.35%, which does not reflect the 2.00% maximum
sales charge, for one year compared to the Lehman Mortgage Index return of
6.92% as of October 31, 1996. Price volatility affected returns and offset
much of The Victory Government Bond Fund's income. As of October 31, 1996,
the Fund's total return was 3.52% for one year, which does not reflect the
effect of the 4.75% maximum sales charge, compared to 5.12% for the Lehman
Government Bond Index for the same period.
David: As Rob mentioned, mortgage securities were the year's best performers
and the Intermediate Income Fund was heavily weighted in this sector for the
year, which helped its performance. However, we have since reduced our
position in this sector because we believe it has peaked, and increased our
Treasury holdings.
Rick: Much like David, I also benefited from an emphasis on the mortgage
security sector. And with our "relative value sector approach," this helped
the performance of the Victory Investment Quality Fund in all but the last
quarter of 1995.
The Victory Intermediate Income Fund
Portfolio Manager
David Bacille
<TABLE>
Total Return
As of 10/31/96
<CAPTION>
Net Asset Maximum
Value Offering
Price
<S> <C> <C>
One Year 4.56% -0.38%
Since Inception Annualized
12/10/93 4.58% 2.83%
</TABLE>
<TABLE>
Victory Intermediate Income Fund
vs. Lehman Int Gov't/Corp
(Dollars in thousands)
<CAPTION>
Intermediate Income Intermediate Income @ NAV Lehman Int Govt/Corp
<S> <C> <C> <C>
12/93 9,522 10,000 10,000
3/94 9,349 9,819 9,797
6/94 9,279 9,745 9,738
9/94 9,306 9,773 9,818
12/94 9,294 9,761 9,807
3/95 9,665 10,151 10,236
6/95 10,121 10,630 10,747
9/95 10,273 10,789 10,924
12/95 10,599 11,132 11,308
3/96 10,494 11,022 11,214
6/96 10,523 11,052 11,284
10/96 10,860 11,406 11,688
Graph reflects investment growth from end of month of fund commencement.
The Lehman Brothers Intermediate Government/Corporate Bond Index (Lehman Int
Gov't/Corp) is an unmanaged index comprised of investment-grade corporate
debt securities and U.S. Treasury and U.S. Government Agency debt securities
that mature in one to ten years.
</TABLE>
The performance data quoted represent past performance and therefore, are not
indicative of future results. Total returns are historical and include the
change in share price and reinvestment of dividends and capital gains
distributions, and unless indicated,show the effect of the maximum 4.75%
sales charge. Investment returns and principal values will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. The total return figures set forth above may reflect the
waiver of a portion of certain fees for various periods since the Fund's
inception date. In such instances and without such waiver of fees, the
total returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
14
<PAGE>
VICTORY TAXABLE FIXED INCOME FUNDS
GENTLEMEN, WHAT ARE YOUR OUTLOOKS FOR THE COMING YEAR?
Rick: From my perspective, the most recent economic releases, (especially
1996's third quarter GDP) seem to indicate that a slowdown in economic
growth is finally underway. I also think there is the potential for a price
rally in the months ahead and that the Fed will continue with its neutral
monetary policy. If this happens, our sector allocation for The Limited
Term Income Fund may shift more toward Treasuries and I may reduce
the mortgage and corporate holdings.
David: My plan is to continue to emphasize very high quality holdings during
the coming year and I may add corporate bonds of companies with improving
financial conditions. At any rate, mortgage-backed securities will play an
important role to help current income without sacrificing the Fund's high
credit quality.
Rick: I support the economy slow down expectation.
The Victory Investment Quality Bond Fund
Portfolio Manager
Richard Heine
<TABLE>
Total Return As of 10/31/96
<CAPTION>
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 4.65% -0.35%
Since Inception Annualized
12/10/93 5.03% 3.27%
</TABLE>
<TABLE>
Victory Investment Quality Bond Fund
vs. Lehman Aggregate
(Dollars in thousands)
<CAPTION>
Invest Quality Bond Invest Quality Bond @ NAV Lehman Aggregate
<S> <C> <C> <C>
12/93 9,521 10,000 10,000
3/94 9,281 9,749 9,713
6/94 9,172 9,633 9,613
9/94 9,205 9,668 9,672
12/94 9,272 9,739 9,708
3/95 9,669 10,156 10,198
6/95 10,235 10,750 10,819
9/95 10,398 10,922 11,032
12/95 10,818 11,362 11,502
3/96 10,603 11,137 11,297
6/96 10,604 11,137 11,361
10/96 11,016 11,571 11,827
Graph reflects investment growth from end of month of fund commencement.
The Lehman Brothers Aggregate Bond Index (Lehman Aggregate) is a broad-based
unmanaged index that represents the general performance of longer-term
(greater than 1 year), investment-grade fixed-income securities.
</TABLE>
The performance data quoted represent past performance and therefore, are not
indicative of future results. Total returns are historical and include the
change in share price and reinvestment of dividends and capital gains
distributions, and unless indicated, show the effect of the maximum 4.75%
sales charge. Investment returns and principal values will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than
their original cost. The total return figures set forth above may reflect the
waiver of a portion of certain fees for various periods since the Fund's
inception date. In such instances and without such waiver of fees, the total
returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
15
<PAGE>
INTRODUCTION TO MUNICIPAL FIXED INCOME FUNDS
TAX-EXEMPT SECURITIES UNIVERSE
2000+ issues reviewed per year;
500 new issues reviewed per year
ISSUE AND ISSUER CREDIT QUALITY
DURATION AND MATURITY SCREEN
INTERMEDIATE-TERM POOL LONG-TERM POOL
RELATIVE VALUE
Scarcity/Liquidity; Geographic/Economic Trends;
Positive Curve Convexity; New Issues; Sector Analysis
CAPITAL GAINS
INTERMEDIATE-TERM FUNDS LONG-TERM FUND
The Victory National Municipal The Victory New York
Bond Fund Tax-Free Fund
The Victory Ohio Municipal
Bond Fund
Victory Municipal Fixed Income Funds and the respective portfolio manager are
as follows:
The Victory National Municipal Bond Fund
The Victory New York Tax-Free Fund
The Victory Ohio Municipal Bond Fund
[PHOTO]
Paul Toft
Paul Toft is a Vice President with Society Asset Management, Inc. ("SAM"). He
has been with SAM since 1994. Prior to his affiliation with Society, he was
Vice President and Manager of Nike Securities and Assistant Vice President
with Van Kampen Merritt. He obtained his MBA from Northwestern University.
THE INVESTMENT PROCESS
The Victory Funds offer a series of Municipal investment strategies that can
help you manage your investments. The investment advisor's fixed income
specialists maintain a close watch on the credit ratings of the issuers of
holdings in the Victory Funds. In addition, our portfolio management team
continuously assesses new municipal issues from across the nation for
special values and incremental returns.
The portfolio managers of the Victory Funds utilize a three-dimensional
approach to managing municipal portfolios.
1. Superior Research.
Credit analysis of municipal securities and issuers is an on-going process.
Portfolio managers and credit analysts review over 2,000 existing issues
annually in addition to up to 500 new issues each year. Analysts review
important factors such as the structure of the offering and the financial
status of the issuing entity, as well as any underlying credit
enhancements, including insurance and letters of credit.
2. No large "Duration Bets" are taken.
Portfolios are carefully managed to keep their duration consistent with their
appropriate benchmark.
3. Relative Value.
The portfolio manager seeks to identify inefficiencies in the marketplace that
may result in an increase in the relative value of the securities both in
the portfolio and available in the market place. Differences in relative
value of municipal securities are created by factors such as geographic and
economic trends, regulatory changes, forces of supply and demand and
investor sentiment.
The portfolio management team for the Victory Municipal Funds seeks to keep
the municipal portfolios fully invested while focusing on maintaining
superior credit quality and adequate liquidity.
16
<PAGE>
VICTORY MUNICIPAL FIXED INCOME FUNDS
PAUL, CAN YOU DESCRIBE SOME OF THE TRENDS THAT AFFECTED THE MUNICIPAL BOND
MARKET THIS YEAR?
Paul: I would have to say that generally speaking, the first quarter of 1996
was quite volatile, as market expectations of slower growth and declining
interest rates were contradicted by strong economic numbers. The Federal
Reserve Board followed a neutral monetary policy, and the latest quarter
seems to support the prospect for slower growth and modest inflation. The
issue of a flat tax, which was popular during the primary elections,
affected municipal yields for part of the year, although the issue has
faded since the presidential election.
CAN YOU TELL US WHAT YOUR INVESTMENT STRATEGY IS FOR THE COMING YEAR FOR EACH
OF THE FUNDS YOU MANAGE?
Paul: My strategy for the National Municipal Bond Fund has been to keep the
portfolios average weighted maturity slightly longer than that of its peer
group, and I intend to keep pursuing that strategy for the near future.
Beyond that, we've also focused on relative value trading. This strategy
has really worked out well, as the Fund returned 5.83% for
the year ended October 31, 1996, without the effect of the maximum sales
charge of 4.75%, compared to the Lehman 10 year Muni Fund Index return of
4.95%.
The Victory National Municipal Bond Fund
Portfolio Manager
Paul Toft
<TABLE>
Total Return As of 10/31/96
<CAPTION>
NATIONAL MUNI Class A
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 5.83% 0.82%
Since Inception Annualized
2/3/94 5.25% 3.40%
</TABLE>
<TABLE>
<CAPTION>
NATIONAL MUNI Class B
Contingent
Net Asset Deferred
Value Charges
<S> <C> <C>
One Year 4.85% 0.85%
Since Inception Annualized
9/26/94 7.38% 6.06%
</TABLE>
<TABLE>
Victory National Municipal Bond Fund
vs. Lehman 10-Yr Muni
(Dollars in thousands)
<CAPTION>
National Muni National Muni @ NAV Lehman 10-Yr Muni
<S> <C> <C> <C>
2/94 9,525 10,000 10,000
5/94 9,452 9,923 9,802
8/94 9,595 10,073 9,962
11/94 9,021 9,471 9,501
2/95 9,664 10,146 10,203
5/95 10,060 10,562 10,682
8/95 10,316 10,830 10,918
11/95 10,643 11,173 11,263
2/96 10,931 11,476 11,400
5/96 10,757 11,293 11,187
8/96 10,918 11,463 11,402
10/96 11,130 11,685 11,665
Graph reflects investment growth from end of month of fund commencement.
The Lehman Brothers 10-Year Municipal Bond Index (Lehman 10 Yr Muni) is a
broad-based unmanaged index that represents the general performance of
investment-grade municipal bonds with maturities of 8 to 12 years.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and reinvestment of dividends and capital gain distributions.
Performance of the different classes of shares will vary based on the
differences in sales charges and class specific expenses paid by the
shareholders. Class A performance with a sales charge shows the effect of the
maximum 4.75% sales charge applied at the beginning of the reported period.
Class B performance with sales charge shows the effect of the applicable
deferred charge, assuming a complete redemption as of October 31, 1996.
Investment returns and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original
cost. The total return figures set forth above may reflect the waiver of a
portion of certain fees for various periods since inception. In such
instances and without such waiver of fees, the total returns would have
been lower.
Certain investors may be subject to Federal AMT.
Fee waivers are voluntary and may be modified or terminated at any time.
17
<PAGE>
VICTORY MUNICIPAL FIXED INCOME FUNDS
The strategy I just described differs slightly from the ones I use for the
state specific Funds. With the New York Tax-Free Fund, the focus is on
generating as much tax-free income as possible while maintaining the high
quality of the issues we buy. The Fund's portfolio holds many high coupon
issues in order to help us maintain a high payout rate. The high payout
rate and yield objective has its negative side, as it affects
the overall ability of the Fund to trade on relative value.
With the Ohio Municipal Bond Fund, I continue to focus on relative value
trading strategy rather than high interest income. I try to keep the Fund's
average weighted maturity between ten and twelve years.
HOW DID THESE STRATEGIES AFFECT THE FUND'S PERFORMANCE?
Paul: Well, The National Municipal Bond Fund ranked 8th highest out of 134
funds within the Lipper Intermediate Municipal Bond* fund category, for
the 12 month period ended October 31, 1996 according to Lipper Analytical
Services.*
The performance of The Ohio Municipal Bond Fund declined a little since 1995,
however, it is still a top performer within its peer group. The Fund ranked
3rd highest out of 56 funds in the Ohio Municipal Debt Funds* category
according to Lipper, for the one year period ending October 31, 1996. At
4.53%, without reflecting the effect of the 4.75% maximum
The Victory New York Tax-Free Fund
Portfolio Manager
Paul Toft
<TABLE>
Total Return As of 10/31/96
<CAPTION>
NY TAX-FREE Class A
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 4.53% -0.42%
Annualized Return
Three Years 3.81% 2.13%
Five Years 6.67% 5.62%
Since Inception
2/11/91 7.09% 6.18%
</TABLE>
<TABLE>
<CAPTION>
NY TAX-FREE Class B
Contingent
Net Asset Deferred
Value Charges
<S> <C> <C>
One Year 3.72% -0.24%
Since Inception
9/26/94 5.92% 4.57%
</TABLE>
<TABLE>
Victory New York Tax-Free Fund
vs. Lehman 10-Yr Muni
(Dollars in thousands)
<CAPTION>
NY Tax Free NY Tax Free @ NAV Lehman 10-Yr Muni
<S> <C> <C> <C>
2/91 9,526 10,000 10,000
8/91 10,100 10,602 10,443
2/92 10,557 11,081 10,941
8/92 11,210 11,767 11,585
2/93 11,957 12,551 12,554
8/93 12,532 13,154 13,076
2/94 12,745 13,378 13,222
8/94 12,559 13,183 13,172
2/95 12,788 13,423 13,491
8/95 13,380 14,045 14,436
2/96 13,937 14,630 15,073
8/96 14,027 14,724 15,076
10/96 14,242 14,950 15,423
Graph reflects investment growth from end of month of fund commencement.
The Lehman Brothers 10-Year Municipal Bond Index (Lehman 10-Yr Muni) is a
broad-based unmanaged index that represents the general performance of
investment-grade municipal bonds with maturities of 8 to 12 years.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and reinvestment of dividends and capital gain distributions.
Performance of the different classes of shares will vary based on the
differences in sales charges and class specific expenses paid by the
shareholders. Class A performance with a sales charge shows the effect of
the maximum 4.75% sales charge applied at the beginning of the reported
period. Class B performance with sales charge shows the effect of the
applicable deferred charge, assuming a complete redemption as of
October 31, 1996. Investment returns and principal value will fluctuate
so that an investor's shares, when redeemed, may be worth more or less than
their original cost. The total return figures set forth above may reflect the
waiver of a portion of certain fees for various periods since the Fund's
inception. In such instances and without such fee waivers, the total
returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
* Lipper Analytical Service Rankings-Lipper ranks funds according to
investment objectives and are based on total returns, which do not include
the effect of sales charges and in the absence of fee waivers, the returns
and rankings may have been lower. Past performance is no guarantee of future
results.
18
<PAGE>
VICTORY MUNICIPAL FIXED INCOME FUNDS
sales charge, the New York Tax Free Bond Fund's one year return was slightly
lower than the Lehman 10 year Muni Index, which was 4.95% as of October 31,
1996.
PAUL, CAN YOU TELL US WHAT YOU ENVISION FOR THE MARKET IN THE COMING YEAR?
Paul: Since the election is over, I doubt there will be many surprises in
terms of major policy shifts next year and inflation does not seem to be
an immediate threat. The market appears to be more confident of the Fed's
ability to practice effective monetary policy, so I expect a pretty good
environment for municipals, going forward.
The Victory Ohio Municipal Bond Fund
Portfolio Manager
Paul Toft
<TABLE>
Total Return As of 10/31/96
<CAPTION>
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 5.87% 0.88%
Annualized Return
Three Years 5.31% 3.63%
Five Years 7.54% 6.50%
Since Inception
5/18/90 7.88% 7.06%
</TABLE>
<TABLE>
Victory Ohio Municipal Bond Fund
vs. Lehman 10-Yr Muni
(Dollars in thousands)
<CAPTION>
Ohio Muni Ohio Muni @ NAV Lehman 10-Yr Muni
<S> <C> <C> <C>
5/90 9,525 10,000 10,000
11/90 9,954 10,450 10,521
5/91 10,401 10,919 11,039
11/91 10,802 11,341 11,577
5/92 11,274 11,836 12,064
11/92 11,786 12,373 12,730
5/93 12,540 13,166 13,551
11/93 13,120 13,774 14,218
5/94 12,979 13,626 14,013
11/94 12,539 13,164 13,584
5/95 14,150 14,856 15,272
11/95 14,866 15,607 16,103
5/96 14,824 15,563 15,995
10/96 15,500 16,273 16,677
Graph reflects investment growth from end of month of fund commencement.
The Lehman Brothers 10-Year Municipal Bond (Lehman 10-Yr Muni) Index is a
broad-based unmanaged index that represents the general performance of
investment-grade municipal bonds with maturities of 8 to 12 years.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and reinvestment of dividends and capital gain distributions,
and unless indicated show the effect of the maximum 4.75% sales charge.
Investment returns and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The total return figures set forth above may reflect the waiver of a portion
of certain fees for various periods since the Fund's inception date. In
such cases and without such waiver of fees, the total returns would
have been lower.
Certain investors may be subject to Federal AMT.
Fee waivers are voluntary and may be modified or terminated at any time.
19
<PAGE>
INTRODUCTION TO EQUITY FUNDS (DIVERSIFIED)
[GRAPHIC]
EQUITY RESEARCH UNIVERSE
DIVERSIFIED MANAGEMENT
Value Growth
Market Condition Assessment
buy/sell decisions
----------------------------------
DIVERSIFIED FUNDS
The Victory Diversified Stock Fund
The Victory Stock Index Fund
The Victory Balanced Fund
THE INVESTMENT PROCESS
The Victory Equity Funds that are managed according to the diversified style
attempt to remain flexible in order to adjust to changing market conditions.
For the Victory Diversified Stock Fund, the portfolio manager seeks to
produce a higher return with less risk by pursuing a blended investment
strategy. This rigorous, two-dimensional approach to stock selection allows
the portfolio manager flexibility to sell into strength and buy into
weakness, always driving toward the goal of producing consistently positive
returns across market cycles.
For the Victory Stock Index Fund, the objective is to seek to match the
investment performance of the Standard & Poor's 500 Composite Index.
Victory Equity Funds are managed with a Diversified Proposition. Their
respective portfolio managers are as follows:
[PHOTO]
The Victory Diversified Stock Fund
Lawrence Babin (seated)
Larry Babin is a Chartered Financial Analyst and a Vice President at Society
Asset Management, Inc. ("SAM"). He has managed the Fund since its inception
and has been with SAM and/or its affiliates since 1982. Larry received his
MBA from the University of Michigan.
The Victory Stock Index Fund
Malini Menon (standing)
Malini Menon is a Vice President and Senior Portfolio Manager with Applied
Technology Investments, Inc., an affiliate of KeyCorp Asset Management
Holding, Inc. She has been with KeyCorp and/or its affiliates since 1990.
Malini holds a Bachelor of Science in mathematics from Majaraja Sayajirao
University and two MBAs: one is in Market Research and International
Business from South Gujarat University and the other is in Quantitative
Business Analysis from Cleveland State University. In addition, she is
pursuing postgraduate studies in Operations Research at Case Western Reserve
University.
The Victory Balanced Fund and its respective portfolio managers are as
follows:
[PHOTO]
The Victory Balanced Fund
Denise M. Coyne (seated)
Denise Coyne is a Chartered Financial Analyst as well as a Certified Public
Accountant. She is a Vice President with Society Asset Management, Inc.
("SAM") and has been with SAM and/or an affiliate since 1985. Ms. Coyne
received her MBA from Miami University.
Richard T. Heine (standing)
Rick Heine is a Chartered Financial Analyst, Vice President and Portfolio
Manager with Society Asset Management, Inc. ("SAM"). He has been with SAM
and/or an affiliate since 1974. Mr. Heine received his MBA from Case Western
Reserve University.
20
<PAGE>
VICTORY EQUITY FUNDS (DIVERSIFIED)
LARRY, MALINI, YOU BOTH MANAGE DIVERSIFIED STOCK PORTFOLIOS, BUT LARRY, YOURS
IS AN ACTIVELY MANAGED FUND, WHILE MALINI, YOURS IS PASSIVELY MANAGED. CAN
YOU TELL US THE DIFFERENCE BETWEEN MANAGEMENT STYLES AND HOW YOUR
PORTFOLIO'S REFLECT THAT?
Malini: Well, the fund I manage, The Victory Stock Index, attempts to
replicate the performance of the S&P 500 and we invest exclusively in the
stocks that make up that Index and futures. Also, we attempt to maintain our
stock and sector weights close to the Index as well.
Larry: Victory Diversified Stock is, as it's name implies, a diversified stock
fund, but I am not held to the restriction of only being able to invest in
the stocks of companies within its growth and income benchmark. I can
purchase securities outside of that benchmark that meet our particular
screening requirements. Additionally, because the fund has a growth
orientation as well as a value orientation, we have unique opportunities
to seek out investment opportunities. My goal is to try to take advantage of
those opportunities before the market reacts.
WELL, LARRY, THAT'S QUITE AN UNDERTAKING. DID YOU HAVE TO CHANGE YOUR
STRATEGY AS THE YEAR PROGRESSED?
Larry: When we began the fiscal year in 1995, the emphasis was on the
financial, utility and energy sectors. We were also relatively underweighted
in technology companies, a classic defensive move that is very typical of a
value orientation. But, as the economic environment of the last twelve months
began to unfold, I switched to a more growth oriented strategy and increased
investments in the technology sector and that move has paid off. IBM is
currently the Fund's single largest holding, and as of this interview, is
doing quite well.
The Victory Diversified Stock Fund
Portfolio Manager
Lawrence Babin
<TABLE>
Total Return As of 10/31/96
<CAPTION>
DIVERSIFIED FUND Class A
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 27.16% 21.11%
Annualized Return
Three Years 19.02% 17.10%
Five Years 16.49% 15.36%
Since Inception
10/20/89 14.48% 13.69%
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED FUND Class B
Contingent
Net Asset Deferred
Value Charges
<S> <C> <C>
Since Inception
3/1/96 11.62% 6.62%
</TABLE>
<TABLE>
Victory Diversified Stock Fund
vs. S&P 500
(Dollars in thousands)
<CAPTION>
Diversified Stock Diversified Stock S&P 500
Class A Class A @ NAV
<S> <C> <C> <C>
10/89 9,528 10,000 10,000
5/90 10,524 11,044 10,846
12/90 10,049 10,546 10,125
7/91 11,690 12,269 12,109
2/92 12,543 13,164 13,133
9/92 12,788 13,421 13,536
4/93 13,732 14,411 14,479
11/93 14,602 15,325 15,463
6/94 14,784 15,515 15,120
1/95 15,984 16,776 16,267
8/95 19,322 20,278 19,743
3/96 22,553 23,669 22,986
10/96 24,939 26,173 25,442
Graph reflects investment growth from end of month of fund commencement.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged
index that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and reinvestment of dividends and capital gain distributions.
Performance of the different classes of shares will vary based on the
differences in sales charges and class specific expenses paid by
shareholders. Class A performance with sales charge shows the effect of the
maximum 4.75% sales charge applied at the beginning of the period. Class B
performance with sales charge shows the effect of the applicable contingent
deferred sales charge, assuming a complete redemption as of October 31, 1996.
Investment returns and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The total return figures set forth above may reflect the waiver of a
portion of certain fees for various periods since inception. In such instances
and without such waiver of fees, the total returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
21
<PAGE>
VICTORY EQUITY FUNDS (DIVERSIFIED)
MALINI, SINCE YOUR FUND IS PASSIVELY MANAGED, WERE YOU ABLE TO TAKE ANY TYPE
OF ACTION IN SUCH A VOLATILE MARKET ENVIRONMENT?
Malini: I did. Remember, passive management doesn't mean you're not acutely
aware of market conditions and unable to react to them. It means that you must
work in a "tighter" environment. For example, I couldn't purchase securities
that weren't in the S&P 500, but I did invest in the S&P 500 futures
contracts to hedge cash flows, providing us some liquidity while reducing
investment transaction costs, which should benefit our shareholders.
CAN EITHER OF YOU TELL US WHY IT WAS SUCH A GOOD YEAR FOR EQUITIES?
Malini: We had sound corporate earnings, record inflows to mutual funds into
the markets and subdued inflation. In a sense, it was the best of both
worlds--economic expansion accompanied by price stability.
Larry: I would agree with Malini. Low inflation, coupled with modest growth,
has been particularly good for large-cap stocks. Corporate earnings have
remained strong and many companies have met their profit expectations.
Perhaps the most important reason for the continued good stock market was
nothing more than robust supply and demand.
DO YOU THINK THE MARKETS WILL PERFORM AS WELL NEXT YEAR?
Malini: Well, without the assistance of a crystal ball, let me answer your
question this way. I believe the economic slowdown the market has been
looking for will finally materialize next year. I don't anticipate a
The Victory Stock Index Fund
Portfolio Manager
Malini Menon
<TABLE>
Total Return As of 10/31/96
<CAPTION>
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 23.38% 17.55%
Since Inception Annualized
12/3/93 17.70% 15.74%
</TABLE>
<TABLE>
Victory Stock Index Fund
vs. S&P 500
(Dollars in thousands)
<CAPTION>
Stock Index Stock Index @ NAV S&P 500
<S> <C> <C> <C>
12/93 9,526 10,000 10,000
3/94 9,149 9,605 9,621
6/94 9,180 9,637 9,661
9/94 9,611 10,090 10,133
12/94 9,613 10,092 10,132
3/95 10,521 11,044 11,118
6/95 11,493 12,065 12,179
9/95 12,389 13,006 13,147
12/95 13,119 13,773 13,939
3/96 13,821 14,509 14,687
6/96 14,419 15,137 15,346
10/96 15,238 15,997 16,257
Graph reflects investment growth from end of month of fund commencement.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged
index that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and the reinvestment of dividends and capital gain distributions,
and unless indicated show the effect of the maximum 4.75% sales charge.
Investment returns and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Total return figures set forth above may reflect the waiver of a portion
of certain fees for various periods since the Fund's inception date. In such
cases and without such waiver of fees, the total returns would have been
lower.
Fee waivers are voluntary and may be modified or terminated at any time.
22
<PAGE>
VICTORY EQUITY FUNDS (DIVERSIFIED)
recession though. We'll just have to take it a day at a time and continue
to make decisions based on our knowledge of the companies we select and I
intend to remain fully invested in all S&P 500 stocks and/or futures in a
continued attempt to match the performance of the Index.
Larry: I can't predict either, but I can tell you that I remain optimistic
about the market. As a manager for this Fund since it's inception, my
emphasis has always been on consistency and taking a long-term perspective.
The Fund's approach of selling into strength and buying into weakness has
proven its worth over the long-term in many different market environments
and has historically done well for its shareholders.
The Victory Balanced Fund
The Victory Balance Fund's objective is to attempt to provide both current
income and capital appreciation for investors. Since the Fund invests in
both stocks and bonds there are two portfolio managers, each of whom manages
their area of expertise. The challenge of this Fund is to find the right
"balance" between these two investment vehicles. This requires teamwork,
talent and a strong fundamental knowledge of both markets. Portfolio
managers Denise Coyne and Rick Heine explain.
AS MANAGERS THAT HOLD BOTH STOCKS AND BONDS IN THE MUTUAL FUND YOU MANAGE,
YOU MUST HAVE HAD SOME INTERESTING CHALLENGES DURING THIS PAST YEAR. CAN YOU
TELL US A LITTLE ABOUT THE ECONOMIC ENVIRONMENT IN YOUR RESPECTIVE AREAS AND
THE ISSUES YOU DEALT WITH IN '96?
Denise: Well, the first important point our shareholders should know is that
even though the fund holds stocks and bonds, and I manage the stock portion
and Rick manages the bond portion, we actually work very closely together to
ensure that the portfolio maintains the asset allocation strategy we've
decided on. We choose the securities for the portfolio carefully and are
very concerned and committed to maintaining that balance.
Rick: Denise is right. We don't manage the portfolio as two independent
entities. We are very aware of what each other is doing and are constantly
re-evaluating our choices and allocations.
THEN IT MUST HAVE BEEN EVEN MORE CHALLENGING TO MANAGE THE PORTFOLIO THIS
PAST YEAR. HOW DID EVENTS IN THE ECONOMY AFFECT IT?
Rick: The two issues that defined the economy for most of '96 were low
inflation and moderate to high growth levels. We had expected growth to be
considerably slower than it turned out to be. In fact, some economic
releases--like employment--indicated the economy was stronger than the market
had anticipated. However, the Fed didn't seem to consider inflation a big
threat, so they didn't increase short-term interest rates.
HOW DID STOCKS AND BONDS PERFORM IN THIS ENVIRONMENT?
Denise: Stocks outperformed both cash and bonds through October 31, 1996.
And the asset allocation of the Balanced Fund was 62% stocks, 5% of that in
the foreign market, 36% in bonds and 2% in cash. That produced a total return
for the Fund of 16.27%, without the effect of the 4.75% maximum sales charge,
for the year ended October 31, 1996. Thus our Fund outperformed the Lipper
Balanced Fund Index,* which posted a return of 14.49% for the past twelve
months.
* Lipper Balanced Fund Index-The net asset weighted performance, adjusted
for capital gains and income dividends, of the thirty largest balanced funds.
The primary objective of Funds which comprise the Index, is to conserve
principal by maintaining at all times a balanced portion of both stocks and
bonds with the stock/bond ratio of the funds investments typically ranging
around 60%/40%.
23
<PAGE>
VICTORY EQUITY FUNDS (DIVERSIFIED)
That's true, but our asset allocation analysis indicates that bonds should be
pretty attractive in a slow growth environment which is what we envision for
the coming year.
DENISE, WE KNOW YOU'VE TOLD US THAT BOTH THE STOCK AND BOND PORTIONS OF THE
PORTFOLIOS ARE MANAGED IN TANDEM, BUT CAN YOU GIVE US SOME SPECIFIC INSIGHT
AS TO HOW THE STOCK PORTION OF THE PORTFOLIO PERFORMED THIS PAST YEAR?
Denise: Sure, our equities lean toward a strong "value" orientation, which
happens to be one of our strengths. This means we look for stocks with
above-market dividend yield and below market price-earnings ratios. We
focused on the financial, energy and utility sectors of the market, and
within the financial section, we selected bank stocks that appeared to be
selling at reasonable prices. In a slower growing economy, increasing the
utility sector seemed appropriate.
RICK, HOW ABOUT THE FIXED INCOME PORTION? ANY THOUGHTS YOU'D LIKE TO SHARE
WITH US?
Rick: Well, I hope our shareholders realize that finding high quality credit
issues is the focus for most of the fixed income portfolios in The Victory
Fund complex. Also, we utilize a relative value approach to find "good
values" within the high quality, fixed income market segments. Right now,
the areas where I'm finding good values are with putable corporate issues,
discount mortgage-backed issues and high coupon callable government agencies.
The Victory Balanced Fund
Portfolio Managers
Denise Coyne
Richard Heine
<TABLE>
Total Return
As of 10/31/96
<CAPTION>
BALANCED FUND Class A
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 16.27% 10.74%
Since Inception Annualized
12/10/93 11.72% 9.86%
</TABLE>
<TABLE>
<CAPTION>
BALANCED FUND Class B
Contingent
Net Asset Deferred
Value Charges
<S> <C> <C>
Since Inception
3/1/96 8.72% 3.72%
</TABLE>
<TABLE>
Victory Balanced Fund
vs. S&P 500 & Lipper Balanced
(Dollars in thousands)
<CAPTION>
Balanced Class A Balanced Class A @ NAV S&P 500 Lipper Balanced
<S> <C> <C> <C> <C>
12/93 9,525 10,000 10,000 10,000
3/94 9,135 9,591 9,621 9,678
6/94 9,159 9,616 9,661 9,599
9/94 9,332 9,797 10,133 9,872
12/94 9,361 9,828 10,132 9,751
3/95 10,036 10,536 11,118 10,334
6/95 10,693 11,227 12,179 11,059
9/95 11,235 11,795 13,147 11,710
12/95 11,806 12,396 13,939 12,233
3/96 12,141 12,747 14,687 12,507
6/96 12,389 13,007 15,346 12,760
10/96 13,082 13,735 16,257 13,373
Graph reflects investment growth from end of month of fund commencement.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged
index that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
The Lipper Balanced Fund Index is a non-weighted index of the 30 largest
funds within the Lipper Balanced Fund investment category.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and reinvestment of dividends and capital gain distributions.
Performance of the different classes of shares will vary based on the
differences in sales charges and class specific expenses paid by shareholders.
Class A performance with sales charge shows the effect of the maximum
4.75% sales charge applied at the beginning of the period. Class B performance
with sales charge shows the effect of the applicable contingent deferred
sales charge, assuming a complete redemption as of October 31, 1996.
Investment returns and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The total return figures set forth above may reflect the waiver of a
portion of certain fees for various periods since inception. In such instances
and without such waiver of fees, the total returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
24
<PAGE>
[PHOTO OF A MAN AND BOY]
You teach him how to invest. He'll teach you how to program the VCR.
You showed him how to ride his bike. You helped him learn how to catch a
baseball. You made him promise not to leave gummy worms in his sister's shoes
anymore. now is the time to start teaching him about investments. If you'd like
to learn more about how to reach a financial goal like paying for a college
education, learn more about the Victory Funds. Because at Victory, we believe
teaching a child about investing is one way to help them secure a strong
financial future.
The Victory Funds are distrubuted by BISYS Fund Services which is not affiliated
with KeyCorp. Certain subsidiaries of KeyCorp provide services to the Victory
Funds, including advisory services, and recieve fees from the funds for their
services, as set forth in the prospectus.
For more information about the Victory Funds, including charges and expenses,
request a prospectus by calling 1-800-KEY-FUNd (1-800-539-3863). Please read the
prospectus carefully before investing or sending money.
o Not FDIC Insured
o No Bank Guarantee
o May Lose Value
[logo]
Victory Funds
<PAGE>
INTRODUCTION TO EQUITY FUNDS (VALUE)
[Graphic]
EQUITY RESEARCH UNIVERSE
VALUE MANAGEMENT
Valuation Statistical Cheapness Earnings Revisions
buy/sell decisions
-------------------------
VALUE FUNDS
The Victory Value Fund
The Victory Special Value Fund
The Victory Ohio Regional Stock Fund
THE INVESTMENT PROCESS
The Victory Funds that are managed according to a "Value style" seek to
outperform an appropriate market benchmark such as the S&P 500 or The S&P 500
Barra Value Index,* while maintaining broad market sector exposure. The
approach to managing these funds is to target stocks that are statistically
inexpensive (low P/Es, low price-to-book, high-yield stocks) and find those
issues where investor sentiment is improving as evidenced by upward earnings
revisions and positive earning events.
* The S&P 500/Barra Value Index contains firms with lower price-to-book
ratios and has 50 percent of the market capitalization of the S&P 500 Index.
Victory Equity Funds are managed with a Value Proposition. Their respective
portfolio managers are as follows:
[photo]
The Victory Value Fund
Judith Jones (seated)
Judith (Judy) Jones is a Chartered Financial Analyst as well as a Certified
Financial Planner. She is a Vice President with Society Asset Management,
Inc. ("SAM") and has managed the Victory Value Fund since its inception. She
has been with SAM and its affiliates since 1965. Judy received her MBA from
Kent State University.
The Victory Special Value Fund
Anthony Aveni (right)
Anthony (Tony) Aveni is a Chartered Financial Analyst and a Senior Vice
President with Society Asset Management, Inc., ("SAM"). Tony has been a Fund
Manager with SAM since 1987 and is the Chief Investment Officer of SAM. He
received his MBA from Case Western Reserve University and has managed The
Victory Special Value Fund since its inception.
Barbara Myers (left)
Barbara Myers is a Chartered Financial Analyst, a Portfolio Manager and a Vice
President with Society Asset Management, Inc. ("SAM"). She joined SAM in 1994
and has seven years of previous investment experience. Ms. Myers received a
BBA from Cleveland State University and an MBA from Baldwin Wallace College.
The Victory Ohio Regional Stock Fund
Lynn Hamilton (center)
Lynn Hamilton is a Vice President with Society Asset Management, Inc. (SAM)
and has managed The Victory Ohio Regional Stock Fund since its inception.
Mr. Hamilton has been a Fund Manager since 1993. Prior to this position, he
was a Fund Manager with Society National Bank. Mr. Hamilton obtained his MBA
from Miami University.
Also pictured is Paul Danes (seated)
26
<PAGE>
TONY, CAN YOU GIVE US AN OVERALL VIEW OF THE MID-CAP STOCK MARKET ENVIRONMENT
FOR THIS PAST YEAR?
Tony: I'd be happy to. Obviously, there have been impressive gains in the
equity markets during the past twelve months. Similar to last year, the
larger capitalization stocks outperformed their mid and small-cap
counterparts. I can give you the specifics on that. The S&P 400 Mid-cap
Index* rose 17.35% during the Fund's fiscal year ended October 31, 1996,
while the S&P 500 increased by 24.09%.
BARBARA, CAN YOU TELL US IF THE PERFORMANCE OF THE SPECIAL VALUE FUND WAS DUE
TO INVESTMENTS IN ANY PARTICULAR SECTORS?
Barbara: No, performance of the Fund this year hasn't been the result of any
particular sector or economic bet. The key to out-performance was stock
selection. In fact, the Fund's largest sector weightings, which were basic
industry and capital goods companies, have underperformed the overall Mid-cap
Index. Most of our holdings within these sectors dramatically outperformed the
Index, including Tyco which was up 64%, GenCorp, up 61%, Avery Dennison, up 50%
and Kaydon Corp, up 42%. We also added to
The Victory Value Fund
Portfolio Manager
Judith Jones
<TABLE>
Total Return As of 10/31/96
<CAPTION>
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 24.66% 18.76%
Since Inception Annualized
12/3/93 16.84% 14.90%
</TABLE>
<TABLE>
Victory Value Stock Fund
vs. Lipper Grth & Inc vs. S&P 500
<CAPTION>
Value Stock Value Stock @ NAV S&P 500 Lipper Grth & Inc
<S> <C> <C> <C> <C>
12/93 9,528 10,000 10,000 10,000
3/94 9,080 9,529 9,621 9,676
6/94 9,249 9,706 9,661 9,727
9/94 9,568 10,041 10,133 10,128
12/94 9,553 10,026 10,132 9,932
3/95 10,441 10,958 11,118 10,711
6/95 11,183 11,736 12,179 11,590
9/95 12,010 12,604 13,147 12,487
12/95 12,776 13,408 13,939 13,060
3/96 13,600 14,273 14,687 13,810
6/96 14,031 14,726 15,346 14,164
10/96 14,834 15,568 16,257 14,953
Graph reflects investment growth from end of month of fund commencement.
The Lipper Growth & Income Index is a non-weighted index of the 30 largest
funds in the Lipper Growth & Income Fund investment category.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged
index that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and the reinvestment of dividends and capital gain distributions,
and unless indicated show the effect of the maximum 4.75% sales charge.
Investment returns and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Total return figures set forth above may reflect the waiver of a portion
of certain fees for various periods since the Fund's inception date. In such
cases and without such waiver of fees, the total returns would have been
lower.
Fee waivers are voluntary and may be modified or terminated at any time.
* The S&P 400 Mid-cap Index is comprised of companies in the S&P
Industrials Index (a subset of the S&P 500 Index that excludes
transportation, financial and utility stocks) whose market capitalization
between $200 million and $5 billion.
27
<PAGE>
VICTORY EQUITY FUNDS (VALUE)
our retail sector throughout the year which contributed to the Fund's
performance which was 20.60% compared to 17.35% for the S&P 400 Mid-cap Index
for the year ended October 31, 1996.
TONY, IS THERE ANYTHING YOU'D LIKE TO ADD TO THAT?
Tony: Yes. While we reduced our basic and capital goods sector weights we also
added some securities such as Nalco Chemical, a water treatment company,
McCormick and Company, they're known for distribution of spices, and Nellcor,
which is in hospital and home healthcare supplies. Barbara was talking about
the performance of some of the securities in the portfolio. These companies
are all very different industries, are attractive values with good franchises
and for a variety of reasons, are currently out of favor among investors.
However, we believe there are fundamental changes occurring in these
companies that make them attractive investments.
JUDY, AS MANAGER OF THE VALUE FUND, DID YOU HAVE SIMILAR EXPERIENCES AS TONY
AND BARBARA WITH YOUR FUND?
Judy: Well, let me answer your question this way, the general feeling at the
beginning of 1996 was that value stocks would outperform growth stocks.
Unfortunately, this was not the way it turned out--growth outperformed
value. In spite of that, the Value Fund posted a return of 24.66%, which
does not include the effect of the
The Victory Special Value Fund
Portfolio Managers
Anthony Aveni
Barbara Myers
<TABLE>
Total Return As of 10/31/96
<CAPTION>
SPECIAL VALUE Class A
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 20.60% 14.84%
Since Inception Annualized
12/3/93 15.12% 13.21%
</TABLE>
<TABLE>
SPECIAL VALUE Class B
Contingent
Net Asset Deferred
Value Charge
<S> <C> <C>
Since Inception
3/1/96 9.66% 4.66%
</TABLE>
<TABLE>
Victory Special Value Fund
vs. S&P 400 Mid Cap
(Dollars in thousands)
<CAPTION>
Special Value Special Value S&P 400 Mid Cap
Class A Class A @ NAV
<S> <C> <C> <C>
12/93 9,528 10,000 10,000
3/94 9,422 9,889 9,620
6/94 9,281 9,741 9,269
9/94 9,717 10,198 9,897
12/94 9,649 10,127 9,641
3/95 10,431 10,948 10,430
6/95 11,045 11,592 11,340
9/95 11,813 12,399 12,446
12/95 12,234 12,840 12,624
3/96 12,773 13,406 13,401
6/96 13,277 13,935 13,787
10/96 13,949 14,640 14,230
Graph reflects investment growth from end of month of fund commencement.
The Standard & Poor's 400 Mid-Cap Index (S&P 400 Mid Cap) is a broad-based
unmanaged index that represents the general performance of domestically
traded common stocks of mid-sized companies.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and reinvestment of dividends and capital gain distributions.
Performance of the different classes of shares will vary based on the
differences in sales charges and class specific expenses paid by shareholders.
Class A performance with sales charge shows the effect of the maximum
4.75% sales charge applied at the beginning of the period. Class B performance
with sales charge shows the effect of the applicable contingent deferred sales
charge, assuming a complete redemption as of October 31, 1996. Investment
returns and principal value will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. The total
return figure set forth above may reflect the waiver of a portion of certain
fees for various periods since the Fund's inception. In such instances
and without such waiver of fees, the total returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
28
<PAGE>
VICTORY EQUITY FUNDS (VALUE)
4.75% maximum sales charge, as opposed to the S&P 500/Barra Value Index* with a
return of 24.61% and the S&P 500 return of 24.09% for the 12 months ending
October 31, 1996.
CONGRATULATIONS! THAT'S IMPRESSIVE NEWS. BUT WAS THERE EVER A TIME DURING THE
PAST YEAR WHEN VALUE OUTPERFORMED GROWTH?
Judy: In the first quarter of '96, consumer cyclical stocks, which lagged all
of last year, were one of the best performing groups. This sector includes
the auto stocks and many retailers which had strong earnings comparisons,
attractive valuations and low market performance expectations. The Value Fund
benefited from its holdings in this sector.
LYNN, WHAT ABOUT THE OHIO REGIONAL STOCK FUND? DID YOU HAVE ANY SPECIAL
CONCERNS THIS YEAR?
Lynn: Well, fortunately, the Ohio economy has been particularly strong...
in fact, Ohio was a leader in the economic recovery that began a few years
ago. In terms of stock performance, we have participated in the upward
momentum of the S&P 500, but keep in mind, as Judy said, during the last
three quarters of the Fund's fiscal year, the rally was led by the large cap
growth oriented industries and technology stocks in particular.
SO, HOW DID YOUR FUND PERFORM?
Lynn: The strong value orientation of the Fund caused it to lag the S&P 500,
which as I
The Victory Ohio Regional Stock Fund
Portfolio Manager
Lynn Hamilton
<TABLE>
Total Return As of 10/31/96
<CAPTION>
OHIO REGIONAL Class A
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 17.79% 12.23%
Annualized Return
Three Years 12.71% 10.90%
Five Years 14.48% 13.36%
Since Inception
10/20/89 12.57% 11.79%
OHIO REGIONAL Class B
Since Inception
3/1/96 9.03% 4.03%
</TABLE>
<TABLE>
Victory Ohio Regional Stock Fund
vs. S&P 500
(Dollars in thousands)
<CAPTION>
Ohio Regional Ohio Regional @ NAV S&P 500
<S> <C> <C> <C>
10/89 9,529 10,000 10,000
4/90 8,939 9,380 9,883
10/90 6,801 7,137 9,253
4/91 10,029 10,524 11,624
10/91 11,473 12,039 12,353
4/92 12,992 13,634 13,255
10/92 12,791 13,423 13,582
4/93 14,154 14,853 14,479
10/93 15,754 16,532 15,612
4/94 16,051 16,844 15,250
10/94 16,376 17,185 16,215
4/95 17,532 18,398 17,913
10/95 19,149 20,095 20,502
4/96 21,966 23,051 23,324
10/96 22,556 23,670 25,442
Graph reflects investment growth from end of month of fund commencement.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged
index that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and reinvestment of dividends and capital gain distributions.
Performance of the different classes of shares will vary based on the
differences in sales charges and class specific expenses paid by shareholders.
Class A performance with sales charge shows the effect of the maximum
4.75% sales charge applied at the beginning of the period. Class B performance
with sales charge shows the effect of the applicable contingent deferred
sales charge, assuming a complete redemption as of October 31, 1996.
Investment returns and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The total return figures set forth above may reflect the waiver of a
portion of certain fees for various periods since inception. In such instances
and without such waiver of fees, the total returns would have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
* The S&P 500/Barra Value Index contains firms with lower price-to-book
ratios and has 50 percent of the market capitalization of the S&P 500 Index.
29
<PAGE>
VICTORY EQUITY FUNDS (VALUE)
said, was due to the surge in the market led by the technology sector.
Havingsaid that, let me also say that careful stock selection is the key to the
Ohio Regional Fund. I believe that the strength of the Fund is in knowing the
companies so well. I have an opportunity to talk to the managers of the
companies that I actually invest in. I spend a considerable amount of time
visiting the companies, talking to their suppliers, competitors and customers. I
use a value discipline, coupled with a strong "bottom-up" analysis of the
companies.
LYNN, YOU MUST HAVE AN OPPORTUNITY TO REALLY GET TO KNOW OHIO.
Lynn: I do. You know what they say, "It's the heart of it all."
THANKS, LYNN. LET'S TALK ABOUT YOUR COLLECTIVE OUTLOOK FOR THE MONTHS AHEAD.
TONY, BARBARA, YOUR IMPRESSIONS?
Tony: So far, economic conditions of moderate growth and low inflation have
been ideal for stocks. However, corporate profit margins are at historically
high levels and the pace of profit growth and lofty valuation levels of
common stocks do raise the element of risk. If any of these factors begin to
wane, and we view that as likely, a defensive or value oriented investment
style should be beneficial.
Barbara: Tony's right. Our emphasis on below average price/earnings and
price/book ratios and above average dividend yields when selecting
investments served the Fund's well this year during market weakness. And
value stocks have historically superior performance over the long-term.
JUDY, HOW ABOUT FROM YOUR PERSPECTIVE?
Judy: I think investors will continue to focus on corporate earnings which,
in all likelihood, will lead to increased stock market volatility. This has
been one of the longest bull markets on record. Staying with the value
proposition, the high yield, low price to earnings ratio, and low price to
book value, the Value Fund is well positioned and we believe it will
continue to provide relatively good returns compared to funds that do not
invest in value oriented stocks.
ALL OF YOU MENTIONED THAT GROWTH STOCKS OUTPERFORMED VALUE STOCKS FOR MUCH OF
1996, BUT IT SEEMS LIKE YOUR FUNDS ALL HAD A GOOD YEAR AND THAT THEY
PERFORMED VERY COMPETITIVELY.
Tony: If I can answer this for the group. The risks associated with investing
in each of these funds is different. The Victory Value Fund invests in larger
companies with more predictable earnings growth; the risk is therefore lower
than that associated with the mid-cap universe, which is comprised of smaller
companies with the potential for greater long term growth, but also greater
volatility of earnings. By the same token, the Ohio Regional Stock Fund may
be subject to region specific risk and reduced scope for industry
diversification because of this geographical limitation.
30
<PAGE>
INTRODUCTION TO EQUITY FUNDS (GROWTH)
[Graphic]
THE INVESTMENT PROCESS
The Victory Equity Funds that are managed according to the growth style
subscribe to the philosophy of "Growth At a Reasonable Price" (GARP). They
seek to identify stocks believed to have future return prospects greater
than the overall market.
EQUITY RESEARCH UNIVERSE
Growth Management
Return Prospects Statistical Valuation Risk Assessment
buy/sell decisions
--------------------------------------------
GROWTH FUNDS
The Victory Growth Fund
The Victory Special Growth Fund
The Victory International Growth Fund
Victory Equity Funds are managed with a Growth Proposition. Their respective
portfolio managers are as follows:
[Photo]
The Victory Growth Fund
William Ruple (right)
William (Bill) Ruple is a Vice President and Portfolio Manager with Society
Asset Management, Inc. ("SAM"). He has been with SAM and its affiliates
since 1970. Bill received his B.S. from Ohio Wesleyan University and his
MBA from Case Western Reserve University.
The Victory Special Growth Fund
Annette Geddes (left)
Annette Geddes is Managing Director at Spears, Benzak, Salomon & Farrell
("SBSF"), a subsidiary of KeyCorp. Annette has been managing the Fund since
April 1, 1996. Prior to joining SBSF, Annette managed a $100 million
diversified equity portfolio at Steinhardt Management Company and has, in
addition, a long record of managing equity portfolios for important corporate
and public clients. Annette holds a B.A. in Economics from Wellesley College.
The Victory International Growth Fund
Conrad Metz (center)
Conrad Metz is a Vice President of International Equity Investments and
Portfolio Manager with Society Asset Management, Inc. (SAM). He has managed
the International Growth Fund since October, 1995. Mr. Metz received a
B.A. from the University of California at Berkley. He is a charter member of
the International Society of Financial Analysts.
31
<PAGE>
VICTORY EQUITY FUNDS (GROWTH)
ANNETTE, CAN YOU TELL US A LITTLE ABOUT THE CIRCUMSTANCES SURROUNDING THE
SMALL CAP EQUITY MARKET DURING THE PAST YEAR? DID IT DIFFER SIGNIFICANTLY
FROM OTHER AREAS OF THE MARKET?
Annette: That's a good question. While the large cap sector of the stock
market outperformed small stocks in the past year, we believe the six-year
old bull market for emerging growth stocks remains intact. The peak in growth
stock performance occurred in the second quarter of 1996, coinciding with the
peak in growth of the gross domestic product. Subsequently, the increase in
interest rates with the long Treasury Bond crossing 7% for the first time in
a year penalized small growth stocks the most.
The market also had to deal with investor anxiety which was caused by a
string of earnings disappointments and the usual election year jitters. With
the election behind us, and our belief that the S&P 500 will slow
dramatically in 1997, small cap growth stocks that have the potential to
deliver earning gains in excess of 25%, while selling at meaningful P/E
discounts should be very attractive to investors.
CONRAD, SINCE YOU MANAGE THE INTERNATIONAL GROWTH FUND, CAN YOU TELL US A
LITTLE ABOUT THAT ENVIRONMENT? WAS IT VERY DIFFERENT FROM OUR DOMESTIC
ECONOMIC SCENARIO?
Conrad: I think in the past year that international investing(1) has been
remarkably challenging. Investors needed to remind themselves of the proven
long-term benefits of international diversification. Foreign equity markets
took a back seat to the U.S. stock
The Victory Growth Fund
Portfolio Manager
William Ruple
<TABLE>
Total Return As of 10/31/96
<CAPTION>
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 25.66% 19.65%
Since Inception Annualized
12/3/93 16.57% 14.63%
</TABLE>
<TABLE>
Victory Growth Fund
vs. S&P 500
(Dollars in thousands)
<CAPTION>
Growth Stock Growth Stock @ NAV S&P 500
<S> <C> <C> <C>
12/93 9,525 10,000 10,000
3/94 9,189 9,647 9,621
6/94 9,197 9,655 9,661
9/94 9,509 9,983 10,133
12/94 9,478 9,950 10,132
3/95 10,202 10,711 11,118
6/95 11,048 11,599 12,179
9/95 11,837 12,428 13,147
12/95 12,461 13,082 13,939
3/96 13,089 13,741 14,687
6/96 13,916 14,609 15,346
10/96 14,838 15,578 16,257
Graph reflects investment growth from end of month of fund commencement.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged
index that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and the reinvestment of dividends and capital gains
distributions, and unless indicated show the effect of the maximum 4.75%
sales charge. Investment returns and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Total return figures set forth above may reflect the waiver of
a portion of certain fees for various periods since the Fund's inception
date. In such cases and without such waiver of fees, the total returns would
have been lower.
Fee waivers are voluntary and may be modified or terminated at any time.
(1) International investing is subject to certain factors such as currency
exchange rate volatility, possible political, social or economic instability,
foreign taxation and differences in auditing and other financial standards.
32
<PAGE>
VICTORY EQUITY FUNDS (GROWTH)
markets, and the U.S. dollar gained strength throughout the year. Generally,
foreign central banks lowered their discount rates while Fed watchers
anticipated a U.S. rate hike. The end result is that the MSCI EAFE Index*
trailed the S&P 500 by more than 50% in the twelve months that ended on October
31, 1996.
Let's stay with the international fund for a minute. You've said that the S&P
500 outperformed the EAFE Index. How did the International Growth Fund do
against the EAFE, since that's the Fund's benchmark?
Conrad: The Fund returned 5.65%** during the past twelve months while EAFE
returned 10.47% in U.S. dollar terms. About 3% of the under performance in
the fourth quarter of 1995 is attributable to the Fund's exposure to emerging
markets. In the calendar's first quarter of 1996, above-average turnover of
the portfolio holdings was partly responsible for 1% of under performance.
However, in the second half of the Fund's fiscal year, the Fund outperformed
EAFE by a small margin. This was accomplished by reducing exposures in Japan
and by successful stock selection in Australia, Malaysia and the Netherlands.
THANKS, CONRAD. WE'LL COME BACK TO THE INTERNATIONAL FUND IN JUST A MOMENT.
IN THE MEANTIME, BILL CAN YOU TELL US ABOUT THE GROWTH FUND'S PERFORMANCE
THIS YEAR?
Bill: Sure, in mid-1995, we adjusted the Fund's diversification profile from
"sector neutral"
The Victory Special Growth Fund
Portfolio Manager
Annette Geddes
<TABLE>
Total Return As of 10/31/96
<CAPTION>
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 19.73% 14.03%
Since Inception Annualized
1/11/94 13.19% 11.25%
</TABLE>
<TABLE>
Victory Special Growth Fund
vs. Russell 2000
(Dollars in thousands)
<CAPTION>
Special Growth Special Growth @ NAV Russell 2000
<S> <C> <C> <C>
1/94 9,524 10,000 10,000
4/94 9,352 9,820 9,494
7/94 8,705 9,140 9,217
10/94 9,324 9,790 9,660
1/95 9,062 9,515 9,399
4/95 10,054 10,557 10,180
7/95 11,285 11,849 11,520
10/95 11,266 11,829 11,433
1/96 12,020 12,621 12,214
4/96 13,708 14,393 13,539
7/96 12,067 12,671 12,316
10/96 13,489 14,163 13,331
Graph reflects investment growth from end of month of fund commencement.
The Russell 2000 Index (Russell 2000) is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
small- to mid-sized companies.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and the reinvestment of dividends and capital gains
distributions, and unless indicated show the effect of the maximum 4.75%
sales charge. Investment returns and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than
their original cost. Total return figures set forth above may reflect the
waiver of a portion of certain fees for various periods since the Fund's
inception date. In such cases and without such waiver of fees, the total
returns would have been lower. Small-Cap funds carry additional risks and
historically have experienced a greater degree of market volatility than
average.
Fee waivers are voluntary and may be modified or terminated at any time.
* MSCI EAFE Index-Morgan Stanley Capital International Europe, Australia,
and Far East Index (MSCI EAFE) is a broad based capitalization weighted
unmanaged index that represents the general performance of over 1,000
companies of the European, Australian and Far Eastern equity markets.
** Reflects the total return on Class A shares without showing the effect of
the 4.75% maximum sales charge.
33
<PAGE>
VICTORY EQUITY FUNDS (GROWTH)
relative to the S&P 500 to a more growth oriented approach. As a result, more
emphasis was placed on the consumer staples and technology sectors. This
strategy really paid off well because we were in an environment of low inflation
and steady growth in the large cap sector. As a result, the Fund returned
25.66%, which does not reflect the effect of the 4.75% maximum sales charge, vs.
24.09% for the S&P 500 over the past year ended October 31, 1996.
DID YOU ADD ANY NEW SECURITIES TO THE PORTFOLIO?
Bill: Actually, I did. I took advantage of the July stock market sell-off to
add positions in technology companies like Cisco Systems, Electronic Data
Systems and 3Com.
ANNETTE, WHAT ABOUT THE SPECIAL GROWTH FUND? HOW DID IT PERFORM AND WHAT
SECTORS DID YOU INVEST IN?
Annette: Well, technology stocks represent the largest commitment in the
portfolio and this sector worked out well for us. New product launches and
solid earnings reports bolster our confidence that good stock selection will
bring in rewards. In the computer software business, two of our promising
holdings are Viasoft and Systemsofe. In the pharmaceutical arena, one our
largest holdings, Interneuron, had a very successful launch of its diet drug
Redux. Basically, most of the stocks we own either already have or are in
the process of, resuming leadership positions within their respective
industries.
As far as the performance of the Fund is concerned, the fundamental
characteristics of the portfolio have never been
The Victory International Growth Fund
<TABLE>
Total Return As of 10/31/96
<CAPTION>
INTERNATIONAL GROWTH Class A
Maximum
Net Asset Offering
Value Price
<S> <C> <C>
One Year 5.65% 6.65%
Annualized Return
Three Years 4.77% 3.09%
Five Years 8.51% 7.45%
Since Inception
5/18/90 6.23% 5.44%
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH Class B
Contingent
Net Asset Deferred
Value Charges
<S> <C> <C>
Since Inception
3/1/96 1.11% -3.89%
</TABLE>
<TABLE>
Victory Internationl Growth Fund
vs. MSCI EAFE
(Dollars in thousands)
<CAPTION>
International Growth International Growth MSCII EAFE
Class A Class A @ NAV
<S> <C> <C> <C>
5/90 9,527 10,000 10,000
12/90 8,841 9,279 8,633
7/91 9,187 9,643 9,199
2/92 9,490 9,961 9,134
9/92 9,592 10,068 8,843
4/93 10,764 11,298 10,424
11/93 11,396 11,962 10,511
6/94 12,741 13,374 12,260
1/95 11,778 12,362 11,680
8/95 13,302 13,963 12,733
3/96 13,915 14,606 13,898
10/96 13,985 14,679 13,956
Graph reflects investment growth from end of month of fund commencement.
*MSCI EAFE Index-Morgan Stanley Capital International Europe, Australia,
and Far East Index (MSCI EAFE) is a broad based capitalization weighted
unmanaged index that represents the general performance of over 1,000
companies of the European, Australian and Far Eastern equity markets.
</TABLE>
The performance data quoted represent past performance and are not indicative
of future results. Total returns are historical and include the change in
share price and reinvestment of dividends and capital gain distributions.
Performance of the different classes of shares will vary based on the
differences in sales charges and class specific expenses paid by
shareholders. Class A performance with sales charge shows the effect of the
maximum 4.75% sales charge applied at the beginning of the period. Class B
performance with sales charge shows the effect of the applicable contingent
deferred sales charge, assuming a complete redemption as of October 31, 1996.
Investment returns and principle value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The total return figures set forth above may reflect the waiver of a portion
of certain fees for various periods since the Fund's inception. In such
instances and without such waiver of fees, the total returns would have been
lower.
Fee waivers are voluntary and may be modified or terminated at any time.
34
<PAGE>
VICTORY EQUITY FUNDS (GROWTH)
stronger. On average, the companies in the portfolio reflect earnings gains of
58% for the current year and their price/earnings ratio at 33 times is at a
discount to this earnings growth rate. The portfolio remains broadly diversified
with 25 industry groups represented, and we think we're well diversified and
well positioned for '97.
BILL, WHAT'S YOUR OUTLOOK?
Bill: Well, I don't think we should ignore the fact that there could be a
pullback in the market, but it's our view that the equity market can
continue to rise as long as economic growth slows to a more sustainable
2 1/2% rate. In the slow growth-low inflation environment that we envision
for the near-term future, we believe investors will continue to focus on
stable and consistent earning growth stocks.
CONRAD, LET'S GO BACK TO THE INTERNATIONAL FUND FOR A MINUTE. CAN YOU TELL US
ABOUT ANY TRENDS YOU'RE SEEING IN FOREIGN STOCK MARKETS AND HOW THAT HAS
AFFECTED YOUR CHOICES FOR THE PORTFOLIO?
Conrad: For the sixth year running, Japan proved to be one of the worst
performing stock markets outside of the U.S., with a negative total return
of 0.83% in the trailing 12 months to October 31, 1996, vs. the EAFE's
+10.47%. Non Japanese Asian markets grew 19.69% during the same time period
and were led by countries like Hong Kong and Malaysia. It's important for
investors to remember that Hong Kong and U.S. currencies are tied, so at the
present, there is very little currency risk involved with investments in
Hong Kong. Australia was also up strongly in the twelve months ended October
31, 1996, aided by official interest rate cuts and rising GDP expectations.
WHAT ABOUT EUROPE?
Conrad: Well, in what we consider "Continental Europe" the stock markets
returned 16.09% in the same time period and this was spurred by interest rate
cuts at the major central banks. Let me give you a specific example: The MSCI
United Kingdom Index* returned 20.33% in the twelve month period to
October 31, 1996, which is almost double that of the broader EAFE return.
Generally speaking, I'd say that over the past several months, fears of a
Federal Reserve Bank interest rate hike have caused emerging stock markets to
pull back as those countries rely heavily on dollar inflows to keep their
economies buoyant. Consequently, the developed markets of Europe had begun to
outperform their smaller cousins.
As far as how this affects the International Growth Fund, we remain under
weighted in Japan relative to the EAFE and hold high quality stocks there.
We've increased our exposure to Hong Kong. Though we remain cautious, we are
reviewing sound fundamentals of companies in Chile, Portugal, Taiwan and
Thailand.
* MSCI United Kingdom Index--A capitalization weighted index,
including net dividends and capital gains reinvested, consisting of
137 companies of the United Kingdom.
35
<PAGE>
[photo of a female scientist]
Think investing is as complicated as rocket science? It is.
If you think successful investing can only be done by a professional with over
100 years of investment experience, consider one of the mutual funds offered by
Victory. We'll see if one of our portfolio managers can engineer the right
investment solution for you so you can get a smooth and easy landing.
The Victory Funds are distrubuted by BISYS Fund Services which is not affiliated
with KeyCorp. Certain subsidiaries of KeyCorp provide services to the Victory
Funds, including advisory services, and recieve fees from the funds for their
services, as set forth in the prospectus.
For more information about the Victory Funds, including charges and expenses,
request a prospectus by calling 1-800-KEY-FUND (1-800-539-3863). Please read the
prospectus carefully before investing or sending money.
o Not FDIC Insured
o No Bank Guarantee
o May Lose Value
[logo]
Victory Funds
<PAGE>
[graphic]
ARE WE FAILING TO PLAN OR PLANNING TO FAIL?
Many people just can't seem to get a financial plan started. Baby Boomers
are struggling to send their children to college and they wonder about how
to save for retirement at the same time.
Generation Xers are trying to establish themselves in the job market and to
set up their own households. But amid large mortgages, soaring medical and
child-care costs and numerous credit card bills, there never seems to be any
money left over to set aside as savings.
Most people don't plan to fail at financial security...however, they fail to
plan for it. Financial planning may require a bit of a sacrifice and it means
you may have to give up little luxuries like eating out or buying new
clothes. But by shifting our focus from the immediate delight to the future
need, we can learn to defer gratification and achieve financial security.
HOW CAN I GET STARTED?
FINANCIAL PLANNING ISN'T THAT HARD TO DO, BUT IT DOES TAKE DISCIPLINE. HERE
ARE SOME TIPS TO HELP YOU GET STARTED ON THE ROAD TO FINANCIAL SECURITY:
* NO MATTER WHAT YOUR AGE, IT IS NEVER TOO LATE TO START. Obviously, if you
begin when you are younger, you'll have more time to acquire and grow your
nest egg. But start saving now, no matter how old you are. You'll be
surprised at how quickly your savings can add up.
* SIMPLIFY YOUR LIFESTYLE. Everyone can find a few ways to reduce their
discretionary expenses. You may opt to eat in more often, rent movies
instead of going out, or plan a stay-at-home vacation in order to stay true
to your savings plan.
* PAY YOURSELF FIRST. Determine what you can afford to save each month, then
transfer it to savings first, before you pay bills or spend money.
* PAY DOWN CREDIT CARDS AND INSTALLMENT LOANS and try to pay cash for
purchases such as clothes, entertainment and gasoline. If you need to use
your credit card, try to pay off the balance at the end of the month. At the
very least, pay more than the minimum amount due. Research shows that if you
have a $1,500 credit card balance and only pay $25.00 a month or 2% of the
minimum balance (whichever is greater), it will take you almost 10 years to
pay off your debt. In the meantime, you will have incurred $1,543.00
in interest charges.*
* CONTRIBUTE A SET AMOUNT EACH MONTH TO A MUTUAL FUND OR OTHER INVESTMENT.
Many mutual funds allow you to have your money automatically withdrawn from
your checking or savings account, thereby making it very convenient for you
to maintain your investment program.
* EVEN IF YOU BEGIN BY SAVING ONLY A FEW DOLLARS EACH WEEK, STICK WITH YOUR
SAVINGS PLAN. When you pay down credit card bills or earn a raise at work,
try to supplement your savings with a portion of this "found" money.
* INVEST WITH A LONG-TERM FOCUS. Instead of trying to beat the market through
speculative, high-risk investments, consider looking for low-to-moderate risk
investments that grow over time. Mutual funds offer a wide range of
investment opportunities that provide diversification, asset allocation and
acceptable levels of risk.
* Assumes APR of 16.99% (Source: Mutual Funds Product Group).
37
<PAGE>
[graphic]
GLOSSARY OF OFTEN-USED INVESTMENT TERMS
* BOND RATING
An indication of the risk of a bond issue, as determined by a bond rating
service (such as Moody's or Standard & Poor's). Bonds with the highest
ratings (AAA) have the lowest credit risk.
* PAR VALUE
The face value of a security. A bond selling at par, for instance, is worth
the same dollar amount it was issued for or at which it will be redeemed at
maturity--typically, $1000 per bond.
* PORTFOLIO
Any combination of more than one security. A mutual fund typically has a
large, diversified portfolio of securities or of investments in order to help
lower investment risks.
* SETTLEMENT DATE
Date by which an executed order must be settled, either by a buyer paying for
the securities with cash or by a seller delivering the securities and
receiving the proceeds of the sale for them. In a regular way delivery of
stocks and bonds, the settlement date is three business days after the trade
was executed. For listed options and government securities, settlement is
required by the next business day.
* SHORT-TERM CAPITAL GAIN (LOSS)
A capital gain (loss) arising from an asset which was held six months or less.
Short-term capital gains are taxed at the taxpayer's ordinary tax rate.
* CALL OPTIONS
A contract for the right to buy a specified number of shares at a
predetermined price on or before a stated date. The purchaser of a call
option feels the underlying stock price will rise, and he purchases the call
option from an investor equally convinced the underlying stock price will
either stay the same or fall.
* PUT OPTION
A specified contract for the right to sell a specified number of shares at a
predetermined price on or before a stated date. The purchaser of a put option
feels the underlying stock price will fall, and he purchases the put option
from an investor equally convinced the price will stay the same or rise.
* PROSPECTUS
A document providing investors information about the fund's investment
objective, policies, and risks. It also provides the basic information and
details of the funds operations and services; information on sales charges;
redemption rights; tax status of the dividends and income; expenses; the fund
custodian and other service providers; and how to buy and sell shares.
* DOLLAR COST AVERAGING OR CONSTANT DOLLAR PLAN*
A method of accumulating assets by investing a fixed amount of dollars in
securities at set intervals. The result is that more shares are purchased
when the price is low and fewer shares are purchased when the price is high.
The overall cost is lower than it would be if a constant number of shares
were bought at set intervals assuming a general upward price trend.
* CONVERTIBLE SECURITIES
Corporate bonds, preferred stocks and other securities that carry an option
to be exchanged for, or "converted" into, a set number of shares of common
stock.
* This strategy does not assure profit and does not protect against loss in
declining markets. An investor should be prepared to continue the program of
investment at regual intervals, even during economic downterms, in order to
fully utilize a dollar cost averaging program.
38
<PAGE>
How To Read Your Financial Statement
This guide will assist you in extracting information from the report which is
most important to you.
The Financial Statements summarize and describe the Fund's financial
transactions. They are broken down into four different statements.
THE STATEMENT OF ASSETS AND LIABILITIES
[graphic]
Presents all of the assets and liabilities of each mutual Fund. This is each
individual Fund's "balance sheet" as of the date of the statement.
1. Summary of the mutual fund's assets stated at market value including
investments owned, dividends, interest and other amounts owed to each Fund by
outside parties, and other assets owned by each fund.
2. Summary of all amounts owed by each Fund including distributions declared
but not yet paid to shareholders and other amounts due to outside parties.
3. Summary of the amounts that comprise each Fund's net assets including
capital, undistributed net investment income, unrealized gains from
investments owned and realized gains from investments sold.
4. The number of shares owned by shareholders of each Fund.
5. The market worth of each mutual fund's total net assets divided by the
number of outstanding shares.
6. The net asset value per share plus sales charges.
THE STATEMENT OF OPERATIONS
[graphic]
Presents the results of operating activities during the period.
1. Investment income includes dividend and interest income earned from
holding investments.
2. Summary of expenses incurred by each Fund from its operations.
3. Summary of realized gains or losses from selling each Fund's investments
and the change during the period in unrealized gains or losses from holding
each Fund's investments.
4. Net change due to mutual fund operations.
39
<PAGE>
HOW TO READ YOUR FINANCIAL STATEMENT
THE STATEMENT OF CHANGES IN NET ASSETS
[GRAPHIC]
Presents the activity that affects the value of total net assets of each Fund
during the two most recent reporting periods.
1. See Statement of Operations.
2. Distributions declared to shareholders from net investment income or from
net realized gains during the periods. Each Fund declares distributions based
on investment income and taxable realized gains, which may differ from the
Fund's operations for financial statement purposes. Thus, distributions may
exceed net investment income or realized gains.
3. Dollar amount of mutual fund shares issued, reinvested and redeemed during
the periods. Detail of this activity pertaining to Funds with two share
classes is presented in the footnotes.
4. Compares total net assets as of the end of the current and prior periods.
5. Number of mutual fund shares issued, reinvested and redeemed during the
periods. Detail of this activity pertaining to Funds with two share classes
is presented in the footnotes.
The Notes to Financial Statements provide explanatory information to the
financial statements. These include information on accounting methods used
by the mutual Fund, contractual arrangements between the Fund and its service
providers, certain transactions affecting the Fund, and other general
information about the Fund.
THE FINANCIAL HIGHLIGHTS
[GRAPHIC]
Present changes in net asset value per share as well as certain ratios and
supplementary data for the five most recent reporting periods.
1. The table presents changes in the net asset value per share caused by the
Fund's investment activities and distributions.
2. Total return presents the historical return on an investment in the Fund
throughout the period including changes in net asset value per share and
reinvestment of dividends. The total return presented excludes sales charges.
3. Actual ratios of expenses and net investment income to average net assets
during the period.
4. Hypothetical ratios of expenses and net investment income to average net
assets during the period assuming no fee waivers or expense reimbursements
had occurred.
5. Portfolio turnover presents the rate of investment activity. Higher
turnover indicates more active investment purchases and sales.
40
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
U.S. GOVERNMENT OBLIGATIONS FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
- ---------------------------------------------------------
U.S. TREASURY NOTES (22.2%)
$70,000 7.50%, 1/31/97 $ 70,356
10,000 6.75%, 2/28/97 10,033
15,000 6.88%, 2/28/97 15,056
50,000 6.63%, 3/31/97 50,219
25,000 6.50%, 4/30/97 25,083
50,000 6.50%, 5/15/97 50,229
25,000 6.13%, 5/31/97 25,039
25,000 5.63%, 6/30/97 25,024
30,000 6.38%, 6/30/97 30,172
- ---------------------------------------------------------
TOTAL U.S. TREASURY NOTES 301,211
- ---------------------------------------------------------
TOTAL INVESTMENTS 301,211
- ---------------------------------------------------------
- ---------------------------------------------------------
REPURCHASE AGREEMENTS (77.9%)
60,000 Aubrey G. Lanston & Co.,
Inc.,
5.54%, 11/1/96,
(Collateralized by $60,000
various U.S. Treasury
Securities, 4.75%-10.63%,
8/31/98-8/15/15, market
value-$61,907) 60,000
65,000 Barclays de Zoete Wedd
Securities, Inc.,
5.53%, 11/1/96,
(Collateralized by $65,244
U.S. Treasury Notes,
6.38%, 3/31/01, market
value-$66,301) 65,000
60,000 Chase Securities, Inc.,
5.50%, 11/1/96,
(Collateralized by $60,923
U.S. Treasury Notes,
5.13%-5.88%,
12/31/98-3/31/99, market
value-$61,203) 60,000
60,000 Dean Witter Reynolds, Inc.,
5.47%, 11/1/96,
(Collateralized by $61,964
various U.S. Treasury
Securities, 0.00%-7.25%,
11/21/96-5/15/16, market
value-$61,201) 60,000
50,000 Deutsche Morgan Grenfell,
5.40%, 11/1/96,
(Collateralized by $51,645
various U.S. Treasury
Securities, 0.00%-6.38%,
3/20/97-8/15/02, market
value-$51,001) 50,000
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$65,000 Donaldson-Lufkin Jenrette
Securities Corp.,
5.55%, 11/1/96,
(Collateralized by
$160,616 U.S. Treasury
Strips, 0.00%,
5/15/97-8/15/17, market
value-$66,300) $ 65,000
65,000 Goldman Sachs Group L.P.,
5.54%, 11/1/96,
(Collateralized by $63,763
various U.S. Treasury
Securities, 5.50%-7.88%,
6/30/97-2/15/21, market
value-$66,301) 65,000
65,000 Nesbitt Burns Securities,
5.55%, 11/1/96,
(Collateralized by
$236,218 U.S. Treasury
Strips, 0.00%,
5/15/04-8/15/23, market
value-$66,300) 65,000
58,055 Lehman Brothers, Inc.,
5.55%, 11/1/96,
(Collateralized by $58,280
U.S. Treasury Notes,
6.13%, 8/31/98, market
value-$59,216) 58,055
60,000 Morgan Stanley Group, Inc.,
5.53%, 11/1/96,
(Collateralized by $61,670
U.S. Treasury Bills,
0.00%, 12/26/96, market
value-$61,202) 60,000
335,000 NationsBanc Capital Markets,
Inc.,
5.55%, 11/1/96,
(Collateralized by
$334,634 various U.S.
Treasury Securities,
0.00%-9.13%,
11/15/96-10/31/01, market
value-$341,701) 335,000
50,000 Nomura Securities
International, Inc.,
5.40%, 11/1/96,
(Collateralized by $46,900
U.S. Treasury Notes,
7.07%, 8/15/01, market
value-$51,781) 50,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
U.S. GOVERNMENT OBLIGATIONS FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$65,000 UBS Securities, Inc.,
5.53%, 11/1/96,
(Collateralized by
$150,284 various U.S.
Treasury Strips, 0.00%,
5/15/08-5/15/10, market
value-$66,301) $ 65,000
- ---------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS 1,058,055
- ---------------------------------------------------------
TOTAL (COST $1,359,266)(a) $1,359,266
- ---------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $1,357,817.
(a) Cost for federal income tax and financial reporting purposes are the same.
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
PRIME OBLIGATIONS FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
- ----------------------------------------------------------
BANK DEPOSIT NOTES (0.8%)
$ 4,000 Huntington Bank Note,
5.85%, 9/30/97 $ 4,000
- ----------------------------------------------------------
TOTAL BANK DEPOSIT NOTES 4,000
- ----------------------------------------------------------
- ----------------------------------------------------------
BANKER'S ACCEPTANCES (1.8%)
3,000 Republic Bank of New York,
5.44%, 11/26/96 2,989
4,000 First National Bank of
Chicago, 5.25%, 12/3/96 3,981
2,200 Republic Bank of New York,
5.54%, 1/21/97 2,173
- ----------------------------------------------------------
TOTAL BANKER'S ACCEPTANCES 9,143
- ----------------------------------------------------------
- ----------------------------------------------------------
CERTIFICATES OF DEPOSIT (0.4%)
2,000 Deutsche Bank,
5.94%, 6/10/97 1,998
- ----------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT 1,998
- ----------------------------------------------------------
- ----------------------------------------------------------
COMMERCIAL PAPER (36.0%)
3,700 Ameritech Corp.,
5.26%, 11/25/96 3,687
4,565 Asset Securitization Co-op
Corp., 5.32%, 12/4/96 4,543
5,000 Asset Securitization Co-op
Corp., 5.35%, 12/9/96 4,972
3,800 Broadway Capital Corp.,
5.43%, 11/20/96 3,789
4,500 Broadway Capital Corp.,
5.30%, 12/31/96 4,460
3,692 Broadway Capital Corp.,
5.50%, 1/7/97 3,654
6,000 CIMC, 5.45%, 1/9/97, LOC
Societe Generale 5,937
10,000 Coca-Cola Co.,
5.23%, 12/2/96 9,955
10,045 Fleet Funding, Inc.,
5.30%, 11/15/96 10,024
8,119 Fleet Funding, Inc.,
5.27% 12/2/96 8,082
5,000 General Motors Acceptance
Corp., 5.32%, 12/16/96 4,967
3,200 IBM Credit Corp.,
5.30%, 11/13/96 3,194
2,500 Merrill Lynch, 5.27%,
11/20/96 2,493
5,000 Merrill Lynch, 5.28%,
12/2/96 4,977
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 10,000 Morgan Stanley Group, Inc.,
5.70%, 11/1/96 $ 10,000
8,000 Pemex, 5.33%, 12/27/96, LOC
Swiss Bank 7,934
3,515 Retailer Funding Corp.,
5.30%, 12/4/96 3,498
2,873 Retailer Funding Corp.,
5.30%, 12/5/96 2,858
10,000 Sanwa Business Credit Corp.,
5.40%, 11/8/96 9,989
5,000 Sanwa Business Credit Corp.,
5.30%, 11/15/96 4,990
4,000 Sharp Electronics Corp.,
5.35%, 12/20/96 3,971
6,070 Sheffield Receivables Corp.,
5.27%, 11/8/96 6,064
15,000 Smith Barney, Inc.,
5.26%, 11/14/96 14,971
6,865 Sony Capital Corp.,
5.27%, 11/20/96 6,846
8,000 Sony Capital Corp.,
5.26%,12/23/96 7,939
5,000 Toshiba America, Inc.,
5.47%, 1/2/97 4,953
5,000 Toyota Motor Credit Corp.,
5.24%, 12/20/96 4,964
4,000 Unibanco, 5.48%, 1/31/97,
LOC Westdeutsche
Landesbank 3,945
5,800 Vehicle Services, 5.52%,
9/6/97, LOC NationsBank of
Texas 5,770
5,000 WMX Technologies, Inc.,
5.28%, 11/4/96 4,998
- ----------------------------------------------------------
TOTAL COMMERCIAL PAPER 178,424
- ----------------------------------------------------------
- ---------------------------------------------------------
CORPORATE BONDS(0.5%)
1,000 PepsiCo, Inc.,
7.00%, 11/15/96 1,000
1,500 WMX Technologies, Inc.,
7.13%, 3/22/97 1,507
- ----------------------------------------------------------
TOTAL CORPORATE BONDS 2,507
- ----------------------------------------------------------
- ---------------------------------------------------------
CORPORATE NOTES(33.8%)
3,020 Astro Aluminum,
5.50%*, 4/1/05** 3,020
5,000 AT&T Capital Corp.,
5.45%*, 11/1/96 5,000
10,000 AT&T Capital Corp.,
5.41%*, 11/29/96 10,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
PRIME OBLIGATIONS FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 3,300 Baylis Group Partnership,
5.50%*, 1/1/10** $ 3,300
5,000 Bear Stearns Cos.,
5.91%*, 12/16/96 5,002
5,000 Bear Stearns Cos.,
5.44%*, 2/14/97 5,000
200 Carelife, Inc.,
5.50%*, 8/1/11** 200
2,350 Carelife, Inc.,
5.50%*, 8/1/11** 2,350
1,485 Cleveland Steel Container,
5.50%*, 12/1/08** 1,485
5,000 Dean Witter Discover & Co.,
5.69%*, 2/3/97 5,002
835 Dietz Road Ltd. Partnership,
5.50%*, 11/1/08** 835
2,920 Dome Corp.,
5.52%*, 8/31/16** 2,920
247 D.J. Schipper Enterprise,
5.51%*, 4/1/09** 247
1,500 Ford Motor Credit Corp.,
5.68%, 5/27/96 1,502
2,500 Ford Motor Credit Corp.,
5.46%*, 3/14/97 2,499
5,000 Ford Motor Credit Corp.,
5.61%*, 5/20/97 4,998
15,000 General American Life
Insurance, 5.70%*,
12/31/89, GIC** 15,000
1,800 GMH Enterprises,
5.50%*, 7/1/03** 1,800
930 GNWT, 5.40%*, 11/1/09** 930
335 Highland Road Partners,
5.50%*, 10/1/04** 335
815 Highland Road Partners,
5.50%*, 10/1/04** 815
4,000 Huntington National Bank,
5.40%*, 11/13/96 4,000
4,000 Huntington National Bank,
5.36%*, 6/27/97 3,997
2,000 IBM Credit Corp.,
5.60%, 11/6/96 2,000
5,000 Industrial Development
Authority of Bedford, VA,
5.70%*, 12/12/96 5,000
22,000 Lehman Government Securities
Master Note, 5.71%*,
12/31/99** 22,000
900 McKinley Air Transport,
5.50%*, 8/1/09** 900
940 MCMC Pob LII,
5.50%*, 8/1/14** 940
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 3,125 Morgan Stanley Group, Inc.,
5.74%*, 1/20/97 $ 3,127
8,000 Morgan Stanley Group, Inc.,
5.73%*, 3/15/01** 8,000
3,340 Olympic Steel Corp.,
5.40%*, 10/1/08** 3,340
675 Pharmed, Inc. Project,
5.40%*, 4/1/09** 675
1,125 Presrite Corp.,
5.90%*, 1/1/04** 1,125
3,280 Reichert Limited
Partnership, 5.50%*,
4/15/11** 3,280
600 Rivnut Engineered Products,
5.50%*, 2/1/01** 600
10,000 RKS LLC Health Care, 5.45%*,
5/1/26** 10,000
840 S & SLP Project,
5.50%*, 12/1/07** 840
2,963 Schipper Enterprises,
5.51%*, 4/1/09** 2,963
15,000 Sea River Maritime Exxon
Shipping, 5.42%*,
10/1/01** 15,000
750 Sofa Express Project,
5.50%*, 4/1/06** 750
1,660 Tell-Schipper Properties,
Inc. 5.51%*, 10/1/03** 1,660
3,500 Transamerica Financial,
5.48%*, 5/24/97 3,498
1,890 Zanetos Partnership Project,
5.50%*, 7/1/13** 1,890
- ----------------------------------------------------------
TOTAL CORPORATE NOTES 167,825
- ----------------------------------------------------------
- ----------------------------------------------------------
MEDIUM TERM NOTES (3.0%)
1,000 Associates Corp. of North
America, 7.35%, 1/24/97 1,004
5,000 Bear Stearns Cos., Inc.,
5.53%*, 2/14/97 5,000
1,500 Ford Motor Credit Co.,
7.80%, 3/17/97 1,511
4,000 General Motors Acceptance
Corp., 7.60%, 1/9/97 4,014
1,100 General Motors Acceptance
Corp., 7.45%, 6/5/97 1,111
1,000 Morgan Stanley Group, Inc.,
7.79%, 2/3/97 1,006
1,000 Phillip Morris Cos., Inc.,
8.75%, 6/15/97 1,017
- ----------------------------------------------------------
TOTAL MEDIUM TERM NOTES 14,663
- ----------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
PRIME OBLIGATIONS FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
- ----------------------------------------------------------
MUNICIPAL BONDS (1.5%)
OHIO (1.5%):
$ 7,500 Cuyahoga County Taxable
Economic Development
Revenue, 5.49%*, 6/1/22** $ 7,500
- ----------------------------------------------------------
TOTAL MUNICIPAL BONDS 7,500
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. GOVERNMENT AGENCIES (9.0%)
FEDERAL FARM CREDIT BANK:
4,030 5.93%, 7/1/97 4,035
3,500 5.93%, 6/13/97 3,500
FEDERAL HOME LOAN BANK:
4,000 5.38%, 3/14/97 4,000
4,000 5.40%, 3/25/97 3,998
5,000 4.25%, 6/30/97 4,944
2,050 5.80%, 11/4/97 2,050
FEDERAL HOME LOAN MORTGAGE CORP.:
5,500 5.10%, 1/13/97 5,500
FEDERAL NATIONAL MORTGAGE ASSOC.:
4,000 5.60%, 11/1/96 4,000
STUDENT LOAN MORTGAGE ASSOC.:
10,000 5.37%*, 9/3/97 9,994
2,400 6.00%, 9/12/97 2,400
- ----------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 44,421
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. TREASURY NOTES (1.6%)
4,000 8.50%, 4/15/97 4,051
4,000 5.75%, 9/30/97 3,998
- ----------------------------------------------------------
TOTAL U.S. TREASURY NOTES 8,049
- ----------------------------------------------------------
TOTAL INVESTMENTS 438,530
- ----------------------------------------------------------
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
- ----------------------------------------------------------
REPURCHASE AGREEMENTS (12.2%)
$ 20,000 Goldman Sachs Group, L.P.,
5.54%, 11/1/96,
(Collateralized by $20,664
U.S. Treasury Notes,
5.50%, 4/15/00, market
value - $20,401) $ 20,000
20,572 Lehman Brothers, Inc.,
5.55%, 11/1/96,
(Collateralized by $20,655
U.S. Treasury Notes,
6.13%, 8/31/98, market
value - $20,987) 20,572
20,000 NationsBanc Capital Markets,
Inc., 5.55%, 11/1/96,
(Collateralized by $22,771
U.S. Treasury Strips,
0.00%, 5/15/98-2/15/99,
market value - $20,400) 20,000
- ----------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS 60,572
- ----------------------------------------------------------
TOTAL (COST $499,102) (A) $499,102
- ----------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $496,019.
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rate reflected on the Schedule of Investments is
the rate in effect on October 31, 1996.
** Put and demand features exist allowing the Fund to require the repurchase of
the instrument within variable time periods of less than one year.
GIC -- Guaranteed Insurance Contract.
LOC -- Letter of Credit.
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
FINANCIAL RESERVES FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
- ----------------------------------------------------------
BANKER'S ACCEPTANCES (0.5%)
$ 4,000 FNB Chicago,
5.48%, 12/30/96 $ 3,964
- ----------------------------------------------------------
TOTAL BANKER'S ACCEPTANCES 3,964
- ----------------------------------------------------------
- ----------------------------------------------------------
COMMERCIAL PAPER (41.8%)
5,000 Ameritech Corp.,
5.40%, 1/30/97 4,932
11,157 Arizona Higher Education
Loan Program,
5.30%, 11/1/96,
LOC Dresdner Bank 11,157
10,000 Asset Securitization Co-op
Corp.,
5.32%*, 12/4/96 9,951
10,000 Asset Securitization Co-op
Corp., 5.35%, 12/9/96 9,944
4,500 Avco Financial Services,
Inc.,
5.25%, 11/15/96 4,491
5,000 Banco Nacional Comerico,
5.40%, 12/5/96,
LOC Societe Generale 4,975
10,138 Broadway Capital Corp.,
5.37%, 1/27/97 10,006
10,000 Canadian Wheat Board,
5.42%, 12/4/96 9,950
13,240 Coca-Cola Co.,
5.23%, 12/2/96 13,180
20,000 Fleet Funding Corp.,
5.30%, 11/15/96 19,959
12,000 Fleet Funding Corp.,
5.27%, 12/2/96 11,945
15,000 Ford Motor Credit Corp.,
5.44%, 1/29/97 14,798
5,000 General Motors Acceptance
Corp.,
5.32%, 12/16/96 4,967
5,000 Merrill Lynch Corp.,
5.28%, 12/2/96 4,977
15,869 Nebraska Higher Education
Capital Services,
5.37%, 11/4/96,
LOC State Street 15,862
5,507 Nebraska Higher Education
Loan Program,
5.26%, 11/1/96,
LOC State Street 5,507
13,000 Pemex,
5.33%, 12/27/96 12,892
20,000 Phillip Morris Cos., Inc.,
5.25%, 11/13/96 19,965
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 10,000 Retailer Funding Corp.,
5.27%, 11/15/96 $ 9,979
10,144 Retailer Funding Corp.,
5.27%, 11/20/96 10,116
5,000 Sanwa Business Credit Corp.,
5.34%, 11/4/96 4,998
10,000 Sanwa Business Credit Corp.,
5.37%, 11/6/96 9,992
15,000 Sanwa Business Credit Corp.,
5.30%, 11/15/96 14,969
5,000 Sharp Electronics Corp.,
5.42%, 11/22/96 4,984
10,000 Sheffield Receivables Corp.,
5.27%, 11/8/96 9,990
15,000 Smith Barney, Inc.,
5.26%, 11/14/96 14,972
7,000 Sony Capital Corp.,
5.26%, 12/23/96 6,947
10,000 Toshiba America, Inc.,
5.47%, 1/2/97 9,906
6,000 Toshiba Capital,
5.35%, 11/19/96 5,984
8,000 Toyota Motor Credit Corp.,
5.24%, 12/20/96 7,943
6,000 Unibanco,
5.48%, 1/31/97,
LOC West Deutsche Bank 5,917
15,000 WMX Technologies, Inc.,
5.28%, 11/4/96 14,993
- ----------------------------------------------------------
TOTAL COMMERCIAL PAPER 321,148
- ----------------------------------------------------------
- ----------------------------------------------------------
CORPORATE NOTES (37.3%)
10,000 Armstrong County Hospital,
5.45%*, 9/1/17** 10,000
3,000 Associates Corp.,
6.75%, 6/13/97 3,015
8,000 A T & T Capital Corp.,
5.45%*, 11/1/96 8,000
16,000 A T & T Capital Corp.,
5.41%*, 11/29/96 16,000
2,215 Austin Printing Co.,
5.50%*, 8/1/14** 2,215
3,325 Automated Packaging System,
5.50%*, 10/1/08**,
LOC National City Bank 3,325
5,000 Bank of Hawaii,
5.57%, 11/6/96 5,000
8,000 Bear Stearns Co.,
5.44%*, 5/14/97 8,000
10,000 Bear Stearns Co.,
5.91%*, 12/16/96,
LOC Euroclear 10,004
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
FINANCIAL RESERVES FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 980 Bee Holdings, Inc.,
5.50%*, 9/1/15** $ 980
1,950 Bee Holdings, Inc.,
5.50%*, 9/1/15** 1,950
4,025 Buckeye Corrugated,
5.50%*, 1/1/05** 4,025
4,000 CIT Group Holdings,
7.63%, 12/5/96 4,007
4,000 Ford Motor Credit Corp.,
7.70%, 2/27/97 4,030
1,000 Ford Motor Credit Corp.,
8.05%, 3/28/97 1,009
5,000 Ford Motor Credit Corp.,
5.63%*, 9/2/97 5,004
25,000 General American Life
Insurance,
5.70%*, 12/31/89** GIC 25,000
4,000 General Motors Acceptance
Corp.,
7.60%, 2/10/97 4,022
5,000 General Motors Acceptance
Corp.,
5.56%*, 10/15/97 5,002
1,350 Hancor, Inc.,
5.50%*, 12/1/04** 1,350
7,000 Huntington National Bank,
5.40%*, 11/13/96 7,000
8,000 Huntington National Bank,
5.44%*, 6/27/97 7,994
7,000 Huntington National Bank,
5.85%, 9/30/97 7,000
8,000 Industrial Development
Authority of Bedford, VA,
5.45%*, 12/12/96 8,000
31,982 Lehman Brothers Government
Security,
5.48%*, 1/1/99 31,982
4,000 Morgan Stanley Group, Inc.,
5.66%*, 10/31/97 4,001
15,000 Morgan Stanley Group, Inc.,
5.73%*, 3/15/01** 15,000
11,800 OFC Corp.,
5.45%*, 1/1/26**,
LOC LaSalle Bank 11,800
650 Parkway Business Plaza,
5.50%*, 4/1/13** 650
1,000 PepsiCo, Inc.,
7.22%, 11/15/96 1,001
3,950 Phillip Morris Cos., Inc.,
8.75%, 6/15/97 4,016
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
$ 7,000 PNC Bank,
5.28%*, 3/4/97 $ 6,998
3,125 Sandridge Foods,
5.50%*, 12/1/00** 3,125
25,000 Sea River Maritime, Inc.,
5.42%*, 10/1/11** 25,000
1,405 SGS Tool Co.,
5.50%*, 8/1/08** 1,405
7,170 Shelbourne Realty,
5.40%*, 4/1/17**
LOC Star Bank 7,170
660 TPC Properties, Inc.,
5.50%*, 11/1/09** 660
5,000 Venturecor, Inc.,
5.45%*, 4/1/36** 5,000
14,000 Xerox Credit Corp.,
5.43%*, 5/13/97 13,993
2,380 Zanetos Partnership Project,
5.50%*, 7/1/13** 2,380
- ----------------------------------------------------------
TOTAL CORPORATE NOTES 286,113
- ----------------------------------------------------------
- ----------------------------------------------
U.S. GOVERNMENT AGENCIES (13.2%)
FEDERAL FARM CREDIT BANK:
5,000 5.93%, 7/1/97 5,007
FEDERAL HOME LOAN BANK:
7,000 5.38%, 3/14/97 7,000
7,000 5.40%, 3/25/97 6,996
8,000 4.25%, 6/30/97 7,910
FEDERAL NATIONAL MORTGAGE ASSOC.:
5,000 5.60%, 11/1/96 5,000
15,000 5.36%*, 5/25/99 15,000
20,000 5.36%*, 7/14/99 20,000
STUDENT LOAN MORTGAGE ASSOC.:
6,000 5.37%*, 9/3/97 5,997
4,000 6.00%, 9/12/97 4,000
10,000 5.53%*, 10/30/97 10,018
10,000 5.34%*, 9/28/98 9,997
4,500 5.39%*, 2/8/99 4,501
- ----------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 101,426
- ----------------------------------------------------------
- ----------------------------------------------
U.S. TREASURY NOTES (1.8%)
7,000 8.50%, 4/15/97 7,090
7,000 5.75%, 9/30/97 6,997
- ----------------------------------------------------------
TOTAL U.S. TREASURY NOTES 14,087
- ----------------------------------------------------------
TOTAL INVESTMENTS 726,738
- ----------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
FINANCIAL RESERVES FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
- -----------------------------------------------------------
REPURCHASE AGREEMENTS (5.4%)
$ 21,405 Lehman Brothers, Inc.,
5.55%, 11/1/96,
(Collateralized by $21,574
U.S. Treasury Notes,
6.13%, 8/31/98, market
value-$21,920) $ 21,405
20,000 NationsBanc Capital Markets,
Inc.,
5.55%, 11/1/96,
(Collateralized by $19,544
various U.S. Treasury
Notes, 6.00-9.13%,
5/15/99-12/31/99, market
value-$20,405) 20,000
- ----------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS 41,405
- ----------------------------------------------------------
TOTAL (COST $768,143) (a) $768,143
- ---------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $767,990.
(a) Cost and value for federal income tax and financial reporting purposes are
the same.
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rate reflected on the Schedule of Investments is
the rate in effect at October 31, 1996.
** Put and demand features exist allowing the Fund to require the repurchase of
the instrument within variable time periods of less than one year.
GIC -- Guaranteed Insurance Contract.
LOC -- Letter of Credit.
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
TAX-FREE MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
- -------------------------------------------------------------
MUNICIPAL BONDS (99.4%)
ALASKA (0.2%):
$ 750 Anchorage, Prerefunded,
5.90%, 6/1/97 $ 759
----------
ARIZONA (1.0%):
1,500 Pima County IDR,
3.90%*, 9/1/09**,
LOC National City Bank 1,500
2,100 Salt River Program,
3.55%, 12/6/96 2,100
----------
3,600
----------
CALIFORNIA (1.6%):
5,500 State,
4.50%, 6/30/97 5,519
----------
COLORADO (0.3%):
1,000 Arvada Industrial,
3.70%*, 8/1/02**,
LOC Union Bank of
Switzerland 1,000
----------
FLORIDA (5.6%):
9,800 Dade County Housing Finance
Authority,
3.80%*, 8/1/05**,
LOC John Hancock 9,800
1,900 Housing Finance,
Prerefunded,
5.50%, 11/1/96 1,900
4,500 Housing Finance Authority of
Broward County,
3.65%*, 12/1/29**,
LOC John Hancock 4,500
1,000 Jacksonville Electric,
3.55%, 12/6/96 1,000
2,000 Sunshine State Government,
3.70%, 12/11/96,
LOC National Westminster
Bank 2,000
----------
19,200
----------
GEORGIA (1.8%):
1,500 Burke County, Oglethorpe
Power,
3.65%, 11/12/96,
LOC Credit Suisse 1,500
4,590 State Residential,
3.75%, 12/1/18**,
LOC FNB Chicago 4,590
----------
6,090
----------
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
ILLINOIS (7.3%):
$ 1,050 Development IDR,
3.75%*, 11/1/08**,
LOC ABN Amro Bank $ 1,050
1,500 Development, Kindlen,
3.80%*, 5/1/06**, LOC
LaSalle National Bank 1,500
3,600 Financial Authority,
3.70%*, 12/1/05**,
LOC LaSalle National Bank 3,600
5,000 Health Facility,
3.50%*, 8/1/15**, LOC
FNB Chicago 5,000
4,900 Health Facility,
3.60%, 12/1/18**, LOC
FNB Chicago 4,900
2,800 Kankakee County IDR,
3.75%*, 12/1/07**,
LOC Societe Generale 2,800
2,470 Lincoln IDR Self Storage,
3.60%*, 2/1/04**,
LOC Bank One Milwaukee 2,470
1,785 River Grove IDR,
3.60%*, 2/1/03**,
LOC Bank One Milwaukee 1,785
1,975 Tinley Park Multi-Family
Revenue,
3.60%*, 12/1/08**,
LOC LaSalle National Bank 1,975
----------
25,080
----------
INDIANA (14.0%):
1,575 Crawfordsville,
3.65%*, 4/1/30**,
LOC Federal Home Loan Bank 1,575
2,334 Duneland School Corp.,
4.21%, 12/30/96 2,335
2,000 Duneland School Corp.,
4.24%, 12/30/96 2,001
4,874 Goshen Community Schools,
4.00%, 12/31/96 4,877
2,600 Greenwood IDR,
3.70%*, 2/1/16**,
LOC Bank One Indianapolis 2,600
1,750 Hamilton Southeastern
Schools,
3.90%, 12/31/96 1,751
1,050 Indianapolis, Calderon,
3.70%*, 2/1/99**,
LOC Bank One Indianapolis 1,050
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
TAX-FREE MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 835 Indianapolis Local,
6.64%, 12/1/96 $ 835
6,755 Michigan City,
4.25%, 12/31/96 6,758
2,540 Scottsburg,
3.70%*, 10/1/09**,
LOC PNC Bank 2,540
4,100 Seymour,
3.65%*, 1/1/31**,
LOC Federal Home Loan Bank 4,100
500 Seymour,
3.65%*, 1/1/31**,
LOC Federal Home Loan Bank 500
5,750 State Bd Bk,
4.50%, 1/30/97 5,758
935 Syracuse Economic
Development Revenue,
3.60%*, 12/1/05**,
LOC Bank One Indianapolis 935
5,000 Tippecanoe School Corp.,
3.66%, 12/30/96, LOC
Bank One 5,000
1,030 Wakarusa Economic
Development,
3.60%*, 7/1/03**, LOC
Bank One Indianapolis 1,030
3,250 Wayne Township School
District,
4.18%, 12/31/96 3,251
1,300 West Central School Corp.,
4.20%, 12/30/96 1,301
----------
48,197
----------
IOWA (2.1%):
4,325 City of Urbandale,
4.00%*, 10/1/15**, LOC
Principle Mutual Life
Insurance Co. 4,325
3,100 Ottumwa Community School
District,
4.30%, 8/5/97 3,106
----------
7,431
----------
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
KANSAS (2.5%):
$ 6,200 Burlington Pollution
Control,
3.50%, 12/4/96, LOC
Societe Generale $ 6,200
2,300 Fairway,
4.00%*, 11/1/14**, LOC
Principle Mutual Life
Insurance Co. 2,300
----------
8,500
----------
KENTUCKY (9.7%):
1,285 Bath County,
3.70%*, 12/1/13**, LOC
Fifth Third Bank 1,285
2,475 Boone County,
3.70%*, 12/1/09**, LOC
PNC Bank 2,475
3,000 Boone County,
3.72%*, 9/1/16**, LOC
Star Bank 3,000
5,000 Carroll County IDR,
4.00%*, 9/1/10**, LOC
National City Bank 5,000
3,190 Covington,
3.60%*, 4/1/05**, LOC
Fifth Third Bank 3,190
2,500 Hillsborough County,
Ringhaven,
3.75%*, 12/1/11**, LOC
Mellon Bank 2,500
4,500 Jefferson County,
3.72%*, 12/1/11**, LOC
Fifth Third Bank 4,500
1,400 Lewis County,
3.70%*, 12/1/03**, LOC
Fifth Third Bank 1,400
2,000 Louisville, Zeochem,
3.70%*, 9/1/01**, LOC
National City Bank 2,000
3,600 Mayfield Multi-City Lease
Revenue,
3.75%*, 7/1/26**, LOC
PNC Bank 3,600
1,450 Rural Economic Development
Authority,
3.70%*, 9/1/10**, LOC
Westdeutsche Landesbank 1,450
3,000 Somerset Glen Oak,
3.70%*, 4/1/06**, LOC
Bank One Milwaukee 3,000
----------
33,400
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
TAX-FREE MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
LOUISIANA (2.3%):
$ 8,000 St. Tammany Public Finance
Authority,
3.85%*, 6/1/05**, LOC
Banque Paribas $ 8,000
----------
MAINE (0.7%):
1,000 Portland Schools, GO,
4.10%, 6/1/97 1,000
1,355 Scarborough,
3.90%, 12/20/96 1,355
----------
2,355
----------
MICHIGAN (1.4%):
1,200 State Strategic Fund,
3.65%*, 5/1/05**, LOC
Comerica Bank 1,200
800 State Strategic Fund,
3.75%*, 11/1/06**, LOC
Harris Trust 800
3,000 Wayne Charter County
Airport Revenue,
3.65%, 12/1/16**, LOC
Bayerische Landesbank 3,000
----------
5,000
----------
MINNESOTA (1.0%):
3,330 St.Cloud Housing, Webway,
3.80%*, 11/1/05**, LOC
National City Bank 3,330
----------
MISSOURI (4.7%):
1,130 Cuba IDR,
3.70%*, 10/1/05**, LOC
Bank One Cleveland 1,130
2,000 Independence Water Utility,
3.55%, 12/5/96, LOC
Westdeutsche Landesbank 2,000
3,600 Kansas City,
4.00%*, 5/1/15**, LOC
Principle Mutual Life
Insurance Co. 3,600
4,600 St. Louis IDR,
3.80%*, 2/1/07**, LOC
John Hancock 4,600
4,725 St. Louis IDR,
3.65%*, 9/1/16**, LOC
LaSalle National Bank 4,725
----------
16,055
----------
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
NEBRASKA (1.4%):
$ 5,000 Investment Finance,
3.80%, 1/15/97**, GNMA/FGIC $ 5,000
----------
NEVADA (0.7%):
1,150 Director State Department
Business & Industry,
3.70%*, 8/1/01**, LOC
Bank One Milwaukee 1,150
1,245 Director State Department
Business & Industry,
3.70%*, 8/1/14**, LOC
Bank One Milwaukee 1,245
----------
2,395
----------
NEW HAMPSHIRE (0.9%):
1,100 Belknap County,
4.16%, 6/30/97 1,100
2,000 Belknap County,
4.10%, 6/30/97 2,001
----------
3,101
----------
NEW YORK (0.6%):
1,200 Monroe County IDA,
Prerefunded,
8.00%, 12/15/03** 1,230
1,000 New York City, Series B,
3.65%*, 10/1/21**, FGIC 1,000
----------
2,230
----------
NORTH CAROLINA (1.4%):
5,000 North Carolina Eastern,
3.65%, 11/12/96, LOC Morgan
Guaranty 5,000
----------
OHIO (17.3%):
635 Akron Bath Copley
Township Hospital,
3.65%*, 5/1/13**, LOC
National City Bank 635
4,465 Akron Sewer
System Revenue,
3.55%*, 12/4/14**, LOC
Credit Suisse 4,465
275 Beavercreek,
4.25%, 5/1/97 275
775 Cleveland Public
Power System, Prerefunded,
5.38%, 8/1/17** 815
1,500 Crawford County,
4.21%, 5/16/97 1,501
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
TAX-FREE MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 1,900 Franklin County,
Childrens Hospital,
3.70%*, 12/1/14** $ 1,900
4,040 Franklin County IDR,
3.70%*, 6/1/10**, LOC
Fifth Third Bank 4,040
3,030 Franklin County,
Wesley Glen,
3.72%*, 4/1/13**, LOC
Fifth Third Bank 3,030
1,500 Geneva Area City Schools,
4.06%, 5/1/97 1,501
1,660 Lebanon, Bond Anticipation
Note,
3.92%, 12/20/96 1,661
4,850 Lorain County Elyria Home,
3.60%*, 6/1/12**, LOC
Fifth Third Bank 4,850
5,045 Mahoning County,
3.60%*, 4/1/17**, LOC
Bank One Akron 5,045
1,240 Northwood,
4.80%, 7/31/97 1,246
4,500 Scioto County Hospital,
3.45%*, 12/1/25**, LOC
Mellon Bank 4,500
900 Seven Hills,
4.15%, 7/31/97 900
500 Sheffield Lake,
4.27%, 8/1/97 500
2,750 State Air Quality,
3.70%, 12/10/96, FGIC 2,750
700 State Common Higher
Education,
4.63%, 12/1/96 700
6,800 State Water Development,
3.65%, 12/6/96, FGIC 6,800
800 Strongsville,
3.90%, 12/26/96 800
10,700 Student Loan Funding Corp.,
3.55%*, 12/29/98** 10,700
1,000 Wilmington,
3.91%, 12/27/96 1,000
----------
59,614
----------
TENNESSEE (1.8%):
6,200 Hawkins County, Kingston,
4.15%*, 8/1/09**, LOC
Bankers Trust 6,200
----------
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
TEXAS (5.8%):
$ 6,000 Grapevine,
3.70%*, 4/1/19**, LOC
FNB Chicago $ 6,000
4,140 Harris County,
3.70%*, 10/1/16**, LOC
Morgan Guaranty 4,140
1,000 State GO,
6.70%, 12/1/96 1,002
5,000 State,
4.75%, 8/29/97 5,031
4,000 Veteran Housing Association,
3.90%, 11/6/96** 4,000
----------
20,173
----------
WASHINGTON (0.3%):
1,000 Pierce County,
3.90%, 11/1/96, LOC
Deutsche Bank 1,000
----------
WISCONSIN (11.4%):
860 Appleton IDR,
3.70%*, 8/1/01**, LOC
Bank One Milwaukee 860
1,450 Berlin IDR,
3.75%*, 4/1/07**, LOC
Bank One Milwaukee 1,450
3,635 Fredonia IDR,
3.70%*, 4/1/06**, LOC
Bank One Milwaukee 3,635
2,500 Germantown School District,
3.93%, 8/29/97 2,501
2,800 Janesville,
3.72%*, 9/1/07**, LOC
General Electric Credit
Corp. 2,800
3,735 Kenosha Metalmen,
3.70%*, 9/1/14**, LOC
Bank One Milwaukee 3,735
1,280 Mosinee School District,
4.08%, 9/15/97 1,281
1,960 New Richmond School
District,
4.11%, 10/31/97 1,960
1,600 Oak Creek,
3.70%*, 12/1/07**, LOC
Bank One Milwaukee 1,600
1,200 Oshkosh, Schloesser,
3.70%*, 3/1/02**, LOC
Bank One Milwaukee 1,200
3,000 Plymouth IDR,
3.80%*, 8/1/04**, LOC
Rabobank 3,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
TAX-FREE MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 1,675 Port Washington-Saukville
School District,
4.11%, 10/30/97 $ 1,675
1,300 Prairie Du Chien,
3.80%*, 6/1/02**, LOC
LaSalle National Bank 1,300
6,700 Stevens Point Area School
District,
3.92%, 10/8/97 6,701
2,000 Waukesha IDR,
3.70%*, 12/1/07**,
LOC Bank One Milwaukee 2,000
3,600 Whitefish Bay School
District,
3.83%, 6/20/97 3,601
----------
39,299
----------
WYOMING (1.5%):
1,500 Converse County Pollution,
3.55%, 12/6/96, LOC
Deutsche Bank 1,500
1,300 Gillette County,
3.55%, 12/6/96, LOC
Deutsche Bank 1,300
2,250 Lincoln County,
3.65%, 1/1/16**, LOC
Union Bank of Switzerland 2,250
----------
5,050
- --------------------------------------------------------------
TOTAL MUNICIPAL BONDS 342,578
- --------------------------------------------------------------
- --------------------------------------------------------------
INVESTMENT COMPANIES (0.3%)
934,260 Federated Tax-Free Money
Market Fund 934
628 Fidelity Ohio Tax Free Fund 1
- --------------------------------------------------------------
TOTAL INVESTMENT COMPANIES 935
- --------------------------------------------------------------
TOTAL (COST $343,513) (a) $ 343,513
- --------------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $344,796.
(a) Cost and value for federal income tax and financial reporting purposes are
the same.
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rate reflected on the Schedule of Investments is
the rate in effect at October 31, 1996.
** Put and demand features exist allowing the Fund to require the repurchase of
the investment within variable time periods of less than one year.
FGIC -- Insured by Financial Guaranty Insurance Corp.
GNMA -- Government National Mortgage Assoc.
GO -- General Obligation
IDR -- Industrial Development Revenue
IDA -- Industrial Development Authority
LOC -- Letter of Credit
SEE NOTES TO FINANCIAL STATEMENTS.
53
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
- ----------------------------------------------
MUNICIPAL BONDS (98.3%)
OHIO (98.3%):
$ 6,000 Akron,
3.51%, 12/19/96 $ 6,000
2,000 Archbold,
4.31%, 3/27/97 2,004
3,000 Auglaize County IDR,
3.70%*, 5/1/03**, LOC Bank
One Dayton 3,000
1,700 Avon,
4.24%, 7/2/97 1,703
1,300 Barberton,
4.15%, 5/15/97 1,302
1,400 Beavercreek,
4.13%, 11/15/96 1,400
2,750 Beavercreek,
4.13%, 11/15/96 2,750
600 Beavercreek Local School
District,
4.30%, 6/27/97 601
1,750 Bedford Heights IDR,
3.80%*, 12/1/04**, LOC
National City Bank 1,750
960 Bellville,
4.16%, 10/22/97 961
1,000 Belmont County,
4.09%, 11/26/96 1,000
1,550 Belmont County,
3.89%, 12/19/96 1,551
1,165 Blue Ash,
3.80%, 3/1/97**, LOC
KeyCorp 1,165
2,950 Bowling Green,
4.09%, 9/11/97, LOC
General Electric Capital
Corp. 2,951
2,500 Bowling Green IDR,
3.70%*, 8/1/09** 2,500
530 Brecksville,
3.99%, 4/30/97 530
6,400 Brecksville-Broadview
Heights City School
District,
3.90%, 1/17/97 6,405
540 Brooklyn Heights IDR,
3.70%*, 2/1/02**, LOC Bank
One Cleveland 540
1,000 Butler County,
4.30%*, 11/1/20**, LOC
Fifth Third Bank 1,000
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 4,750 Centerville Health Bethany
IDR,
3.55%*, 11/1/13**, LOC PNC
Bank $ 4,750
2,270 Chillicothe IDR,
3.65%*, 10/1/15**, LOC
Huntington National Bank 2,270
400 Cincinnati,
4.60%, 12/1/96 400
1,600 Cincinnati,
3.55%*, 11/1/00**, LOC PNC
Bank 1,600
6,850 Cincinnati City School
District,
4.54%, 12/31/96 6,858
7,400 Cincinnati & Hamilton IDR,
3.60%*, 5/1/15**, LOC PNC
Bank 7,400
7,000 Cleveland, Cuyahoga County
IDR,
3.55%*, 12/1/15**, LOC
Credit Local De France 7,000
1,784 Cleveland Heights,
4.10%, 8/28/97 1,786
1,530 Cleveland Water Works,
7.88%, 1/1/16, Pre-
Refunded 1/1/97 1,571
500 Clinton County,
3.70%*, 11/1/99**, LOC
Fifth Third Bank 500
6,700 Clinton County IDR,
3.60%*, 6/1/11**, LOC
Union Bank of Switzerland 6,700
1,050 Crawford County,
4.35%, 5/16/97 1,052
545 Cuyahoga County,
3.85%, 4/15/97**, LOC Bank
One Cleveland 545
400 Cuyahoga County IDR,
3.83%*, 12/1/98**, LOC
National City Bank 400
4,030 Cuyahoga County IDR,
3.95%*, 12/7/05**, LOC
National City Bank 4,030
380 Cuyahoga County IDR,
4.00%*, 11/2/09**, LOC
Huntington National Bank 380
4,525 Cuyahoga County IDR,
3.65%*, 12/1/12**, LOC
National City Bank 4,525
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
54
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 3,500 Cuyahoga County IDR,
3.75%*, 4/1/16**, LOC Bank
One Cleveland $ 3,500
2,700 Cuyahoga County Revenue,
Allen Group Project,
3.60%*, 4/1/12**, LOC
Union Bank of Switzerland 2,700
2,400 Cuyahoga Falls Portage,
3.70%*, 9/1/14**, LOC
Fifth Third Bank 2,400
3,300 Cuyahoga Falls Portage,
3.70%*, 5/1/15**, LOC
Fifth Third Bank 3,300
4,250 Dayton,
4.50%, 3/25/97 4,258
1,340 Defiance County IDR,
3.85%*, 12/1/97**, LOC PNC
Bank 1,340
900 Delaware County IDR,
3.65%*, 12/1/04**, LOC
Wells Fargo 900
570 Dover,
4.15%, 5/23/97 571
7,900 Dublin,
4.03%, 6/18/97 7,901
1,800 East Palestine City School
District,
3.50%, 2/28/97 1,801
1,455 Eastern Local School
District,
4.65%, 5/30/97 1,459
980 Elyria,
3.74%, 3/20/97 981
950 Elyria City School District,
4.13%, 4/10/97 951
1,800 Euclid,
4.15%, 7/11/97 1,802
1,075 Euclid IDR,
3.85%, 4/15/97**, LOC Bank
One Cleveland 1,075
661 Fairfield County,
4.65%, 9/3/97 664
809 Franklin County,
3.96%, 4/9/97 809
1,525 Franklin County,
3.70%*, 10/1/15**, LOC
Fifth Third Bank 1,525
2,070 Franklin County IDR,
3.95%, 3/1/97**, LOC
KeyCorp 2,070
7,000 Franklin County IDR,
3.75%*, 12/1/15**, LOC
Bank One Cleveland 7,000
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 2,600 Franklin County IDR,
3.60%*, 12/1/16**, LOC
Fifth Third Bank $ 2,600
700 Franklin County IDR,
3.75%*, 4/1/19**, LOC
Huntington National Bank 700
1,000 Franklin County Children's
Hospital,
3.70%*, 12/1/14** 1,000
1,820 Franklin County Health Care
Facilities,
3.60%*, 6/1/15**, LOC
Fifth Third Bank 1,820
1,000 Franklin County Hospital
Revenue,
3.55%*, 5/1/15**, LOC
National Bank of Detroit 1,000
3,860 Franklin County IDR,
3.75%*, 12/1/02**, LOC
Huntington National Bank 3,860
1,075 Franklin County, Wesley
Glen,
3.72%*, 4/1/13**, LOC
Fifth Third Bank 1,075
4,000 Geauga County,
3.94%, 12/12/96 4,001
1,100 Geauga County,
3.79%, 12/20/96 1,100
1,100 Geauga County Park,
4.04%, 12/12/96 1,100
1,408 Georgetown School District,
3.84%, 12/19/96 1,408
940 Granville,
4.06%, 11/19/96 940
3,200 Greene County IDR,
3.85%*, 8/1/09**, LOC PNC
Bank 3,200
1,810 Grove City Cross County,
3.60%*, 6/1/06**, LOC Bank
One Cleveland 1,810
10,000 Hamilton County,
4.25%, 7/10/97 10,019
3,100 Hamilton County,
3.60%*, 6/15/05**, LOC
Fifth Third Bank 3,100
2,605 Hamilton County,
3.70%*, 12/1/08**, LOC
Fifth Third Bank 2,605
3,690 Hamilton County IDR,
3.70%*, 12/1/04**, LOC
Fifth Third Bank 3,690
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
55
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 1,290 Hancock County,
3.75%, 12/1/96**, LOC Bank
One Cleveland $ 1,290
1,083 Harrison,
3.80%, 1/10/97 1,084
2,895 Higher Education Facilities,
3.60%*, 10/1/11**, LOC
Fifth Third Bank 2,895
3,095 Higher Education Facilities,
Mt. Union College,
3.55%*, 9/1/20**, LOC
National Bank of Detroit 3,095
870 Highland Local School
District,
4.38%, 12/19/96 871
3,800 Highland Heights,
3.89%, 12/19/96 3,801
865 Hilliard IDR,
3.70%*, 12/1/14**, LOC
Fifth Third Bank 865
500 Holmes County,
3.65%*, 4/1/09**, LOC
Rabobank 500
5,000 Housing Finance Agency,
3.40%, 9/1/28**, GIC AIG 5,000
6,250 Housing Finance Authority,
3.75%*, 3/1/20**, LOC Bank
of New York 6,250
7,400 Housing Finance Authority,
Hunters Green Apartments,
3.75%*, 4/1/26**, LOC PNC
Bank 7,400
1,076 Huber Heights,
3.75%, 4/1/97 1,076
1,900 Hudson,
3.78%, 11/14/96 1,900
2,225 Huron County,
3.70%*, 4/1/11**, LOC Bank
One Indianapolis 2,225
2,000 Indian Lake,
4.14%, 4/9/97 2,002
2,100 Kent,
4.19%, 4/10/97 2,103
700 Kings Local School District,
4.40%, 7/11/97 701
2,125 Lake County,
4.15%, 10/9/97 2,128
657 Lake County,
4.15%, 10/29/97 658
1,650 Lebanon,
4.37%, 10/16/97 1,654
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 1,840 Licking County,
3.70%*, 4/1/05**, LOC Bank
One Cleveland $ 1,840
1,320 Lorain County,
3.85%, 4/15/97**, LOC Bank
One Cleveland 1,320
1,083 Lorain County,
4.22%, 8/29/97 1,086
1,959 Lorain County,
4.75%, 10/29/97 1,969
1,370 Lorain County Hospital, Mary
Health,
3.55%*, 5/1/01**, LOC PNB
Bank 1,370
1,000 Lorain County Industrial
Development,
3.85%*, 6/1/09**, LOC Bank
One Cleveland 1,000
1,195 Lucas County,
3.75%, 12/1/96**, LOC Bank
One Cleveland 1,195
565 Lucas County,
3.65%*, 3/1/06**, LOC
National City Bank 565
425 Lucas County,
3.65%*, 12/1/07**, LOC
National City Bank 425
6,000 Lucas County,
3.65%*, 12/1/12**, LOC
National City Bank 6,000
2,000 Mahoning County,
3.65%*, 12/1/21**, LOC PNC
Bank 2,000
390 Mahoning County IDR,
3.65%*, 6/1/03**, LOC Bank
One Akron 390
4,400 Mahoning County IDR,
3.55%*, 3/15/20**, LOC PNC
Bank 4,400
860 Maple Heights,
3.50%, 12/12/96 860
660 Maple Heights,
4.10%, 7/9/97 660
5 Marion County,
3.60%*, 3/1/16**, LOC Bank
One Cleveland 5
895 Marion County IDR,
3.60%*, 4/1/17**, LOC Bank
One Cleveland 895
530 Marion County IDR,
3.60%* 5/1/19**, LOC Bank
One Cleveland 530
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
56
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 211 Marion County IDR,
3.60%*, 8/1/20**, LOC Bank
One Cleveland $ 211
1,255 Marion County IDR,
3.60%*, 11/1/21**, LOC
Bank One Cleveland 1,255
1,045 Marion County IDR,
3.60%*, 10/1/22**, LOC
Bank One Cleveland 1,045
900 Mayfield Heights,
4.22%, 7/3/97 901
360 Medina,
3.85%, 11/1/96 360
500 Medina County,
4.50%, 10/9/97 502
600 Miami County,
4.45%, 11/26/96 600
700 Middlefield,
3.49%, 2/28/97 700
500 Millford,
4.27%, 4/14/96 501
685 Montgomery County,
3.75%, 11/1/96, LOC MBIA 685
500 Montgomery County,
6.60%, 11/1/10, Pre-
Refunded 11/1/96 500
760 Montgomery County IDR,
3.65%*, 9/1/01**, LOC
KeyCorp 760
335 Montgomery County IDR,
3.80%, 12/15/04**, LOC
Bank One Dayton 335
3,500 Montgomery County IDR,
3.65%*, 1/1/29**, LOC
Federal Home Loan Bank 3,500
3,900 Montgomery County Miami
Valley Northern,
3.45%, 12/6/96, LOC
Northern Trust 3,900
2,770 Montgomery IDR,
4.00%*, 5/2/05**, LOC
Huntington National Bank 2,770
1,695 Muskingum County IDR,
4.00%*, 6/1/02**, LOC
Huntington National Bank 1,695
2,000 Muskingum County Health,
7.50%, 3/1/12, Pre-
Refunded 3/1/97 2,064
1,800 Napoleon City School
District,
4.08%, 3/18/97 1,801
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 200 North Baltimore Local School
District,
4.65%, 4/17/97 $ 201
660 Norwalk,
4.50%, 9/25/97 662
200 Orrville IDR,
3.85%*, 9/1/00**, LOC
National City Bank 200
200 Orrville IDR,
3.85%*, 8/1/03**, LOC
National City Bank 200
1,650 Orrville IDR,
3.65%*, 12/1/07**, LOC
National City Bank 1,650
1,200 Paulding County IDR,
3.60%*, 3/1/99**, LOC
Fifth Third Bank 1,200
700 Perrysburg,
4.90%, 11/21/96 700
750 Perrysburg,
4.75%, 8/21/97 753
1,550 Pickerington,
4.00%, 11/26/96 1,550
875 Pickerington,
4.25%, 6/27/97 876
3,400 Pike County IDR,
3.70%*, 6/1/13**, LOC
Fifth Third Bank 3,400
1,805 Portage County,
4.20%, 3/11/97 1,807
910 Portage County,
4.05%, 7/10/97 910
1,780 Portage County,
4.35%, 7/10/97 1,784
2,000 Portsmouth,
3.70%*, 12/1/09**, LOC
National City Bank 2,000
1,715 Portsmouth IDR,
3.70%*, 10/1/02**, LOC
Bank One Akron 1,715
1,366 Richland County,
4.39%, 6/26/97 1,369
3,350 Richland County IDR,
3.70%*, 12/1/16**, LOC
Huntington National Bank 3,350
3,000 Ross County Medical Center,
3.55%*, 12/1/20**, LOC
Fifth Third Bank 3,000
580 Rossford,
4.80%, 1/2/97 581
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
57
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 2,530 Salem Hospital Facility,
3.55%*, 11/1/11**, LOC PNC
Bank $ 2,530
1,000 School District Cash
Program,
4.53%, 12/31/96 1,001
7,700 School District Cash
Program,
4.53%, 6/30/97 7,726
2,300 Seneca County, St. Francis
Hospital,
3.60%*, 12/15/13**, LOC
National City Bank 2,300
1,200 Sharonville IDR,
3.75%, 10/1/98**, LOC
Fifth Third Bank 1,200
6,025 Sharonville IDR,
3.60%*, 9/1/14**, LOC
National City Bank 6,025
2,350 Stark County,
3.60%*, 3/1/13**, LOC Bank
One Akron 2,350
7,500 State Air Quality
Development Revenue,
3.55%, 11/1/96**, LOC
Toronto Dominion 7,500
400 State Air Quality
Development Revenue,
3.65%, 12/2/96, FGIC 400
4,200 State Air Quality
Development Revenue,
3.45%, 12/4/96, FGIC 4,200
7,700 State Air Quality
Development Revenue,
3.65%, 12/6/96, FGIC 7,700
1,200 State Air Quality
Development Revenue,
3.70%, 12/10/96, FGIC 1,200
2,500 State Air Quality
Development Revenue,
3.60%, 12/12/96, FGIC 2,500
2,000 State Air Quality
Development Revenue,
3.65%, 12/16/96, LOC
Toronto Dominion 2,000
440 State Cincinnati River IDR,
3.85%*, 6/1/00**, LOC PNC
Bank 440
1,000 State Environmental,
6.85%*, 12/1/01**, LOC PNC
Bank 1,000
1,000 State Higher Education,
5.30%, 12/1/96 1,001
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 1,000 State Higher Education,
3.65%*, 9/1/09**, LOC
National City Bank $ 1,000
2,105 State IDR,
3.65%*, 1/2/03**, LOC Bank
One Cleveland 2,105
390 State IDR,
3.65%*, 1/2/03**, LOC Bank
One Cleveland 390
875 State IDR,
3.65%*, 6/7/06**, LOC
National City Bank 875
870 State IDR,
3.65%*, 8/1/07**, LOC Bank
One Cleveland 870
830 State IDR,
3.65%*, 12/1/11**, LOC
National City Bank 830
685 State IDR,
3.65%*, 6/1/16**, LOC
National City Bank 685
2,385 State IDR,
3.70%*, 6/1/20**, LOC Bank
One Cleveland 2,385
2,385 State IDR,
3.70%*, 6/1/20**, LOC Bank
One Cleveland 2,385
180 State Rolen Plastic,
3.65%*, 8/7/02**, LOC Bank
One Cleveland 180
5,000 State Water Development
Authority,
3.70%, 11/22/96, LOC
Toronto Dominion 5,000
900 State Water Development
Authority,
3.65%, 12/6/96, LOC FGIC 900
3,000 State Water Development
Authority, Water Pollution
Development,
3.70%, 12/9/96, LOC
Toronto Dominion 3,000
1,500 State Water Development
Authority,
3.60%, 12/12/96, LOC FGIC 1,500
6,000 State Water Pollution
Development,
3.65%, 12/17/96, LOC
Toronto Dominion 6,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
58
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 8,350 State Water Pollution
Development,
3.65%, 12/18/96, LOC
Toronto Dominion $ 8,350
840 Streetsboro,
4.20%, 10/10/97 841
8,490 Strongsville School
District,
4.30%, 12/12/96 8,495
1,750 Student Loan Funding Corp.,
Cincinnati,
5.25%, 7/1/97 1,763
5,100 Student Loan Funding Corp.,
Cincinnati,
3.65%*, 1/1/07**, LOC
National Westminster Bank 5,100
3,400 Student Loan Funding Corp.,
Cincinnati,
3.65%*, 1/1/07**, LOC
National Westminster Bank 3,400
9,700 Student Loan Funding Corp.,
Cincinnati,
3.65%*, 1/1/07**, LOC
National Westminster Bank 9,700
42,685 Student Loan Funding Corp.,
Cincinnati, Student Loan
Revenue,
3.55%*, 12/29/98**, LOC
Fuji Bank 42,685
2,200 Summit County, Cuyahoga
Falls Hospital,
3.60%*, 7/1/99**, LOC Bank
One Cleveland 2,200
485 Summit County Economic
Development,
4.31%, 3/1/97**, LOC Bank
One Akron 485
680 Summit County IDR,
3.80%, 11/1/96**, LOC Bank
One Akron 680
405 Summit County IDR,
4.00%, 3/1/97**, LOC Bank
One Akron 405
890 Summit County IDR,
3.70%*, 9/1/01**, LOC Bank
One Akron 890
1,040 Summit County IDR,
3.75%*, 9/1/01**, LOC Bank
One Akron 1,040
400 Summit County IDR,
3.75%*, 11/1/01**, LOC
Fifth Third Bank 400
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 2,140 Summit County IDR,
3.95%*, 8/1/05**, LOC
Huntington National Bank $ 2,140
2,185 Summit County IDR,
3.60%*, 9/1/05**, LOC Bank
One Cleveland 2,185
2,465 Summit County IDR,
3.67%*, 6/6/16**, LOC
Fifth Third Bank 2,465
240 Summit County IDR,
3.70%, 10/1/06**, LOC Bank
One Akron 240
1,735 Summit County IDR,
3.60%*, 9/1/11**, LOC Bank
One Akron 1,735
505 Sunbury,
4.27%, 5/1/97 506
950 Tallmadge,
4.25%, 7/23/97 951
575 Tiffin,
4.36%, 7/10/97 576
5,220 Toledo,
4.38%, 12/1/96, LOC
Canadian Imperial Bank of
Commerce 5,224
2,000 Toledo Lucas County,
3.45%, 12/4/96, LOC Bank
of Nova Scotia 2,000
3,100 Toledo, Lucas County,
3.65%, 12/10/96, LOC Bank
of Nova Scotia 3,100
2,800 Toledo, Lucas County IDR,
3.80%*, 12/1/06**, LOC PNC
Bank 2,800
1,700 Toledo, Lucas County Port
Authority,
3.65%*, 12/1/13**, LOC Old
Kent Bank 1,700
1,685 Troy Economic Development
Revenue,
3.85%*, 6/1/08**, LOC
Societe Generale 1,685
715 Trumbull County,
4.45%, 2/11/97 716
1,150 Trumbull County,
4.07%, 4/10/97 1,151
300 Trumbull County IDR,
3.85%*, 6/1/05**, LOC PNC
Bank 300
7,000 Trumbull County IDR,
3.75%*, 12/1/06**, LOC
Mellon Bank 7,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL MONEY MARKET FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 500 Twinsburg IDR,
3.85%*, 7/1/98**, LOC
National City Bank $ 500
485 Union County,
4.50%, 6/27/97 487
1,625 Vermilion IDR,
3.55%*, 10/1/04**, LOC
Bank One Dayton 1,625
980 Warren County,
4.38%, 6/3/97 982
1,950 Washington County,
3.88%, 12/19/96 1,951
700 Washington County,
4.30%, 2/3/97 701
475 Wauseon,
4.75%, 5/22/97 477
4,940 Wayne County IDR,
3.68%*, 9/1/21**, LOC
Fifth Third Bank 4,940
1,600 West Clermont Local School
District,
4.32%, 4/15/97 1,603
2,260 Westerville IDR,
3.55%*, 12/1/11**, LOC
National City Bank 2,260
250 Westlake IDR,
3.75%, 11/1/96**, LOC
Huntington National Bank 250
2,450 Westlake IDR,
3.55%*, 3/1/02**, LOC
Bayerische Vereinsbank 2,450
6,530 Westlake IDR,
3.95%*, 7/2/08**, LOC
National City Bank 6,530
1,700 Westlake IDR,
3.67%*, 6/1/16**, LOC
Fifth Third Bank 1,700
1,400 Williams County,
5.05%, 11/21/96 1,401
350 Williams County,
4.75%, 5/15/97 351
<CAPTION>
SHARES OR
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C> <C>
$ 5,525 Williams County,
3.65%*, 11/1/08**, LOC
National Bank of Detroit $ 5,525
3,000 Wooster,
3.53%, 12/19/96 3,000
2,353 Wyoming,
4.30%, 6/27/97 2,358
654 Wyoming,
4.24%, 7/10/97 655
- ------------------------------------------------------------
TOTAL MUNICIPAL BONDS 550,748
- ------------------------------------------------------------
- ------------------------------------------------------------
INVESTMENT COMPANIES (1.3%)
7,466,624 Federated Ohio Municipal
Cash Trust Fund 7,467
- ------------------------------------------------------------
TOTAL INVESTMENT COMPANIES 7,467
- ------------------------------------------------------------
TOTAL (COST-$558,215)(A) $ 558,215
- ------------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $561,131.
(a) Cost for federal income tax and financial reporting purposes are the same.
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rate reflected on the Schedule of Investments is
the rate in effect at October 31, 1996.
** Put and demand features exist allowing the Fund to require the repurchase of
the investment within variable time periods of less than one year.
AIG -- American International Group
FGIC -- Insured by Financial Guaranty Insurance Corp.
GIC -- Guaranteed Insurance Contract
GO -- General Obligation
IDR -- Industrial Development Revenue
LOC -- Letter of Credit
MBIA -- Insured by Municipal Bond Insurance Association
SEE NOTES TO FINANCIAL STATEMENTS.
60
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
LIMITED TERM INCOME FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ---------------------------------------------------------
ASSET BACKED SECURITIES (1.2%)
$ 1,000 American Express,
6.05%, 7/15/97 $ 1,003
34 GMAC 1993 A Grantor Trust,
Class A,
4.15%, 3/15/98 34
- ----------------------------------------------------------
TOTAL ASSET BACKED SECURITIES 1,037
- ----------------------------------------------------------
- ----------------------------------------------------------
COMMERCIAL PAPER (0.7%)
FINANCIAL SERVICES (0.7%):
650 General Electric Capital
Corp.,
5.57%, 11/1/96 650
- ----------------------------------------------------------
TOTAL COMMERCIAL PAPER 650
- ----------------------------------------------------------
- ----------------------------------------------------------
CORPORATE BONDS (25.2%)
AUTOMOTIVE (3.4%):
3,000 Ford Motor Credit Corp.,
7.13%, 12/1/97 3,039
--------
BROKERAGE SERVICES (4.2%):
2,000 Lehman Brothers, Inc.,
5.75%, 11/15/98 1,980
1,800 Merrill Lynch Corp.,
5.00%, 12/15/96 1,800
--------
3,780
--------
BUSINESS EQUIPMENT (2.4%):
2,175 International Business
Machines Corp.,
6.38%, 11/1/97 2,187
--------
CHEMICALS (1.1%):
1,000 Dow Capital BV.,
5.75%, 9/15/97 1,001
--------
FINANCIAL SERVICES (5.1%):
1,000 Associates Corp.,
6.88%, 1/15/97 1,003
1,500 Associates Corp.,
7.25%, 9/1/99 1,541
2,000 Norwest Corp.,
7.75%, 12/31/96 2,008
--------
4,552
--------
INDUSTRIAL GOODS & SERVICES (4.5%):
2,000 Burlington Resources, Inc.,
7.15%, 5/1/99 2,045
2,000 WMX Technologies, Inc.,
7.13%, 3/22/97 2,010
--------
4,055
--------
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
INSURANCE (2.3%):
$ 2,000 International Lease
Finance Corp.,
8.35%, 10/1/98 $ 2,083
--------
UTILITY--GAS & ELECTRIC (2.2%):
1,000 Northern Illinois Gas Co.,
5.50%, 2/1/97 999
1,000 Northern States Power Co.,
5.50%, 2/1/99 984
--------
1,983
- ----------------------------------------------------------
TOTAL CORPORATE BONDS 22,680
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. GOVERNMENT AGENCIES (13.0%)
FEDERAL HOME LOAN MORTGAGE CORP.:
1,000 7.19%, 9/15/99 1,008
FEDERAL NATIONAL MORTGAGE ASSOC.:
2,511 9.00%, 3/1/25 2,641
7,652 9.00%, 5/1/25 8,049
- ----------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 11,698
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. TREASURY NOTES (58.1%)
3,000 7.38%, 11/15/97 3,053
5,000 5.25%, 12/31/97 4,982
2,000 5.13%, 2/28/98 1,987
4,000 7.88%, 4/15/98 4,123
26,000 8.25%, 7/15/98 27,059
5,000 5.13%, 11/30/98 4,937
6,000 6.88%, 7/31/99 6,144
- ----------------------------------------------------------
TOTAL U.S. TREASURY NOTES 52,285
- ----------------------------------------------------------
TOTAL (COST $88,344) (A) $ 88,350
- ----------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $90,019.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 443
Unrealized depreciation (437)
--------
Net unrealized appreciation $ 6
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
INTERMEDIATE INCOME FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS (1.4%)
FEDERAL HOME LOAN MORTGAGE CORP.:
$ 904 6.00%, 10/25/03 $ 901
970 5.80%, 4/15/14 968
698 7.50%, 7/25/18 712
1,119 7.50%, 9/15/20 1,136
- ----------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 3,717
- ----------------------------------------------------------
- ----------------------------------------------------------
COMMERCIAL PAPER (0.6%)
FINANCIAL SERVICES (0.6%):
1,555 General Electric Capital
Corp., 5.57%, 11/1/96 1,555
- ----------------------------------------------------------
TOTAL COMMERCIAL PAPER 1,555
- ----------------------------------------------------------
- ----------------------------------------------------------
CORPORATE BONDS (22.8%)
AUTOMOTIVE (3.1%):
5,000 Daimler-Benz North America,
7.38%, 9/15/06 5,162
1,000 Ford Motor Co.,
9.00%, 9/15/01 1,099
1,000 General Motors Corp.,
9.63%, 12/1/00 1,109
1,000 General Motors Corp.,
9.13%, 7/15/01 1,099
--------
8,469
--------
BANKING (1.5%):
2,000 Republic New York Corp.,
7.75%, 5/15/02 2,115
2,000 SouthTrust Bank, Birmingham,
5.58%, 2/6/06 1,945
--------
4,060
--------
BROKERAGE SERVICES (1.8%):
5,000 Lehman Brothers, Senior
Subordinated Note,
5.75%, 11/15/98 4,950
--------
CHEMICALS (0.4%):
1,000 Dow Capital BV,
5.75%, 9/15/97 1,001
--------
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
FINANCIAL SERVICES (6.2%):
$ 5,000 Grand Metro Financial,
6.50%, 9/15/99 $ 5,031
2,500 Merrill Lynch,
8.25%, 11/15/99 2,634
1,000 Norwest Corp.,
7.75%, 12/31/96 1,004
3,000 Transamerica Financial,
8.75%, 10/1/99 3,184
2,000 Travelers Group,
6.88%, 6/1/25** 2,002
3,000 U.S. West Capital Funding,
6.31%, 11/1/05 2,989
--------
16,844
--------
INDUSTRIAL GOODS & SERVICES (5.3%):
2,000 ConAgra Inc.,
7.13%, 10/1/26** 2,035
7,000 Eaton Corp.,
9.38%, 4/1/99 7,017
2,000 News America Holdings,
7.43%, 10/1/26** 2,038
3,000 Service Corp. International,
8.38%, 12/15/04 3,236
--------
14,326
--------
OIL & GAS EXPLORATION & PRODUCTION SERVICES (1.5%):
4,000 Standard Oil,
9.00%, 6/1/19 4,180
--------
UTILITIES -- ELECTRIC (0.4%):
1,000 Cincinnati Gas & Electric,
6.90%, 6/1/25** 992
--------
UTILITIES -- GAS (1.8%):
5,000 Columbia Gas Systems,
6.39%, 11/28/00 4,956
--------
UTILITIES -- TELECOMMUNICATIONS (0.8%):
2,000 GTE Corp.,
9.10%, 6/1/03 2,245
- ----------------------------------------------------------
TOTAL CORPORATE BONDS 62,023
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. GOVERNMENT AGENCIES (9.5%)
FEDERAL HOME LOAN MORTGAGE CORP.:
4,964 6.00%, 3/11/11 4,792
FEDERAL NATIONAL MORTGAGE ASSOC.:
2,000 5.23%, 11/25/98 1,978
2,500 7.92%, 3/30/05 2,559
GOVERNMENT NATIONAL MORTGAGE ASSOC.:
4,925 6.50%, 3/15/26 4,711
5,067 6.00%, 4/15/26 4,716
3,000 8.00%, 11/1/26 3,063
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
62
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
INTERMEDIATE INCOME FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
TENNESSEE VALLEY AUTHORITY:
$ 4,000 6.24%, 7/15/45 $ 3,985
- ----------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 25,804
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. TREASURY BONDS (0.7%)
2,000 6.75% , 8/15/26 2,022
- ----------------------------------------------------------
TOTAL U.S. TREASURY BONDS 2,022
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. TREASURY NOTES (63.5%)
3,000 6.50%, 5/15/97 3,018
45,000 7.88%, 4/15/98 46,384
8,000 5.13%, 11/30/98 7,900
43,000 7.00%, 4/15/99 44,134
5,000 6.75%, 5/31/99 5,104
57,850 6.25%, 8/31/00 58,273
5,000 5.75%, 8/15/03 4,870
3,000 7.00%, 7/15/06 3,133
- ----------------------------------------------------------
TOTAL U.S. TREASURY NOTES 172,816
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. TREASURY OBLIGATIONS (1.2%)
U.S. TREASURY STRIPS (1.2%)
5,000 0.00%, 2/8/03 3,342
- ----------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS 3,342
- ----------------------------------------------------------
TOTAL (COST $270,156) (a) $271,279
- ----------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $272,087.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax reporting purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $272. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 2,092
Unrealized depreciation (1,241)
--------
Net unrealized appreciation $ 851
=========
</TABLE>
** Put and demand features exist allowing the Fund to require the repurchase of
the investment within variable time periods less than one year.
SEE NOTES TO FINANCIAL STATEMENTS.
63
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
INVESTMENT QUALITY BOND FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ---------------------------------------------------------
ASSET BACKED SECURITIES (0.3%)
$ 410 Railcar Trust, Series 92-1,
7.75%, 6/1/04 $ 431
- ---------------------------------------------------------
TOTAL ASSET BACKED SECURITIES 431
- ---------------------------------------------------------
- ---------------------------------------------------------
COMMERCIAL PAPER (0.3%)
FINANCIAL SERVICES (0.3):
520 General Electric Capital
Corp., 5.57%, 11/1/96 520
- ---------------------------------------------------------
TOTAL COMMERCIAL PAPER 520
- ---------------------------------------------------------
- ---------------------------------------------------------
CORPORATE BONDS (27.9%)
AUTOMOTIVE (3.6%):
2,000 Daimler-Benz North America,
7.38%, 9/15/06 2,065
1,000 Ford Motor Co.,
9.00%, 9/15/01 1,099
1,000 Ford Motor Co.,
8.88%, 1/15/22 1,155
939 General Motors Corp.,
9.13%, 7/15/01 1,032
--------
5,351
--------
BANKING (4.2%):
1,000 BankAmerica Corp.,
9.63%, 2/13/01 1,111
1,020 First Union Corp.,
9.45%, 6/15/99 1,099
2,000 Societe Generale,
7.40%, 6/1/06 2,053
1,000 SunTrust Banks, Inc.,
7.38%, 7/1/02 1,034
1,000 Wachovia Corp.,
6.05%, 10/1/25 990
--------
6,287
--------
BROKERAGE SERVICES (4.2%):
2,000 Lehman Brothers, Inc.,
7.63, 6/1/06 2,038
1,000 Morgan Stanley Group, Inc.,
5.63, 3/1/99 987
1,000 Morgan Stanley Group, Inc.,
8.88%, 10/15/01 1,095
1,000 Morgan Stanley Mortgage,
7.22%*, 11/15/28 1,023
1,200 Salomon Brothers,
6.70%, 12/1/98 1,210
--------
6,353
--------
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
ELECTRICAL & ELECTRONIC (1.5%):
$ 2,300 Philips Electronics,
7.13%, 5/15/25** $ 2,326
--------
FINANCIAL SERVICES (3.7%):
2,546 BHP Finance, 6.69%, 3/1/06 2,501
1,000 Liberty Mutual,
7.88%, 10/15/26 1,014
1,020 Merrill Lynch,
8.25%, 11/15/99 1,075
1,000 Merrill Lynch,
6.00%, 3/1/01 980
--------
5,570
--------
INDUSTRIAL GOODS & SERVICES (6.7%):
1,000 ConAgra, Inc.,
7.13%, 10/1/26, callable
on 10/1/06 @ 100 1,018
2,500 Eaton Corp.,
9.38%, 4/1/99 2,506
1,500 Georgia-Pacific,
9.95%, 6/15/02 1,717
2,200 Harris Corp.,
6.65%, 8/1/06** 2,214
1,000 Tosco,
7.63%, 5/15/06 1,027
1,000 USX Corp.,
7.20%, 2/15/04 999
500 Westvaco Corp.,
9.75%, 6/15/20 623
--------
10,104
--------
INSURANCE (0.6%):
900 Aetna Insurance,
6.97%, 8/15/36 915
--------
OIL & GAS (0.6%):
1,000 Union Oil of California,
6.38%, 2/1/04 964
--------
PRINTING & PUBLISHING (1.4%):
2,000 Time Warner, Inc.,
9.15%, 2/1/23 2,173
--------
RETAIL STORES (0.7%):
1,000 Dayton Hudson,
6.40%, 2/15/03 976
--------
TEXTILE PRODUCTS (0.7%):
1,000 Levi Straus,
6.80%, 11/1/03 996
- ---------------------------------------------------------
TOTAL CORPORATE BONDS 42,015
- ---------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
64
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
INVESTMENT QUALITY BOND FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ---------------------------------------------------------
U.S. GOVERNMENT AGENCIES (35.3%)
FEDERAL HOME LOAN MORTGAGE CORP.:
$ 2,000 8.19%, 10/6/04 $ 2,069
860 7.50%, 4/1/07 874
1,410 6.00%, 2/1/11 1,362
7,798 6.00%, 5/1/11 7,522
FEDERAL NATIONAL MORTGAGE ASSOC.:
2,700 8.50%, 2/1/05 2,852
2,000 6.65%, 3/8/06 1,955
2,743 6.00%, 8/1/10 2,649
7,721 6.00%, 5/1/11 7,444
1,564 9.00%, 3/1/25 1,642
899 9.00%, 5/1/25 943
GOVERNMENT NATIONAL MORTGAGE ASSOC.:
2,323 6.50%, 2/15/09 2,297
1,197 9.00%, 2/15/17 1,261
1,168 8.50%, 9/15/17 1,210
993 9.00%, 12/15/19 1,046
1,399 9.00%, 1/15/20 1,480
873 6.50%, 7/15/23 840
172 7.50%, 8/15/23 173
541 7.50%, 8/15/23 542
1,296 7.00%, 10/15/23 1,274
1,934 6.50%, 1/15/24 1,846
5,045 8.50%, 12/15/24 5,232
4,985 6.50%, 2/15/26 4,773
2,025 6.50%, 4/15/26 1,937
- ---------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 53,223
- ---------------------------------------------------------
- ---------------------------------------------------------
U.S. TREASURY BONDS (3.9%)
1,300 7.50%, 11/15/24 1,426
3,400 6.00%, 2/15/26 3,102
1,300 6.75%, 8/15/26 1,314
- ---------------------------------------------------------
TOTAL U.S. TREASURY BONDS 5,842
- ---------------------------------------------------------
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- ---------------------------------------------------------
U.S. TREASURY NOTES (30.9%)
$ 600 7.25%, 2/15/98 $ 612
5,200 6.00%, 8/15/99 5,213
2,500 7.75%, 1/31/00 2,630
12,060 6.13%, 9/30/00 12,098
9,400 6.38%, 8/15/02 9,508
3,500 12.38%, 5/15/04 4,766
6,400 7.88%, 11/15/04 7,024
1,500 6.88%, 5/15/06 1,554
3,100 7.00%, 7/15/06 3,237
- ---------------------------------------------------------
TOTAL U.S. TREASURY NOTES 46,642
- ---------------------------------------------------------
TOTAL (COST $147,366) (a) $148,673
- ---------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $150,807.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax reporting purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $766. Cost for federal income tax puposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 1,378
Unrealized depreciation (837)
--------
Net unrealized appreciation $ 541
========
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rate reflected on the Schedule of Investments is
the rate in effect at October 31, 1996.
** Put and demand features exist allowing the Fund to require the repurchase of
the investment within variable time periods of less than one year.
SEE NOTES TO FINANCIAL STATEMENTS.
65
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
GOVERNMENT BOND FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ----------------------------------------------
COMMERCIAL PAPER (0.5%)
FINANCIAL SERVICES (0.5%):
$ 137 General Eelectric Capital
Corp., 5.57%, 11/01/96 $ 137
- ----------------------------------------------------------
TOTAL COMMERCIAL PAPER 137
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. TREASURY NOTES (85.5%)
6,850 6.25%, 7/31/98 6,910
2,000 6.38%, 5/15/99 2,023
2,000 6.00%, 8/15/99 2,005
5,000 6.38%, 8/15/02 5,058
2,200 6.25%, 2/15/03 2,209
4,100 6.50%, 8/15/05 4,143
- ----------------------------------------------------------
TOTAL U.S. TREASURY NOTES 22,348
- ----------------------------------------------------------
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------
U.S. TREASURY BONDS (12.6%)
$ 3,500 6.25%, 8/15/23 $ 3,286
- ----------------------------------------------------------
TOTAL U.S. TREASURY BONDS 3,286
- ----------------------------------------------------------
TOTAL (COST $25,335)(a) $ 25,771
- ----------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $26,130.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 436
Unrealized depreciation 0
--------
Net unrealized depreciation $ 436
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
66
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
GOVERNMENT MORTGAGE FUND (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ---------------------------------------------------------
U.S. GOVERNMENT AGENCIES (98.7%)
FEDERAL HOME LOAN MORTGAGE CORP.:
$ 3,970 0.00%, 11/1/96*** $ 3,969
164 9.50%, 8/1/21 175
1,289 7.71%*, 12/1/23 1,335
3,929 7.50%, 4/1/24 3,942
4,360 7.50%, 4/1/24 4,375
4,369 7.50%, 4/1/24 4,384
4,418 7.50%, 4/1/24 4,433
3,762 9.50%, 6/1/25 4,028
FEDERAL NATIONAL MORTGAGE ASSOC.:
8,395 6.00%, 8/1/10 8,105
1,090 8.00%, 5/1/17 1,110
1,662 9.50%, 6/1/22 1,780
1,966 8.00%, 2/1/23 2,015
4,664 6.50%, 4/1/24 4,473
2,727 8.50%, 8/1/24 2,819
2,095 8.50%, 6/1/25 2,166
3,933 9.00%, 6/1/25 4,130
GOVERNMENT NATIONAL MORTGAGE ASSOC.:
4,274 9.50%, 4/15/10 4,619
9,212 6.00%, 1/15/11 8,934
1,638 9.50%, 11/15/17 1,756
414 9.00%, 11/15/18 436
284 9.50%, 1/15/19 305
384 8.50%, 12/15/19 398
30 8.50%, 2/15/20 31
920 9.50%, 5/15/20 987
1,213 9.00%, 3/15/21 1,277
92 8.50%, 5/15/21 95
889 9.00%, 5/15/21 936
801 9.00%, 6/15/21 843
1,685 9.50%, 6/15/21 1,807
5,247 8.00%, 5/15/22 5,361
5,370 8.00%, 5/15/22 5,486
3,243 8.00%, 10/15/22 3,314
2,513 9.00%, 2/15/23 2,650
3,820 7.50%, 7/15/23 3,832
1,505 8.00%, 8/15/23 1,538
4,469 7.00%, 9/15/23 4,391
2,563 7.00%, 10/15/23 2,518
4,274 7.00%, 12/15/23 4,199
2,784 6.50%, 1/15/24 2,658
2,565 7.50%, 1/15/24 2,573
10,304 7.00%, 8/15/24 10,149
- ---------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 124,332
- ---------------------------------------------------------
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ---------------------------------------------
U.S. TREASURY NOTES (0.8%)
$ 1,000 6.38%, 9/30/01 $ 1,011
- ---------------------------------------------------------
TOTAL U.S. TREASURY NOTES 1,011
- ---------------------------------------------------------
TOTAL (COST $126,359) (a) $125,343
- ---------------------------------------------------------
</TABLE>
- ---------------
Percentages are based on net assets of $125,992.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax reporting purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $31. Cost for federal income tax puposes differs from value
by net unrealized depreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 588
Unrealized depreciation (1,635)
--------
Net unrealized appreciation $ (1,047)
=========
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rate reflected on the Schedule of Investments is
the rate in effect at October 31, 1996.
*** Discount Rate Note.
SEE NOTES TO FINANCIAL STATEMENTS.
67
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
FUND FOR INCOME (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- --------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS (66.2%)
$ 987 Bear Stearns Mortgage
Capital Corp., 9.40%,
6/25/21 $ 979
2,469 Bear Stearns Secured
Investors Trust, 7.50%,
9/20/20 2,477
17 Drexel, Burnham & Lambert,
9.30%, 6/1/17 17
37 Federal Home Loan Mortgage
Corp., 9.30%, 8/15/15 37
1,000 Federal Home Mortgage
Assoc., 8.25%, 3/25/04 1,017
1,800 Federal Home Mortgage
Assoc., 8.50%, 2/1/05 1,901
1,690 Federal Home Mortgage
Assoc., 9.25%, 3/25/18 1,803
1,000 General Electric Capital
Mortgage Services, Inc.,
7.00%, 3/25/08 973
1,816 Housing Securities, Inc.,
7.25%, 4/25/08 1,821
1,259 Prudential Home Mortgage
Securities, 7.00%, 1/25/08 1,252
1,500 Resolution Trust Corp.,
8.20%, 11/25/21 1,511
- --------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 13,788
- --------------------------------------------------------
- --------------------------------------------------------
COMMERCIAL PAPER (1.6%)
FINANCIAL SERVICES (1.6%):
334 General Electric Capital
Corp., 5.57%, 11/1/96 334
- --------------------------------------------------------
TOTAL COMMERCIAL PAPER 334
- --------------------------------------------------------
- --------------------------------------------------------
U.S. GOVERNMENT AGENCIES (29.8%)
FEDERAL HOME LOAN MORTGAGE CORP.:
9 12.00%, 10/1/10 10
2 12.00%, 7/1/14 2
2 12.00%, 7/1/14 3
21 10.00%, 2/1/17 23
127 9.50%, 8/1/19 135
144 10.00%, 9/1/19 156
193 9.50%, 11/1/19 206
76 9.50%, 11/1/19 81
648 9.50%, 12/1/22 692
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOC.:
$ 35 13.00%, 12/1/12 $ 39
11 10.00%, 5/1/13 12
27 12.00%, 8/1/13 30
11 10.00%, 1/1/14 12
21 12.00%, 4/1/15 24
16 10.00%, 8/1/17 17
8 10.00%, 8/1/17 8
11 10.00%, 10/1/17 12
4 10.00%, 10/1/17 4
6 10.00%, 11/1/17 7
10 10.50%, 1/1/18 11
9 10.00%, 1/1/18 9
6 10.00%, 1/1/18 7
4 10.00%, 1/1/18 4
24 10.00%, 2/1/18 26
22 9.50%, 1/1/19 24
GOVERNMENT NATIONAL MORTGAGE ASSOC.:
65 11.00%, 9/20/14 70
35 10.50%, 2/15/16 39
48 10.00%, 3/15/16 53
121 10.00%, 6/15/17 131
89 9.50%, 8/15/17 95
45 9.50%, 8/15/17 48
87 10.00%, 10/15/17 95
78 10.00%, 1/15/18 85
60 10.00%, 1/15/18 66
16 10.00%, 2/15/18 18
24 10.00%, 3/15/18 26
402 9.50%, 5/15/18 432
90 9.50%, 6/15/18 97
68 10.00%, 7/15/18 74
8 10.00%, 7/15/18 8
94 10.00%, 9/15/18 103
81 10.00%, 9/15/18 89
70 10.00%, 9/15/18 76
44 10.00%, 9/15/18 48
28 10.00%, 9/15/18 30
282 10.00%, 11/15/18 308
101 10.00%, 1/15/19 110
47 10.25%, 3/15/19 51
31 10.25%, 6/15/19 33
160 9.50%, 10/15/19 171
143 10.00%, 7/15/20 156
715 9.50%, 9/20/20 762
260 10.00%, 6/15/21 283
990 10.00%, 8/15/25 1,084
- --------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 6,195
- --------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
68
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
FUND FOR INCOME (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- --------------------------------------------------------
U.S. TREASURY OBLIGATIONS (1.9%)
U.S. TREASURY STRIPS
$ 2,000 0.00%, 8/15/20 $ 394
- --------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS 394
- --------------------------------------------------------
TOTAL (COST $19,927) (a) $20,711
- --------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $20,816.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 856
Unrealized depreciation (72)
-------
Net unrealized appreciation $ 784
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
69
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
NATIONAL MUNICIPAL BOND FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ----------------------------------------------
MUNICIPAL BONDS (91.8%)
ALABAMA (10.6%):
$ 1,150 University of South Alabama
Revenue Bond, Series B,
4.00%, 11/15/98, MBIA $ 1,148
1,290 University of South Alabama
Revenue Bond, 4.20%,
11/15/03, AMBAC 1,230
1,825 University of South Alabama
Revenue Bond, 4.60%,
11/15/07, AMBAC 1,721
-------
4,099
-------
ALASKA (0.7%):
250 Anchorage, GO, 5.25%,
10/1/02, FGIC 258
-------
ARIZONA (2.7%):
125 Maricopa County, School
District #95, Queens
Creek, Series A, 5.20%,
7/1/05 128
270 Pinal County, School
District, GO, 5.40%,
7/1/07, FGIC 274
600 Yuma County, School
District, GO, 6.00%,
7/1/08 650
-------
1,052
-------
COLORADO (6.1%):
765 Eagle, Garfield & Routt
Counties, School District,
GO, 5.15%, 12/1/03 786
410 Eagle, Garfield & Routt
Counties, School District,
GO, 5.25%, 12/1/04 423
250 Summit County, School
District, GO, 4.75%,
12/1/02 252
885 Westminster, Sales & Use Tax
Revenue Bond, 5.00%,
12/1/97 895
-------
2,356
-------
CONNECTICUT (0.5%):
200 State, Special Tax
Obligation, 6.00%, 9/1/06 215
-------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
FLORIDA (5.5%):
$ 150 Orlando, Utilities
Commission, Water &
Electric, 5.80%, 10/1/06 $ 160
1,830 Sarasota Hospital, Revenue
Bonds, 6.00%, 10/1/05 1,979
-------
2,139
-------
HAWAII (7.2%):
1,635 Honolulu City, 6.00%,
11/1/05 1,758
1,000 Honolulu City & County, GO,
5.40%, 4/1/05 1,034
-------
2,792
-------
ILLINOIS (9.2%):
250 Chicago Public Building
Commission, Revenue Bonds,
6.05%, 1/1/06, AMBAC 267
530 Cicero, GO, 5.25%, 12/1/05 537
530 Cicero, GO, 5.35%, 12/1/06 538
500 Northlake, Tax Increment,
GO, 5.00%, 12/1/04, MBIA 505
500 Southern Illinois
University, Revenue Bonds,
5.00%, 4/1/97 503
500 Southern Illinois
University, Revenue Bonds,
5.20%, 4/1/07 499
200 State Sales Tax Revenue
Bonds, Series V, 5.88%,
6/15/05 213
500 Will County, Public Building
Commission, 5.00%,
12/1/97, FGIC 506
-------
3,568
-------
INDIANA (6.2%):
2,500 Southwest Allen,
5.13%, 7/15/16 2,392
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
70
<PAGE>
73
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
NATIONAL MUNICIPAL BOND FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
KANSAS (3.1%):
$ 100 Haysville, Water &
Wastewater Utility Revenue
Bond, 4.00%, 10/1/97 $ 100
110 Haysville, Water &
Wastewater Utility Revenue
Bond, 4.25%, 10/1/98 111
105 Haysville, Water &
Wastewater Utility Revenue
Bond, 4.50%, 10/1/99 106
130 Haysville, Water &
Wastewater Utility Revenue
Bond, 4.60%, 10/1/00, FSA 131
170 Haysville, Water &
Wastewater Utility Revenue
Bond, 4.70%, 10/1/01, FSA 172
180 Haysville, Water &
Wastewater Utility Revenue
Bond, 4.80%, 10/1/02 182
400 Haysville, Water &
Wastewater Utility Revenue
Bond, 5.70%, 10/1/11 411
-------
1,213
-------
MICHIGAN (8.5%):
255 Byron Center, GO, 5.40%,
5/1/07 260
250 Grosse Ile Township, School
District, GO, 6.00%,
5/1/22, FGIC 255
500 Inkster School District,
5.40%, 5/1/11 505
500 Kalamazoo, GO, 4.90%,
5/1/08, MBIA 487
1,000 Kalamazoo, GO, 5.00%,
5/1/09, MBIA 975
250 Leslie Public Schools, GO,
5.55%, 5/1/07 259
225 Municipal Bond Authority
Revenue Bonds, 6.70%,
11/1/06 250
275 Municipal Bond Authority
Revenue Bonds, 6.80%,
11/1/07 305
-------
3,296
-------
MISSOURI (1.4%):
500 Excelsior Springs School
District Building Corp.,
6.50%, 3/1/09 547
-------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
MONTANA (4.7%):
$ 500 University of Montana,
0.00%*, 11/15/14, MBIA $ 184
1,750 University of Montana,
5.00%, 11/15/17 1,633
-------
1,817
-------
NEW YORK (3.9%):
1,500 New York City, Sub-Series
A-10, 3.65%*, 8/1/16, LOC
Morgan Guaranty Trust 1,500
-------
OHIO (7.6%):
390 Butler County Waterworks,
3.60%, 12/1/97 389
200 Columbus Sewer, Revenue
Bonds, 5.50%, 6/1/01 208
1,000 Franklin County, Hospital
Revenue, 5.75%, 11/1/15,
callable 11/1/06 @ 101 990
230 Kent State University,
5.00%, 5/1/05 230
615 Springboro Community City
School District, GO,
3.80%, 12/10/98 613
500 State, Special Obligation,
5.80%, 6/1/03 531
-------
2,961
-------
PENNSYLVANIA (0.5%):
820 Erie, School District, GO,
0.00%, 5/1/23, MBIA 179
-------
SOUTH DAKOTA (3.3%):
250 Rapid City, Water Revenue,
5.00%, 11/1/04, FGIC 253
1,000 State, Health & Educational
Facility Revenue Bonds,
5.00%, 7/1/03, MBIA 1,010
-------
1,263
-------
TENNESSEE (1.3%):
500 Dickson, Electric Utility
Revenue Bond, 5.00%,
3/1/03, MBIA 509
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
71
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
NATIONAL MUNICIPAL BOND FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
TEXAS (3.3%):
$ 200 Conroe Independent School
District, GO, 6.50%,
2/1/04 $ 220
200 Keller Independent School
District, GO, 6.20%,
8/15/04 218
100 State, Series A, GO, 6.00%,
10/1/08 108
525 Wichita Falls, 4.40%, 9/1/98 527
200 Ysleta Independent School
District, GO, 5.60%,
8/15/02 210
-------
1,283
-------
WASHINGTON (0.5%):
200 Seattle Municipal Light &
Power, Revenue Bonds,
6.00%, 7/1/03 214
-------
WISCONSIN (4.4%):
200 Milwaukee Sewer District,
Series A, GO, 6.70%,
10/1/02 221
450 Sheboygan Area School
District, 6.80%, 4/1/98 468
1,000 State, Health Revenue Bonds,
5.50%, 12/1/98 1,027
-------
1,716
-------
WYOMING (0.6%):
225 Sweetwater County School
District, 6.00%, 6/1/98 232
- ---------------------------------------------------------
TOTAL MUNICIPAL BONDS 35,601
- ---------------------------------------------------------
- ---------------------------------------------------------
MUNICIPAL WARRANTS (2.4%)
ALABAMA (2.4%):
400 Scottsboro, Revenue Warrant,
5.20%, 7/1/05 408
100 Scottsboro, Revenue Warrant,
5.30%, 7/1/06 102
400 Scottsboro, Revenue Warrant,
5.38%, 7/1/07 407
-------
917
- ---------------------------------------------------------
TOTAL MUNICIPAL WARRANTS 917
- ---------------------------------------------------------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- ---------------------------------------------------------
INVESTMENT COMPANIES (7.7%)
1,164,900 Federated Tax-Free Money
Market Fund $ 1,165
1,811,991 Lehman Municipal Money
Market Fund 1,812
- ---------------------------------------------------------
TOTAL INVESTMENT COMPANIES 2,977
- ---------------------------------------------------------
TOTAL (COST $39,189) (a) $39,495
- ---------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $38,766.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C> <C>
Unrealized appreciation $ 611
Unrealized depreciation (305)
-------
Net unrealized appreciation $ 306
========
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of market
interest rates. The rate reflected on the Schedule of Investments is the rate
in effect at October 31, 1996.
AMBAC -- AMBAC Indemnity Corp.
FGIC -- Financial Guaranty Insurance Co.
FSA -- Financial Security Assurance
GO -- General Obligation
LOC -- Letter of Credit
MBIA -- Municipal Bond Insurance Assoc.
SEE NOTES TO FINANCIAL STATEMENTS.
72
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
NEW YORK TAX-FREE FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- -------------------------------------------------------
NEW YORK MUNICIPAL BONDS (94.7%)
$ 1,200 Metropolitan Transit
Authority, 7.50%, 7/1/17,
AMBAC, Prerefunded 7/1/98
@ 102 $ 1,291
250 Metropolitan Transit
Authority, 7.00%, 7/1/09,
AMBAC 292
250 Nassau County Industrial
Development Agency, Civic
Facilities Revenue Bonds,
6.75%, 8/1/11, AMBAC,
callable 8/1/01 @ 102 277
680 New York City, Cultural
Resources Revenue Bonds,
6.63%, 1/1/11, AMBAC 742
300 New York City, Series B, GO,
7.00%, 10/1/18, FSA 319
350 New York City, Series C, GO,
7.00%, 2/1/12, FGIC,
Callable 2/1/97 @ 101.5 358
700 New York City, Housing
Development, Refunding
Revenue Bonds, Multi-Unit
Mortgage, Series A, 7.30%,
6/1/10, FHA 748
675 New York City, Housing
Development Refunding
Revenue Bonds, Multi-Unit
Mortgage, Series A, 7.35%,
6/1/19, FHA 716
335 New York City, Housing
Development Revenue Bonds,
Series 1, 7.38%, 4/1/17,
MBIA 349
200 New York City, Industrial
Development Agency, Civic
Facilities Revenue Bonds,
USTA National Tennis
Center, 6.38%, 11/15/14 214
650 New York City, Municipal
Water Finance Authority,
6.75%, 6/15/16, FGIC,
callable 6/15/01 @ 101 710
220 New York City Transit
Authority, 7.50%, 1/1/00 244
370 State, GO, 6.75%, 8/1/18,
AMBAC 406
325 State, GO, 6.75%, 8/1/19,
AMBAC 357
<CAPTION>
SHARES
OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
$ 700 State Dormitory Authority,
Revenue Bonds, City
University, Series 2,
6.75%, 7/1/24, MBIA $ 800
750 State Dormitory Authority,
Ithaca College, Revenue
Bonds, 6.50%, 7/1/10, MBIA 809
225 State Dormitory Authority,
Revenue Bonds, Judicial
Facilities Leases, Series
B, 7.00%, 4/15/16, MBIA 250
340 State Medical Care
Facilities Finance Agency,
7.45%, 2/15/29, MBIA,
Prerefunded 2/15/00 @ 102 378
565 State Medical Care
Facilities Finance Agency,
Refunding Revenue Bonds,
North Shore University,
7.20%, 11/1/20, MBIA 625
550 State Medical Care
Facilities Finance Agency,
Revenue Bonds, St. Luke's,
Series A, 7.10%, 2/15/27,
FHA, callable 2/15/97 @
102 565
500 State Medical Care
Facilities, Unrefunded
Revenue Bonds, 7.38%,
8/15/19, MBIA 546
550 State Tollway Authority,
General Revenue Bonds,
Series C, 6.00%, 1/1/25,
FGIC 564
1,000 State Urban Development,
7.50%, 1/1/12, AMBAC,
Prerefunded 1/1/98 @ 102 1,061
400 State Urban Development,
7.50%, 1/1/20, FSA,
Prerefunded 1/1/00 @ 102 444
900 Triborough Bridge & Tunnel
Authority, 7.00%, 1/1/20,
MBIA, Prerefunded 1/1/01 @
102 1,002
1,000 Triborough Bridge & Tunnel
Authority, Special
Obligation Refunding
Revenue Bonds, Series B,
6.88%, 1/1/15, AMBAC 1,097
250 University Puerto Rico
Revenue Bonds, 5.25%,
6/1/25, MBIA 240
- -------------------------------------------------------
TOTAL NEW YORK MUNICIPAL BONDS 15,404
- -------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
73
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
NEW YORK TAX-FREE FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- -------------------------------------------------------
INVESTMENT COMPANIES (3.4%)
547,732 Providence of New York Fund $ 548
- -------------------------------------------------------
TOTAL INVESTMENT COMPANIES 548
- -------------------------------------------------------
TOTAL (COST $14,834)(a) $15,952
- -------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $16,269.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 1,118
Unrealized depreciation --
-------
Net unrealized appreciation $ 1,118
========
</TABLE>
AMBAC -- AMBAC Indemnity Corporation
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FSA -- Financial Security Assurance
GO -- General Obligation
MBIA -- Municipal Bond Insurance Association
SEE NOTES TO FINANCIAL STATEMENTS.
74
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL BOND FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARE OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------
MUNICIPAL BONDS (95.8%)
- ------------------------------------------------------------
ALTERNATIVE MINIMUM TAX PAPER (9.1%)
$ 3,500 Student Loan Funding Corp.,
Series A, 5.50%, 12/1/01 $ 3,582
3,000 Student Loan Funding Corp.,
Series A, 5.85%*, 8/1/04 3,132
- ------------------------------------------------------------
TOTAL ALTERNATIVE MINIMUM TAX PAPER 6,714
- ------------------------------------------------------------
- ------------------------------------------------------------
GENERAL OBLIGATION BONDS (36.9%)
STATE (0.2%):
150 Ohio State, GO,
4.35%, 8/1/02 148
----------
COUNTY, CITY, SPECIAL DISTRICT & SCHOOLS (36.7%):
1,000 Anthony Wayne School
District,
5.75%, 12/1/18, FGIC 1,011
665 Avon Local School District,
5.50%, 12/1/04, AMBAC 696
250 Avon Local School District,
5.55%, 12/1/05, AMBAC 262
1,500 Batavia Local School
District,
7.00%, 12/1/14, MBIA 1,716
350 Belmont County,
5.85%, 12/1/16, callable
12/1/06 @ 101 355
1,000 Brecksville-Broadview
Heights,
City School District,
6.50%, 12/1/16 1,107
355 Butler County,
5.60%, 12/1/09 361
455 Butler County,
5.65%, 12/1/10 463
500 Canton Waterworks System,
5.75%, 12/1/10, AMBAC 514
1,385 Crawford County,
6.75%, 12/1/19, AMBAC 1,545
1,000 Delaware City School
District,
5.75%, 12/1/20, FGIC 1,005
300 Groveport,
5.60%, 12/1/11, AMBAC 307
1,000 Hilliard School District,
6.15%, 12/1/06, callable
12/1/03 @ 100 1,062
1,135 Holmes County,
5.80%, 12/1/19, AMBAC 1,147
285 Huron County Landfill Issue
II,
5.40%, 12/1/07 290
<CAPTION>
SHARE OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
$ 320 Huron County Landfill Issue
II,
5.60%, 12/1/09 $ 327
450 Indian Lake School Distrct,
3.85%, 12/1/98, FGIC 449
2,500 Indian Valley Local School
District,
7.00%, 12/1/14, callable
12/1/05 @ 102 2,885
1,250 Lakeview Local School
District,
6.95%, 12/1/19, AMBAC 1,413
600 Madison County,
7.00%, 12/1/19, AMBAC 689
780 Middletown,
5.70%, 12/1/06 789
1,000 Monroe Falls, Series A,
6.95%, 12/1/14, AMBAC 1,139
500 Northeastern Local School
District,
5.55%, 12/1/18, FGIC 496
500 Olentangy Local School
District,
6.25%, 12/1/14, callable
12/1/04 @ 102 526
1,000 Toledo,
6.10%, 12/1/14, AMBAC, 1,046
1,500 Twinsburg Local School
District,
5.90%, 12/1/21 1,536
3,000 Upper Arlington City School
District,
5.13%, 12/1/19, MBIA 2,828
1,000 Westerville City School
District,
5.65%, 12/1/06 1,001
----------
26,965
- ------------------------------------------------------------
TOTAL GENERAL OBLIGATION BONDS 27,113
- ------------------------------------------------------------
- ------------------------------------------------------------
REVENUE BONDS (49.8%)
EDUCATION (5.4%):
3,000 Kent State University,
5.50%, 5/1/28 2,904
1,000 State Higher Education
Facility,
5.88%, 12/1/04, callable
12/1/01 @ 102 1,058
----------
3,962
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
75
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL BOND FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARE OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
HOSPITALS, NURSING HOMES & HEALTH CARE (18.3%):
$ 1,300 Cuyahoga County Hospital,
5.63%,1/15/21, MBIA,
callable 1/15/06 @ 102 $ 1,285
1,000 Cuyahoga County Hospital,
5.63%,1/15/26, callable
1/15/06 @ 102 984
330 Franklin County Hospital,
4.50%, 11/1/98 332
455 Franklin County Hospital,
4.90%, 11/1/00 460
500 Franklin County Hospital,
5.88%, 11/1/25, callable
11/1/06 @ 101 498
1,720 Franklin County, Riverside
Hospital,
7.25%, 5/15/20, MBIA 1,886
1,000 Garfield Heights, Marymont
Hospital,
Refunding & Improvement,
6.70%, 11/15/15 1,053
2,000 Lake County Hospital
Improvement Facilities,
6.38%, 8/15/03, AMBAC 2,188
2,000 Lucas County Hospital,
5.75%, 11/15/14, MBIA 2,016
500 Montgomery County Hospital,
5.50%, 4/1/26 483
635 Portage County Hospital,
6.50%, 11/15/03, MBIA 701
675 Portage County Hospital,
6.50%, 11/15/04, MBIA 749
715 Portage County Hospital,
6.50%, 11/15/05, MBIA 796
----------
13,431
----------
HOUSING (5.7%):
2,000 Cuyahoga County Multifamily
Revenue,
6.60%, 10/20/30, GNMA 2,074
275 Ohio Cap Corp.,
5.75%, 7/1/06, MBIA 285
1,775 Ohio Cap Corp.,
6.35%, 7/1/22, callable
7/1/05 @ 102 1,820
----------
4,179
----------
<CAPTION>
SHARE OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
PUBLIC FACILITIES (CONVENTION, SPORT, PUBLIC
BUILDINGS) (3.9%):
$ 2,000 State Building Authority,
Adult Correctional
Facilities,
6.00%, 10/1/07 $ 2,120
500 Toledo, Lucas County,
5.50%, 10/1/10, MBIA 503
200 Toledo, Lucas County
Convention Center,
5.70%, 10/1/15, MBIA 202
----------
2,825
----------
TRANSPORTATION (4.1%):
3,000 State Highway,
4.80%, 5/15/04 3,013
----------
UTILITY (SEWERS, TELEPHONE, ELECTRIC) (12.4%):
1,985 Cleveland Public Power
Systems,
7.00%, 11/15/24, MBIA 2,279
1,575 Franklin County Water
System,
5.80%, 12/1/22 1,594
250 Huber Heights Water System,
5.25%, 12/1/07, MBIA 252
815 Huber Heights Water System,
5.55%, 12/1/10, MBIA 826
650 Huber Heights Water System,
0.00%, 12/1/21, MBIA 157
1,000 Huber Heights Water System,
0.00%, 12/1/22, MBIA 228
1,000 Huber Heights Water System,
0.00%, 12/1/23, MBIA 215
1,245 Huber Heights Water System,
0.00%, 12/1/24, MBIA 253
1,195 Huber Heights Water System,
0.00%, 12/1/25, MBIA 230
500 State Water Development
Authority Revenue,
Fresh Water Service,
5.90%, 12/1/21, AMBAC 511
1,205 Stark County Sewer District,
6.25%, 12/1/07 1,323
500 Southwest Regional Water,
6.00%, 12/1/20, MBIA 514
500 Toledo Waterworks,
5.00%, 11/15/02, FGIC 508
250 Warren County Sewer,
5.65%, 12/1/20, FGIC 248
----------
9,138
- ------------------------------------------------------------
TOTAL REVENUE BONDS 36,548
- ------------------------------------------------------------
TOTAL MUNICIPAL BONDS 70,375
- ------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
76
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO MUNICIPAL BOND FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARE OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------
INVESTMENT COMPANIES (2.6%)
1,554,119 Federated Ohio Municipal
Cash Trust $ 1,554
347,593 Vanguard Ohio Tax Free
Money Market Portfolio 348
- ------------------------------------------------------------
Total Investment Companies 1,902
- ------------------------------------------------------------
TOTAL (COST $69,716) (a) $ 72,277
- ------------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $73,463.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 2,570
Unrealized depreciation (9)
----------
Net unrealized appreciation $ 2,561
==========
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of market
interest rates. The rate reflected on the Schedule of Investments is the rate
in effect at October 31, 1996.
AMBAC -- American Municipal Bond Assurance Corp.
FGIC -- Financial Guaranty Insurance Company
GO -- General Obligation
GNMA -- Government National Mortgage Assoc.
MBIA -- Municipal Bond Insurance Assoc.
SEE NOTES TO FINANCIAL STATEMENTS.
77
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
BALANCED FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------
COMMERCIAL PAPER (2.0%)
FINANCIAL SERVICES (2.0%):
$ 5,384 General Electric Capital
Corp., 5.57%, 11/1/96 $ 5,384
- ------------------------------------------------------------
TOTAL COMMERCIAL PAPER 5,384
- ------------------------------------------------------------
- ------------------------------------------------------------
COMMON STOCKS (57.5%)
AEROSPACE/DEFENSE (2.4%):
37,700 AlliedSignal, Inc. 2,469
20,400 Boeing Co. 1,946
24,400 Textron, Inc. 2,166
----------
6,581
----------
ALUMINUM (0.5%):
25,300 Aluminum Co. of America 1,483
----------
AUTOMOBILES (0.7%):
16,000 Chrysler Corp. 538
30,000 Ford Motor Co. 938
4,300 Ford Motor Co., Convertible
Preferred 440
----------
1,916
----------
AUTOMOTIVE PARTS (0.3%):
30,000 AutoZone, Inc. (b) 769
----------
BANKS (4.7%):
39,900 BankAmerica Corp. 3,651
36,000 Chase Manhattan Corp. 3,087
23,600 First Union Corp. 1,717
7,000 J.P. Morgan & Co., Inc. 605
25,000 Mellon Bank Corp. 1,628
48,500 Norwest Corp. 2,128
----------
12,816
----------
BEVERAGES (0.9%):
66,800 Anheuser-Busch Co., Inc. 2,572
----------
CHEMICALS (1.3%):
30,500 Air Products & Chemicals,
Inc. 1,830
23,800 Dow Chemical Co. 1,850
----------
3,680
----------
COMPUTERS & PERIPHERALS (2.4%):
52,000 Bay Networks, Inc. (b) 1,053
15,000 Cisco Systems, Inc. (b) 928
30,300 Hewlett Packard Co. 1,337
25,000 International Business
Machines Corp. 3,225
----------
6,543
----------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
CONSUMER GOODS (0.7%):
20,000 Colgate-Palmolive, Inc. $ 1,840
30,000 Jardine Strategic Holdings
Ltd. ADR 98
16,000 Professional Staff PLC
ADR (b) 156
----------
2,094
----------
CONTAINERS -- METAL, GLASS, PAPER,
PLASTIC (0.5%):
22,600 Newell Co. 641
30,000 Sonoco Products Co. 799
----------
1,440
----------
COSMETICS & RELATED (0.5%):
27,100 Avon Products, Inc. 1,470
----------
ELECTRONIC & ELECTRICAL -- GENERAL (2.9%):
15,000 Altera Corp. (b) 930
25,100 Emerson Electric Co. 2,234
30,400 General Electric Co. 2,941
900 Hitachi ADR 80
36,300 Raytheon Co. 1,788
----------
7,973
----------
FINANCIAL SERVICES (2.0%):
31,400 American Express Co. 1,476
61,200 Federal National Mortgage
Assoc. 2,394
18,300 Household International,
Inc. 1,620
----------
5,490
----------
FOOD DISTRIBUTORS, SUPERMARKETS &
WHOLESALERS (0.2%):
16,500 Supervalu, Inc. 491
----------
FOOD PROCESSING & PACKAGING (1.5%):
31,500 ConAgra, Inc. 1,571
69,000 Sara Lee Corp. 2,450
----------
4,021
----------
FOREST PRODUCTS -- LUMBER & PAPER (0.3%):
14,000 Mead Corp. 795
----------
HEALTH CARE (0.7%):
52,500 Columbia HCA Healthcare
Corp. 1,877
----------
HEAVY MACHINERY -- INDUSTRIAL, FARM,
CONSTRUCTION (0.9%):
69,300 Baker Hughes, Inc. 2,469
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
78
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
BALANCED FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
INSURANCE (3.1%):
10,000 Aetna Insurance Co. $ 669
69,942 Allstate Corp. 3,925
23,400 Chubb Corp. 1,170
31,000 Everest Re Holdings, Inc. 791
36,700 St. Paul Cos., Inc. 1,996
----------
8,551
----------
MANUFACTURING -- CONSUMER GOODS (0.3%):
17,300 Litton Industries, Inc. (b) 776
----------
MEDICAL SUPPLIES (0.9%):
60,000 Biomet, Inc. 968
24,200 Medtronic, Inc. 1,558
----------
2,526
----------
OIL & GAS EXPLORATION, PRODUCTION & SERVICES
(8.9%):
12,000 Atlantic Richfield Co. 1,590
67,600 Enron Corp. 3,143
23,000 Exxon Corp. 2,038
41,700 Mobil Corp. 4,868
57,600 Phillips Petroleum Co. 2,362
400 Royal Dutch Petroleum Co.
ADR 66
23,500 Royal Dutch Petroleum Co.
ADR 3,886
16,000 Schlumberger Ltd. 1,586
48,500 Texaco, Inc. 4,929
----------
24,468
----------
PAINT, VARNISHES, ENAMELS (0.3%):
17,700 Sherwin-Williams Co. 887
----------
PHARMACEUTICALS (4.8%):
44,000 Abbott Laboratories 2,228
43,900 American Home Products Corp. 2,689
7,000 Bristol-Myers Squibb Co. 740
20,600 Merck & Co., Inc. 1,527
52,800 Pfizer, Inc. 4,369
24,200 Schering-Plough Corp. 1,549
----------
13,102
----------
PRIMARY METAL & MINERAL PRODUCTION (0.2%):
17,100 USX-U.S. Steel Group, Inc. 466
----------
PUBLISHING (0.5%):
35,000 Time Warner, Inc. 1,304
----------
RADIO & TELEVISION (0.6%):
53,700 Viacom, Class B (b) 1,752
----------
RAILROAD & RAILROAD HOLDING COMPANIES (0.6%):
19,000 Norfolk Southern Corp. 1,693
----------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
RETAIL (3.0%):
82,400 Dayton Hudson Corp. $ 2,853
24,000 Lowes Cos., Inc. 969
16,000 May Department Stores Co. 758
19,500 Sears, Roebuck & Co. 943
51,800 Wal-Mart Stores, Inc. 1,379
32,800 Walgreen Co. 1,238
----------
8,140
----------
RETAIL -- SPECIALTY STORES (0.4%):
20,000 Home Depot, Inc. 1,095
----------
SEMICONDUCTORS (1.5%):
19,700 Intel Corp. 2,165
300 Kyocera ADR 39
75,000 LSI Logic Corp. (b) 1,988
----------
4,192
----------
SOFTWARE & COMPUTER SERVICES (1.1%):
10,650 Microsoft Corp. (b) 1,462
32,000 Novell, Inc. (b) 296
30,000 Oracle Systems Corp. (b) 1,269
----------
3,027
----------
TAX RETURN PREPARATION (0.4%):
40,500 H & R Block, Inc. 1,002
----------
TOBACCO & TOBACCO PRODUCTS (0.6%):
16,500 Philip Morris Cos., Inc. 1,528
----------
UTILITIES -- ELECTRIC (3.2%):
54,900 Consolidated Edison Co. NY,
Inc. 1,606
52,000 DQE, Inc. 1,495
20,000 FPL Group, Inc. 920
111,800 Houston Industries 2,557
57,800 Texas Utilities Co. 2,341
----------
8,919
----------
UTILITIES -- TELECOMMUNICATIONS (3.7%):
38,000 AT&T Corp. 1,325
37,000 Ameritech Corp. 2,026
700 Cia Telecommuncaciones de
Chile SA ADR 69
66,500 GTE Corp. 2,801
17,176 Lucent Technologies, Inc. 807
100,000 MCI Telecommunications Corp. 2,513
1,000 Telefonica de Espana ADR 60
25,000 Worldcom, Inc. (b) 609
----------
10,210
- ------------------------------------------------------------
TOTAL COMMON STOCKS 158,118
- ------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
79
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
BALANCED FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------
FOREIGN COMMON STOCKS (4.2%)
AUSTRALIA (0.2%):
BANKS (0.1%):
10,700 National Australia Bank Ltd. $ 117
----------
BUILDING PRODUCTS (0.0%+):
27,300 CSR Ltd. 92
----------
OIL & GAS EXPLORATION, PRODUCTION & SERVICE
(0.1%):
26,500 Santos Ltd. 106
----------
PUBLISHING (0.0%+):
22,000 Publishing & Broadcasting
Ltd. 99
- ------------------------------------------------------------
TOTAL AUSTRALIA 414
- ------------------------------------------------------------
AUSTRIA (0.0%+):
OIL & GAS EXPLORATION, PRODUCTION & SERVICE
(0.0%+):
270 OMV AG 26
- ------------------------------------------------------------
TOTAL AUSTRIA 26
- ------------------------------------------------------------
BELGIUM (0.1%):
UTILITIES -- ELECTRIC (0.1%):
700 Power Financial Corp. 103
- ------------------------------------------------------------
TOTAL BELGIUM 103
- ------------------------------------------------------------
BRITAIN (0.8%):
AEROSPACE & DEFENSE (0.0%):
22,000 Rolls-Royce PLC 91
----------
BANKS (0.1%):
21,000 Allied Irish Banks PLC 133
2,100 HSBC Holdings 44
----------
177
----------
COMPUTER SOFTWARE & SERVICES (0.0%+):
10,000 JBA Holdings PLC 83
----------
FOOD PRODUCTS (0.1%):
43,000 Tesco PLC 233
----------
INDUSTRIAL GOODS & SERVICES (0.1%):
70,000 Hanson PLC 92
----------
INSURANCE (0.1%):
28,700 Commercial Union PLC 303
----------
OIL & GAS EXPLORATION, PRODUCTION & SERVICE
(0.1%):
13,200 Shell Transport & Trading 216
----------
PHARMACEUTICALS (0.1%):
7,000 Glaxo Wellcome PLC 110
----------
PUBLISHING (0.0%+):
2,200 Reed International PLC 41
----------
REAL ESTATE (0.0%+):
20,000 Slough Estates PLC 81
----------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
RETAIL (0.0%+):
33,600 Marks & Spencer PLC $ 282
----------
TRANSPORTATION (0.1%):
22,000 Peninsular & Oriental Steam
Navigation Co. 216
----------
UTILITIES -- WATER (0.1%):
28,300 Severn Trent PLC 285
- ------------------------------------------------------------
TOTAL BRITAIN 2,210
- ------------------------------------------------------------
CANADA (0.0%+):
FOREST PRODUCTS (0.0%+):
5,900 Abitibi-Price, Inc. 83
- ------------------------------------------------------------
TOTAL CANADA 83
- ------------------------------------------------------------
DENMARK (0.0%+):
BANKING (0.0%+):
1,000 Den Danske Bank 72
- ------------------------------------------------------------
TOTAL DENMARK 72
- ------------------------------------------------------------
FINLAND (0.1%):
BANKING (0.1%):
53,000 Merita, Ltd. (b) 157
- ------------------------------------------------------------
TOTAL FINLAND 157
- ------------------------------------------------------------
FRANCE (0.3%):
AGRICULTURE (0.0%+):
300 Eridania Beghin-Say SA 48
----------
BUILDING PRODUCTS (0.1%):
2,350 Compagnie de Saint Gobain 317
----------
CHEMICALS (0.0%+):
1,000 Rhone-Poulenc SA, Class A 30
----------
FINANCIAL SERVICES (0.1%):
900 Credit Local de France 78
----------
INSURANCE (0.1%):
1,250 Cardif SA 171
----------
OIL & GAS EXPLORATION, PRODUCTION & SERVICE
(0.0%+):
700 Elf Aquitaine SA 56
----------
RETAIL (0.0%+):
1,300 Casino Guichard-Perrichon 59
----------
TOBACCO & TOBACCO PRODUCTS (0.0%+):
700 SEITA 28
- ------------------------------------------------------------
TOTAL FRANCE 787
- ------------------------------------------------------------
GERMANY (0.3%):
AUTOMOTIVE (0.1%):
1,100 Volkswagen AG 334
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
80
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
BALANCED FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
BANKS (0.1%):
1,900 Bayerische Hypotheken-und
Weschel-Bank AG $ 56
8,000 Commerzbank AG 179
----------
235
----------
ELECTRICAL & ELECTRONIC (0.0%+):
1,000 Siemens AG 52
----------
CHEMICALS (0.1%):
6,300 BASF AG 201
----------
STEEL (0.0%+):
900 SGL Carbon AG 100
- ------------------------------------------------------------
TOTAL GERMANY 922
- ------------------------------------------------------------
HOLLAND (0.2%):
BANKS (0.1%):
4,497 ING Groep N.V. 140
----------
DISTRIBUTION/WHOLESALE (0.0%+):
4,500 Internatio-Muller N.V. 109
----------
ELECTRICAL & ELECTRONIC (0.1%):
3,300 Philips Electronics N.V. 116
----------
OIL & GAS EXPLORATION, PRODUCTION & SERVICE
(0.0%+):
500 Royal Dutch Petroleum Co. 83
----------
TRANSPORTATION (0.0%+):
3,600 Nedlloyd Group N.V. 90
- ------------------------------------------------------------
TOTAL HOLLAND 538
- ------------------------------------------------------------
HONG KONG (0.2%):
HOTELS & LODGING (0.1%):
35,000 Wharf Holdings Ltd. 145
----------
REAL ESTATE (0.1%):
10,000 Cheung Kong 80
56,000 Hang Lung Development Co. 111
15,000 Hutchison Whampoa Ltd. 105
----------
296
----------
TRANSPORTATION (0.0%+):
60,000 Cross-Harbour Tunnel Co. 130
- ------------------------------------------------------------
TOTAL HONG KONG 571
- ------------------------------------------------------------
ITALY (0.3%):
AGRICULTURE (0.1%):
157,000 Parmalat Finanziaria SpA 225
----------
BANKS (0.1%):
28,000 Istituto Mobiliare Italiano
SpA 222
----------
UTILITIES -- TELECOMMUNICATIONS (0.1%):
121,800 Telecom Italia SpA 232
- ------------------------------------------------------------
TOTAL ITALY 679
- ------------------------------------------------------------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
JAPAN (1.3%):
AUTOMOTIVE (0.2%):
13,000 Honda Motor Co. $ 311
5,000 Toyota Motor Co. 118
----------
429
----------
BANKS (0.1%):
17,000 77 Bank 160
20,000 Higo Bank 147
----------
307
----------
BREWERY (0.1%):
15,000 Kirin Brewery Co. Ltd. 154
----------
BROKERAGE SERVICES (0.1%):
9,000 Nomura Securities Co. Ltd. 149
----------
BUILDING PRODUCTS (0.0%+):
12,000 Inax 102
----------
CHEMICALS (0.0%+):
14,000 Konica Corp. 94
----------
COSMETICS (0.0%+):
6,000 Kao Corp. 71
----------
DISTRIBUTION/WHOLESALE (0.1%):
49,000 Marubeni Corp. 227
----------
ELECTRICAL & ELECTRONIC (0.1%):
7,000 Hitachi Ltd. 62
19,000 Matsushita Electric Works 304
----------
366
----------
ENGINEERING (0.0%+):
3,000 Kinden Corp. 42
----------
ENTERTAINMENT (0.0%+):
800 Toho Co. 123
----------
MANUFACTURING-CONSUMER GOODS (0.1%):
24,000 Furukawa Co. Ltd. 105
3,000 Kurita Water Industries 60
----------
165
----------
PUBLISHING (0.1%):
12,000 Toppan Printing Co. Ltd. 147
----------
REAL ESTATE (0.1%):
10,000 Daito Trust Construction Co.
Ltd. 126
13,000 Daiwa Kosho Lease Co. Ltd. 119
8,000 Mitsui Fudosan 99
----------
344
----------
RETAIL (0.1%):
21,000 Mycal Corp. 323
----------
TOOLS (0.0%+):
10,000 Makita Corp. 137
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
81
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
BALANCED FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
UTILITIES-ELECTRIC (0.2%):
22,000 Shikoku Electric Power $ 445
- ------------------------------------------------------------
TOTAL JAPAN 3,625
- ------------------------------------------------------------
MALAYSIA (0.0%+):
STEEL (0.0%+):
52,000 Malayawata Steel Berhad 104
- ------------------------------------------------------------
TOTAL MALAYSIA 104
- ------------------------------------------------------------
NEW ZEALAND (0.1%):
AIRLINES (0.0%+):
25,000 Air New Zealand Ltd., Class
B 61
HOUSEHOLD GOODS-APPLIANCES & FURNISHINGS (0.1%):
34,800 Fisher & Paykel Industries
Ltd. 127
- ------------------------------------------------------------
TOTAL NEW ZEALAND 188
- ------------------------------------------------------------
SINGAPORE (0.0%+):
REAL ESTATE (0.0%+):
27,000 Straits Steamship Land Ltd. 83
- ------------------------------------------------------------
TOTAL SINGAPORE 83
- ------------------------------------------------------------
SPAIN (0.0%+):
BANKS (0.0%+):
600 Banco Bilbao Vizcaya
(Registered) 29
----------
INSURANCE (0.0%+):
1,300 Corporacion Mapfre 64
----------
UTILITIES-ELECTRIC (0.0%+):
8,000 Iberdrola SA 85
- ------------------------------------------------------------
TOTAL SPAIN 178
- ------------------------------------------------------------
SWEDEN (0.1%):
BANKS (0.1%):
11,200 Sparbanken Sverige AB,
Class A 177
----------
PUBLISHING (0.0%+):
5,000 Marieberg Tidnings AB 122
- ------------------------------------------------------------
TOTAL SWEDEN 299
- ------------------------------------------------------------
SWITZERLAND (0.2%):
BANKS (0.1%):
1,297 CS Holding AG 130
----------
BUSINESS SERVICES (0.0%+):
35 Societie Generale de
Surveillance Holding SA,
Class B 80
----------
FOOD PRODUCTS (0.0%+):
97 Nestle SA-Registered 106
----------
INSURANCE (0.1%):
60 Baloise Holdings-Registered 126
----------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
PHARMACEUTICALS (0.0%+):
68 Ciba-Geigy AG -- Registered $ 84
- ------------------------------------------------------------
TOTAL SWITZERLAND 526
- ------------------------------------------------------------
TOTAL FOREIGN COMMON STOCKS 11,565
- ------------------------------------------------------------
- ------------------------------------------------------------
CONVERTIBLE BONDS (0.1%)
BANKS (0.0%+):
$ 94 Mitsubishi Bank
International Finance
Bermuda, 3.00%, 11/30/02 102
----------
TELECOMMUNICATIONS (0.1%):
100 Nominal Telekom Malaysia,
4.00%, 10/3/04 105
- ------------------------------------------------------------
TOTAL CONVERTIBLE BONDS 207
- ------------------------------------------------------------
- ------------------------------------------------------------
CORPORATE BONDS (9.8%)
AUTOMOTIVE (1.5%):
1,500 Daimler-Benz North America,
7.38%, 9/15/06 1,549
800 Ford Motor Co., 8.88%,
1/15/22 924
1,500 General Motors Corp., 9.13%,
7/15/01 1,648
----------
4,121
----------
BANKS (1.7%):
300 BankAmerica Corp., 9.63%,
2/13/01 333
1,000 BankAmerica Corp., 8.38%,
3/15/02 1,081
1,200 First Union Corp., 9.45%,
8/15/01 1,335
1,000 Societe Generale-New York,
7.40%, 6/1/06 1,026
400 SunTrust Banks, Inc., 7.38%,
7/1/02 414
500 Wachovia Corp., 6.05%,
10/1/25 495
----------
4,684
----------
BROKERAGE SERVICES (2.0%):
1,000 Lehman Brothers, Inc.,
7.63%, 6/1/06 1,019
1,000 Merrill Lynch Corp., 8.25%,
11/15/99 1,054
1,000 Merrill Lynch Corp., 6.00%,
3/1/01 980
750 Morgan Stanley Group, Inc.,
8.88%, 10/15/01 821
800 Morgan Stanley Group, Inc.,
5.63, 3/1/99 790
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
82
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
BALANCED FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
$ 800 Salomon Brothers, Inc.,
6.70%, 12/1/98 $ 807
----------
5,471
----------
ELECTRICAL & ELECTRONIC (0.4%):
1,000 Philips Electronics,
7.13%, 5/15/25 1,011
----------
FINANCIAL SERVICES (0.7%):
1,500 BHP Finance,
6.69%, 3/1/06 1,474
500 Liberty Mutual,
7.88%, 10/15/26 507
----------
1,981
----------
INDUSTRIAL GOODS & SERVICES (2.1%):
1,200 Black & Decker,
7.50%, 4/1/03 1,241
500 ConAgra, Inc.,
7.13%, 10/1/26 509
500 EG&G,
6.80%, 10/15/05 488
1,000 Georgia-Pacific,
9.95%, 6/15/02 1,145
1,000 Harris Corp.,
6.65%, 8/1/06 1,006
700 Tosco,
7.63%, 5/15/06 719
500 Westvaco Corp.,
9.75%, 6/15/20 623
----------
5,731
----------
INSURANCE (0.2%):
600 Aetna Insurance Co.,
6.97%, 8/15/36 610
----------
MEDIA (0.5%):
1,200 Time Warner, Inc.,
9.15%, 2/1/23 1,303
----------
OIL & GAS EXPLORATION & PRODUCTION SERVICES
(0.4%):
1,000 Union Oil of California,
6.38%, 2/1/04 964
----------
RETAIL STORES (0.2%):
500 Dayton Hudson,
6.40%, 2/15/03 488
----------
TEXTILE PRODUCTS (0.2%):
500 Levi Straus Co.,
6.80%, 11/1/03 498
- ------------------------------------------------------------
TOTAL CORPORATE BONDS 26,862
- ------------------------------------------------------------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- -----------------------------------------------------------
RIGHTS & WARRANTS (0.0%)
6,818 Air New Zealand Ltd. Class B
Rights $ 7
- ------------------------------------------------------------
TOTAL RIGHTS & WARRANTS 7
- ------------------------------------------------------------
- ------------------------------------------------------------
U.S. TREASURY NOTES (10.7%)
$ 2,500 6.00%, 8/15/99 2,506
3,700 7.75%, 1/31/00 3,892
2,600 7.13%, 2/29/00 2,689
9,580 6.13%, 9/30/00 9,611
7,400 6.38%, 8/15/02 7,485
2,000 7.88%, 11/15/04 2,195
1,050 7.00%, 7/15/06 1,097
- ------------------------------------------------------------
TOTAL U.S. TREASURY NOTES** 29,475
- ------------------------------------------------------------
- ------------------------------------------------------------
U.S. TREASURY BONDS (2.4%)
50 7.13%, 2/15/23 52
2,075 7.50%, 11/15/24 2,277
900 6.00%, 2/15/26 821
3,650 6.75% , 8/15/26 3,689
- ------------------------------------------------------------
TOTAL U.S. TREASURY BONDS 6,839
- ------------------------------------------------------------
- ----------------------------------------------
U.S. GOVERNMENT SECURITIES (13.0%)
FEDERAL HOME LOAN MORTGAGE CORP.:
1,000 8.19%, 10/6/04 1,035
339 7.50%, 4/1/07 344
1,880 6.00%, 2/1/11 1,817
2,855 6.00%, 5/1/11 2,754
FEDERAL NATIONAL MORTGAGE ASSOC.:
1,500 8.50%, 2/1/05 1,585
1000 6.65%, 3/8/06 978
1,843 6.00%, 11/1/08 1,788
2,743 6.00%, 8/1/10 2,649
2,942 6.00%, 5/1/11 2,836
321 7.40%, 7/25/17 320
991 9.00%, 4/1/25 1,040
899 9.00%, 5/1/25 943
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
83
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
BALANCED FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOC.:
$ 1,530 6.50%, 2/15/09 $ 1,510
185 9.50%, 7/15/09 198
1,382 6.00%, 1/15/11 1,340
1,211 9.00%, 10/15/16 1,281
168 9.00%, 11/15/16 177
641 9.00%, 9/15/19 675
579 9.00%, 12/15/19 610
700 9.00%, 1/15/20 740
415 9.00%, 2/15/20 437
1,381 8.50%, 5/15/20 1,431
601 8.50%, 4/15/21 622
344 8.50%, 3/15/23 356
913 7.50%, 11/15/23 915
1,934 6.50%, 1/15/24 1,846
1,326 7.50%, 5/15/24 1,330
2,991 6.50%, 2/15/26 2,864
1,519 6.50%, 4/15/26 1,453
- ------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES 35,874
- ------------------------------------------------------------
TOTAL (COST $236,773) (a) $ 274,331
- ------------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $274,985.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting purposes in excess of federal income tax reporting of
approximately $726. Cost for federal income tax purposes differs from value
by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $37,138
Unrealized depreciation (306)
-------
Net unrealized appreciation $36,832
========
</TABLE>
(b) Represents non-income producing securities.
** Put and demand features exist allowing the Fund to require the repurchase of
the investment within variable time periods less than one year.
+ Percentage is less than 0.1%.
SEE NOTES TO FINANCIAL STATEMENTS.
84
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
STOCK INDEX FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------
COMMERCIAL PAPER (23.0%)
AUTOMOTIVE (2.9%):
$ 8,000 General Motors Acceptance
Corp., 5.27%, 11/8/96 $ 8,000
--------
FINANCIAL SERVICES (20.1%):
55,667 General Electric Capital
Corp., 5.57%, 11/1/96 55,667
- ----------------------------------------------------------
TOTAL COMMERCIAL PAPER 63,667
- ----------------------------------------------------------
- ----------------------------------------------------------
COMMON STOCKS (75.9%)
ADVERTISING (0.1%):
3,139 Interpublic Group Cos., Inc. 152
--------
AEROSPACE/DEFENSE (1.8%):
11,180 AlliedSignal, Inc. 732
13,797 Boeing Co. 1,316
2,463 General Dynamics Corp. 169
7,981 Lockheed Martin Corp. 715
8,634 McDonnell Douglas Corp. 471
1,995 Northrop Grumman Corp. 161
8,656 Rockwell International Corp. 476
3,288 Textron, Inc. 292
4,915 United Technologies Corp. 633
--------
4,965
--------
AIRLINES (0.2%):
3,607 AMR Corp. Delaware (b) 303
2,574 Delta Air Lines, Inc. 183
5,715 Southwest Airlines Co. 129
2,305 U.S. Air Group, Inc. (b) 40
--------
655
--------
ALUMINUM (0.2%):
6,976 Aluminum Co. of America 409
--------
APPAREL (0.0%+):
2,902 Liz Claiborne, Inc. 123
--------
AUTOMOBILES (1.5%):
29,213 Chrysler Corp. 982
44,954 Ford Motor Co. 1,405
29,805 General Motors Corp. 1,606
2,790 Navistar International
Corp. (b) 26
1,560 PACCAR, Inc. 87
--------
4,106
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
AUTOMOTIVE PARTS (0.3%):
1,587 Cummins Engine, Inc. $ 66
4,011 Dana Corp. 119
3,097 Eaton Corp. 185
2,440 Echlin, Inc. 80
4,750 Genuine Parts Co. 208
2,582 TRW, Inc. 234
--------
892
--------
BANKS (4.4%):
4,344 Bank of Boston Corp. 278
14,660 Bank of New York Co. 486
14,441 BankAmerica Corp. 1,321
3,170 Bankers Trust New York 268
7,818 Barnett Banks, Inc. 298
6,178 Boatmen's Bancshares, Inc. 375
17,067 Chase Manhattan Corp. 1,463
4,386 Comerica, Inc. 233
12,337 First Chicago NBD Corp. 629
10,776 First Union Corp. 784
5,474 Great Western Financial
Corp. 153
7,352 J.P. Morgan & Co., Inc. 635
8,320 KeyCorp 388
5,972 Mellon Bank Corp. 389
11,501 NationsBank Corp. 1,084
14,644 Norwest Corp. 643
13,420 PNC Bank Corp. 486
2,202 Republic New York Corp. 168
9,002 SunTrust Banks, Inc. 420
5,310 U.S. Bancorp 212
6,659 Wachovia Corp. 358
3,720 Wells Fargo & Co. 994
--------
12,065
--------
BANKS -- MONEY CENTERS (REGIONAL) (1.0%):
18,965 Citicorp 1,878
8,508 CoreStates Financial Corp. 414
2,321 Golden West Financial Corp.,
Delaware 151
7,803 National City Corp. 338
--------
2,781
--------
BANKS -- OUTSIDE MONEY CENTER (0.5%):
17,261 Banc One Corp. 731
4,211 Fifth Third Bancorp 264
5,165 First Bank Systems, Inc. 341
--------
1,336
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
85
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
STOCK INDEX FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
BEVERAGES (3.0%):
19,809 Anheuser-Busch Co., Inc. $ 763
3,228 Brown Forman Corp., Class B 140
99,192 Coca-Cola Co. 5,009
1,427 Coors Adolph Co., Class B 28
62,071 PepsiCo, Inc. 1,839
14,746 Seagram Co. Ltd. 558
--------
8,337
--------
BROKERAGE SERVICES (0.3%):
6,728 Merrill Lynch & Co., Inc. 473
5,956 Morgan Stanley Group, Inc. 299
4,102 Salomon Brothers, Inc. 185
--------
957
--------
BUILDING MATERIALS (0.6%):
1,500 Armstrong World Industries,
Inc. 100
1,073 Centex Corp. 32
1,162 Crane Co. 54
1,860 Fleetwood Enterprises, Inc. 63
1,139 Kaufman & Broad Home Corp. 14
6,257 Masco Corp. 196
23,107 Monsanto Co. 916
5,680 Morton International, Inc. 224
1,994 Owens Corning Fiberglas
Corp. (b) 77
975 Pulte Corp. 26
--------
1,702
--------
CHEMICALS -- GENERAL (2.0%):
2,127 Avery Dennison Corp. 140
4,377 Air Products & Chemicals,
Inc. 263
10,002 Dow Chemical Co. 778
22,253 E.I. Du Pont De Nemours Co. 2,064
3,087 Eastman Chemical Co. 163
2,534 Ecolab, Inc. 92
1,491 FMC Corp. (b) 110
2,448 Great Lakes Chemical Corp. 128
4,235 Hercules, Inc. 202
2,990 Mallinckrodt, Inc. 130
2,712 Nalco Chemical Co. 99
7,753 PPG Industries, Inc. 442
5,626 Praxair, Inc. 249
2,611 Rohm & Haas Co. 186
1,969 Sigma-Aldrich Corp. 116
5,115 Union Carbide Corp. 218
3,813 W.R. Grace & Co. (b) 202
--------
5,582
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
COMMERCIAL SERVICES (0.1%):
11,913 CUC International, Inc. (b) $ 292
--------
COMPUTERS & PERIPHERALS (3.4%):
6,612 3Com Corp. (b) 447
4,806 Amdahl Corp. (b) 49
4,820 Apple Computer, Inc. 111
7,326 Bay Networks, Inc. (b) 148
2,827 Cabletron Systems, Inc. (b) 176
25,293 Cisco Systems, Inc. (b) 1,565
10,571 Compaq Computer Corp. (b) 736
2,167 Computer Sciences Corp. (b) 161
1,435 Data General Corp. (b) 21
2,098 Dell Computer, Inc. (b) 171
5,899 Digital Equipment Corp. (b) 174
8,987 EMC Corp. (b) 236
40,630 Hewlett Packard Corp. 1,793
1,884 Integraph Corp. (b) 18
20,971 International Business
Machines Corp. 2,705
2,833 Seagate Technology, Inc. (b) 189
6,904 Silicon Graphics, Inc. (b) 128
7,650 Sun Microsystems, Inc. (b) 467
4,620 Tandem Computers, Inc. (b) 58
6,787 Unisys Corp. (b) 42
--------
9,395
--------
CONGLOMERATES (0.6%):
9,060 Corning, Inc. 351
16,643 Minnesota Mining &
Manufacturing Co. 1,275
--------
1,626
--------
CONSTRUCTION (0.2%):
2,920 Case Corp. 136
3,323 Fluor Corp. 218
1,604 Foster Wheeler Corp. 66
--------
420
--------
CONSUMER PRODUCTS (1.6%):
2,920 American Greetings Corp. 86
2,075 Clorox Co. 226
5,812 Colgate-Palmolive Co. 535
1,526 Jostens, Inc. 33
11,330 Nike, Inc. 667
27,196 Procter & Gamble Co. 2,692
2,349 Reebok International Ltd. 84
1,801 Stride Rite Corp. 15
--------
4,338
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
86
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
STOCK INDEX FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
CONTAINERS (0.3%):
1,150 Ball Corp. $ 28
2,039 Bemis, Inc. 71
5,043 Crown Cork & Seal, Inc. 242
6,263 Newell Co. 178
5,932 Rubbermaid, Inc. 138
3,763 Stone Container Corp. 57
2,557 Tupperware Corp. 131
--------
845
--------
COSMETICS & RELATED (0.7%):
1,032 Alberto Culver Co. 47
5,373 Avon Products, Inc. 291
17,590 Gillette Co. 1,315
4,401 International Flavor &
Fragance, Inc. 182
--------
1,835
--------
DEPARTMENT STORES (0.2%):
4,525 Dillard Department Stores,
Inc., Class A 144
9,051 J. C. Penney Co., Inc. 475
1,415 Mercantile Stores, Inc. 70
--------
689
--------
DIVERSIFIED -- CONGLOMERATES, HOLDINGS (0.0%+)
1,854 National Service Industries,
Inc. 64
--------
DRUG STORES (0.1%):
840 Longs Drug Stores Corp. 38
3,304 Rite Aid Corp. 112
--------
150
--------
ELECTRICAL EQUIPMENT (2.8%):
4,618 DSC Communications
Corp. (b) 64
8,853 Emerson Electric Co. 788
65,258 General Electric Co. 6,314
4,633 General Instrument Corp. (b) 93
1,594 Johnson Controls, Inc. 116
1,645 Thomas & Betts Corp. 70
2,036 W. W. Grainger, Inc. 151
15,778 Westinghouse Electric Corp. 270
--------
7,866
--------
ELECTRICAL SERVICES (0.1%):
4,618 General Public Utilities
Corp. 152
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
ELECTRONIC & ELECTRICAL -- GENERAL (1.2%):
5,327 Advanced Micro Devices, Inc.
(b) $ 95
8,718 AMP, Inc. 295
2,380 Andrew Corp. (b) 116
4,257 Cooper Industries, Inc. 171
2,036 E G & G, Inc. 36
2,024 General Signal Corp. 82
1,570 Harris Corp. 98
4,984 Honeywell, Inc. 310
23,359 Motorola, Inc. 1,075
5,056 National Semiconductor
Corp. (b) 97
9,463 Raytheon Co. 466
2,474 Tandy Corp. 93
1,253 Tektronix, Inc. 49
7,439 Texas Instruments, Inc. 358
--------
3,341
--------
ENTERTAINMENT (1.0%):
1,884 Bally Entertainment Corp.
(b) 57
3,894 Brunswick Corp. 92
4,086 Harrahs Entertainment (b) 68
3,357 Hasbro, Inc. 131
1,416 King World Productions (b) 51
4,579 Loews Corp. 378
26,234 Walt Disney Co. 1,728
--------
2,505
--------
ENVIRONMENTAL CONTROL (0.1%):
12,004 Laidlaw, Inc., Class B 141
--------
FINANCIAL SERVICES (2.5%):
18,860 American Express Co. 886
11,417 Automatic Data Processing,
Inc. 475
2,073 Beneficial Corp. 121
2,663 Ceridian Corp. (b) 132
6,507 Dean Witter Discover & Co. 383
7,062 Federal Home Loan Mortgage
Corp. 713
43,206 Federal National Mortgage
Assoc. 1,690
8,803 First Data Corp. 702
10,030 Fleet Financial Group 500
6,089 Green Tree Financial Corp. 241
4,337 H.F. Ahmanson & Co. 136
3,834 Household International,
Inc. 339
8,819 MBNA Corp. 333
2,637 TransAmerica Corp. 200
--------
6,851
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
87
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
STOCK INDEX FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
FOOD DISTRIBUTORS (0.4%):
10,020 Albertsons, Inc. $ 344
1,438 Fleming Cos., Inc. 25
1,447 Great Atlantic & Pacific
Tea, Inc. 44
4,909 Kroger Co. (b) 219
2,655 Supervalu, Inc. 79
7,213 Sysco Corp. 245
5,907 Winn Dixie Stores, Inc. 197
--------
1,153
--------
FOOD PROCESSING & PACKAGING (2.0%):
21,442 Archer-Daniels-Midland Co. 466
5,783 CPC International, Inc. 456
9,144 Campbell Soup Co. 732
9,577 ConAgra, Inc. 478
6,350 General Mills, Inc. 363
14,448 H.J. Heinz Co. 513
6,153 Hershey Foods Corp. 298
8,455 Kellogg Co. 537
3,305 Pioneer Hi-Bred
International, Inc. 222
5,343 Quaker Oats Co. 190
4,083 Ralston Purina Group 270
18,996 Sara Lee Corp. 674
4,562 Wm. Wrigley Jr. Co. 275
--------
5,474
--------
FOREST PRODUCTS -- LUMBER & PAPER (1.3%):
4,499 Alco Standard Corp. 209
1,924 Boise Cascade Corp. 60
3,824 Champion International Corp. 166
3,547 Georgia Pacific Corp. 266
12,105 International Paper Co. 517
3,299 James River Corp. 104
11,098 Kimberly-Clark Corp. 1,035
4,318 Louisiana Pacific Corp. 90
2,091 Mead Corp. 119
3,992 Moore Corp. Ltd. 81
1,139 Potlatch Corp. 49
2,181 Temple Inland, Inc. 112
2,681 Union Camp Corp. 131
4,048 Westvaco Corp. 115
7,949 Weyerhauser Co. 365
2,159 Willamette Industries, Inc. 146
--------
3,565
--------
FUNERAL SERVICES (0.1%):
8,270 Service Corp. International 236
--------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
HEALTH CARE (0.4%):
26,452 Columbia HCA Healthcare
Corp. $ 946
6,423 Humana, Inc. (b) 117
--------
1,063
--------
HEAVY MACHINERY (0.6%):
5,653 Baker Hughes, Inc. 201
7,743 Caterpillar Tractor, Inc. 531
10,159 Deere & Co. 424
1,971 Harnischfeger Industries,
Inc. 79
4,230 Ingersoll Rand Co. 176
2,168 McDermott International,
Inc. 39
6,092 Tyco Laboratories, Inc. 302
--------
1,752
--------
HOLDING COMPANIES (0.2%):
4,521 ITT Hartford Group, Inc. 285
4,506 ITT Corp. (b) 189
4,563 ITT Industries 106
--------
580
--------
HOSPITAL & NURSING EQUIPMENT (1.0%):
2,165 Bard C.R., Inc. 61
52,587 Johnson & Johnson, Inc. 2,590
--------
2,651
--------
HOTELS & MOTELS (0.3%):
4,310 HFS, Inc. (b) 316
7,832 Hilton Hotels Corp. 238
5,017 Marriott International, Inc. 285
--------
839
--------
HOUSEHOLD GOODS -- APPLIANCES &
FURNISHINGS (0.1%):
4,006 Maytag Corp. 80
2,978 Whirlpool Corp. 141
--------
221
--------
INDUSTRIAL SERVICES (0.1%):
4,502 Dover Corp. 231
--------
INSURANCE -- LIFE (0.3%):
2,832 Jefferson Pilot Corp. 161
3,676 Providian Corp 173
2,798 Torchmark Corp. 135
7,209 United Healthcare 273
1,355 USLIFE Corp. 42
--------
784
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
88
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
STOCK INDEX FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
INSURANCE -- MULTI-LINE (2.1%):
5,865 Aetna Life & Casualty Co. $ 392
1,787 Alexander & Alexander
Services, Inc. 27
8,054 American General Corp. 300
18,603 American International
Group, Inc. 2,021
3,899 AON Corp. 225
2,916 Cigna Corp. 381
3,112 General Re Corp. 458
4,185 Lincoln National Corp. 203
2,884 Marsh & McLennan Cos., Inc. 300
2,307 MGIC Investment Corp. 158
4,951 Safeco Corp. 187
3,327 St. Paul Cos., Inc. 181
19,105 Travelers, Inc. 1,036
4,680 USF&G Corp. 89
--------
5,958
--------
INSURANCE -- PROPERTY, CASUALTY,
HEALTH (0.5%):
17,624 Allstate Corp. 989
6,837 Chubb Corp. 342
2,836 UNUM Corp. 178
--------
1,509
--------
MACHINE TOOLS (0.0%+):
1,335 Cincinnati Milacron, Inc. 26
1,258 Giddings & Lewis, Inc. 15
--------
41
--------
MANUFACURING -- CAPITAL GOODS (0.1%):
4,821 Illinois Tool Works, Inc. 339
1,071 Trinova Corp. 35
--------
374
--------
MANUFACTURING -- CONSUMER GOODS (0.2%):
10,828 Mattel, Inc. 313
2,052 Western Atlas, Inc. (b) 142
--------
455
--------
MANUFACTURING -- MISCELLANEOUS (0.5%):
1,145 Briggs & Stratton Corp. 46
1,666 Millipore Corp. 58
403 NACCO Industries, Inc. 19
4,556 Pall Corp. 117
2,879 Parker-Hannifin Corp. 109
6,329 Unilever N. V. 968
4,175 Whitman Corp. 101
--------
1,418
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
MEDICAL SERVICES (0.1%):
3,996 Beverly Enterprises, Inc.
(b) $ 49
1,645 Community Psychiatric
Centers, Inc. (b) 15
2,515 Manor Care, Inc. 99
8,186 Tenet Healthcare Corp. (b) 171
--------
334
--------
MEDICAL SUPPLIES (0.7%):
2,243 Bausch & Lomb, Inc. 76
11,033 Baxter International, Inc. 459
5,054 Becton Dickinson & Co. 220
4,538 Biomet, Inc. 73
7,015 Boston Scientific Corp. (b) 381
9,398 Medtronic, Inc. 605
2,809 St. Jude Medical, Inc. (b) 111
2,257 United States Surgical Corp. 95
--------
2,020
--------
METALS -- FABRICATION (0.4%):
8,942 Alcan Aluminum Ltd. 294
1,715 Asarco, Inc. 45
3,684 Cyprus Amax Minerals 83
7,779 Freeport-McMoRan Copper &
Gold, Inc., Class B 236
5,414 Homestake Mining Co. 77
1,879 Inland Steel Industries,
Inc. 30
3,382 Newmont Mining Corp. 156
2,578 Phelps Dodge Corp. 162
2,583 Reynolds Metals Co. 145
--------
1,228
--------
MINING (0.0%+):
5,173 Santa Fe Pacific Gold Corp. 61
--------
NEWSPAPERS (0.4%):
5,574 Gannett Co., Inc. 423
3,840 Knight-Ridder, Inc. 144
3,912 New York Times Co., Class A 141
4,191 Times Mirror Co., Class A 194
2,440 Tribune Co. 199
--------
1,101
--------
OFFICE EQUIPMENT & SUPPLIES (0.3%):
5,913 Pitney Bowes, Inc. 330
12,648 Xerox Corp. 587
--------
917
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
89
<PAGE>
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
STOCK INDEX FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
OIL & GAS EXPLORATION & PRODUCTION (2.2%):
3,647 Amerada Hess Corp. $ 202
2,564 Ashland, Inc. 109
4,988 Burlington Resource, Inc. 251
4,242 Coastal Corp. 182
2,053 Columbia Gas System, Inc. 125
779 Eastern Enterprises 30
9,973 Enron Corp. 464
2,682 Enserch Corp. 58
952 Helmerich & Payne, Inc. 52
1,960 Kerr-McGee Corp. 123
1,335 Louisiana Land &
Exploration Co. 76
15,623 Mobil Corp. 1,824
4,964 Noram Energy Corp. 76
12,789 Occidental Petroleum Corp. 313
991 Oneok, Inc. 27
4,081 Oryx Energy Co. (b) 79
5,989 Panenergy Corp. 231
1,804 Pennzoil Co. 92
3,381 Rowan Cos. (b) 76
3,587 Sante Fe Energy Resources,
Inc. (b) 51
3,437 Sonat, Inc. 169
2,967 Sun Co., Inc. 66
7,081 Tenneco, Inc. 351
11,745 USX -- Marathon Group 257
8,491 Union Pacific Resources
Group, Inc. 234
9,756 Unocal Corp. 357
4,177 Williams Co., Inc. 218
--------
6,093
--------
OIL -- INTEGRATED COMPANIES (4.8%):
19,627 Amoco Corp. 1,487
6,309 Atlantic Richfield Co. 836
25,833 Chevron Corp. 1,699
49,198 Exxon Corp. 4,360
10,383 Phillips Petroleum Co. 426
21,170 Royal Dutch Petroleum Co. 3,501
10,300 Texaco, Inc. 1,047
--------
13,356
--------
OILFIELD EQUIPMENT & SERVICES (0.5%):
7,165 Dresser Industries, Inc. 236
4,505 Halliburton Co. 255
9,706 Schlumberger Ltd. 962
--------
1,453
--------
PAINT, VARNISHES & ENAMELS (0.1%):
3,378 Sherwin-Williams Co. 169
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
PHARMACEUTICALS (5.6%):
30,995 Abbott Laboratories $ 1,569
2,561 Allergan, Inc. 78
3,312 Alza Corp., Class A (b) 86
25,043 American Home Products Corp. 1,534
10,470 Amgen, Inc. (b) 642
20,028 Bristol-Myers Squibb Co. 2,118
21,632 Eli Lilly & Co. 1,525
48,391 Merck & Co., Inc. 3,587
25,285 Pfizer, Inc. 2,092
20,087 Pharmacia & Upjohn Co. 723
14,927 Schering-Plough Corp. 955
10,754 Warner-Lambert Co. 684
--------
15,593
--------
PHOTOGRAPHY (0.4%):
13,313 Eastman Kodak Co. 1,062
1,852 Polaroid Corp. 75
--------
1,137
--------
POLLUTION CONTROL SERVICES & EQUIPMENT (0.3%):
8,378 Browning-Ferris Industries,
Inc. 220
2,283 Safety Kleen 36
19,404 WMX Technologies,Inc. 667
--------
923
--------
PRECISION INSTRUMENTS & RELATED (0.0%+):
1,669 Perkin-Elmer Corp. 89
--------
PRIMARY METAL & MINERAL PRODUCTION (0.4%):
3,947 Armco, Inc. (b) 15
3,514 Battle Mountain Gold Co. 27
14,104 Barrick Gold Corp. 368
4,324 Bethlehem Steel Corp. (b) 35
5,018 Echo Bay Mines Ltd. 39
5,629 Englehard Corp. 103
4,636 Inco Ltd. 147
3,507 Nucor Corp. 166
3,246 USX-U.S. Steel Group, Inc. 89
--------
989
--------
PUBLISHING (0.7%):
3,311 Deluxe Corp. 108
3,860 Dow Jones & Co., Inc. 127
6,807 Dun & Bradstreet Corp. 394
1,196 John H. Harland Co. 37
3,934 McGraw Hill, Inc. 184
1,012 Meredith Corp. 51
6,111 R.R. Donnelley & Sons Co. 186
21,011 Time Warner, Inc. 783
--------
1,870
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
90
<PAGE>
93
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
STOCK INDEX FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
RADIO & TELEVISION (0.4%):
9,237 Comcast, Class A Special
Shares $ 136
25,848 Tele-Communications, Inc.,
Class A (b) 321
18,743 US West Media Group (b) 293
13,913 Viacom, Class B (b) 454
--------
1,204
--------
RAILROADS (0.8%):
5,683 Burlington Northern/
Santa Fe, Inc. 468
8,412 CSX Corp. 363
3,238 Conrail, Inc. 308
5,056 Norfolk Southern Corp. 451
8,788 Union Pacific Corp. 493
--------
2,083
--------
RESTAURANTS (0.5%):
6,201 Darden Restaurants, Inc. 52
897 Luby's Cafeterias, Inc. 19
27,539 McDonald's Corp. 1,222
1,919 Ryan's Family Steak Houses,
Inc. (b) 14
1,841 Shoney's, Inc. (b) 14
5,092 Wendy's International, Inc. 105
--------
1,426
--------
RETAIL (2.1%):
5,836 American Stores Co. 241
3,773 Charming Shoppes, Inc. (b) 17
8,630 Dayton Hudson Corp. 299
8,192 Federated Department Stores,
Inc. (b) 270
2,839 Harcourt General, Inc. 141
19,076 K-Mart Corp. 186
6,317 Lowes Cos., Inc. 255
9,911 May Department Stores Co. 470
3,219 Nordstrom, Inc. 116
7,759 Price/Costco, Inc. (b) 154
15,507 Sears, Roebuck & Co. 750
90,736 Wal-Mart Stores, Inc. 2,416
9,717 Walgreen Co. 367
5,188 Woolworth Corp. (b) 109
--------
5,791
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
RETAIL -- SPECIALTY STORES (0.9%):
3,873 Circuit City Stores, Inc. $ 127
1,188 Footstar, Inc. (b) 26
11,315 The Gap 328
2,313 Giant Food, Inc. 78
18,932 Home Depot, Inc. 1,037
10,748 The Limited, Inc. 197
4,126 Melville Corp. 154
2,453 Pep Boys -- Manny,
Moe & Jack 86
2,910 TJX Cos., Inc. 116
10,919 Toys R Us, Inc. (b) 370
--------
2,519
--------
RUBBER & RUBBER PRODUCTS (0.2%):
2,153 B.F. Goodrich, Inc. 91
3,337 Cooper Tire & Rubber Co. 65
6,193 Goodyear Tire & Rubber Co. 284
--------
440
--------
SEMICONDUCTORS (1.5%):
7,032 Applied Materials, Inc. (b) 186
32,616 Intel Corp. 3,584
5,053 LSI Logic Corp. (b) 134
8,198 Micron Technology, Inc. 208
--------
4,112
--------
SOFTWARE & COMPUTER SERVICES (1.9%):
1,837 Autodesk, Inc. 42
14,277 Computer Associates
International, Inc. 844
23,410 Microsoft Corp. (b) 3,213
14,098 Novell, Inc. (b) 130
25,782 Oracle Systems Corp. (b) 1,091
910 Shared Medical Systems Corp. 44
--------
5,364
--------
STEEL (0.1%):
4,270 Allegheny Teledyne, Inc. (b) 91
3,602 Worthington Industries, Inc. 75
--------
166
--------
TAX RETURN PREPARATION (0.0%+):
4,123 H & R Block, Inc. 102
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
91
<PAGE>
94
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
STOCK INDEX FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
TELECOMMUNICATIONS (2.2%):
19,668 AirTouch Communications,
Inc. (b) $ 514
7,510 Alltel Corp. 229
17,283 Bell Atlantic Corp. 1,041
24,926 Lucent Technologies, Inc. 1,172
10,154 Northern Telecom Ltd. 661
16,941 Pacific Telesis Group 576
3,026 Scientific-Atlanta, Inc. 44
16,962 Sprint Corp. 666
3,537 Tellabs, Inc. (b) 301
18,943 U. S. West, Inc. 575
9,701 Worldcom, Inc. (b) 236
--------
6,015
--------
TEXTILE MANUFACTURING (0.1%):
3,054 Fruit of The Loom, Inc. (b) 111
1,573 Russell Corp. 45
801 Springs Industries, Inc.,
Class A 36
2,496 V. F. Corp. 163
--------
355
--------
TOBACCO & TOBACCO PRODUCTS (1.3%):
7,053 American Brands, Inc. 337
32,713 Philip Morris Cos., Inc. 3,030
7,525 UST, Inc. 217
--------
3,584
--------
TOOLS & HARDWARE MANUFACTURING (0.1%):
3,455 Black & Decker Corp. 129
2,432 Snap On Tools, Inc. 78
3,591 Stanley Works 101
1,182 Timken Co. 53
--------
361
--------
TRANSPORTATION LEASING & TRUCKING (0.1%):
1,551 Caliber Systems, Inc. 26
1,647 Consolidated Freightways,
Inc. 40
2,222 Federal Express Corp. (b) 179
3,157 Ryder Systems, Inc. 94
1,014 Yellow Corp. (b) 13
--------
352
--------
TRUCKS -- MANUFACTURING (0.1%):
9,450 Placer Dome, Inc. 227
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
UTILITIES -- ELECTRIC (2.1%):
7,399 American Electric Power Co. $ 307
6,097 Carolina Power & Light Co. 220
7,718 Central & South West Corp. 205
6,189 CINergy Corp. 205
9,247 Consolidated Edison Co. NY,
Inc. 270
5,835 Detroit Edison Co. 176
6,977 Dominion Resources, Inc. 263
8,023 Duke Power Co. 392
17,402 Edison International 344
9,088 Entergy Corp. 254
7,236 FPL Group, Inc. 333
10,436 Houston Industries 239
5,729 Niagara Mohawk Power Corp. 49
2,736 Northern States Power Co.
Minnesota 129
6,058 Ohio Edison Co. 126
11,366 PacifiCorp 240
8,791 Peco Energy Co. 222
6,436 PP&L Resources, Inc. 150
9,636 Public Service Enterprise
Group 259
1,728 Raychem Corp. 135
26,606 Southern Co. 589
8,879 Texas Utilities Co. 360
8,536 Unicom Corp. 222
4,051 Union Electric Co. 156
--------
5,845
--------
UTILITIES -- ELECTRIC & GAS (0.2%):
5,815 Baltimore Gas & Electric Co. 158
16,635 Pacific Gas & Electric Co. 391
1,361 Peoples Energy Corp. 48
--------
597
--------
UTILITIES -- NATURAL GAS (0.1%):
3,672 Consolidated Natural Gas Co. 195
1,986 Nicor, Inc. 69
3,349 Pacific Enterprises 103
--------
367
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
92
<PAGE>
95
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
STOCK INDEX FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
UTILITIES -- TELECOMMUNICATIONS (3.3%):
63,430 A T & T Corp. $ 2,212
21,788 Ameritech Corp. 1,193
39,321 BellSouth Corp. 1,602
38,380 GTE Corp. 1,617
27,148 MCI Telecommunications Corp. 682
17,241 Nynex Corp. 767
24,116 SBC Communications, Inc. 1,174
--------
9,247
- ----------------------------------------------------------
TOTAL COMMON STOCKS 210,366
- ----------------------------------------------------------
- ----------------------------------------------------------
U.S. TREASURY BILLS (0.8%)
2,320 5.20%, 12/19/96(c) 2,302
- ----------------------------------------------------------
TOTAL (COST $221,337)(a) $276,335
- ----------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $277,124.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax reporting purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $533. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $58,822
Unrealized depreciation (4,357)
-------
Net unrealized appreciation $54,465
-------
</TABLE>
(b) Represents non-income producing security.
(c) Serves as collateral for futures contracts.
+ Percentage is less than 0.1%.
<TABLE>
<CAPTION>
NUMBER OF MARKET
CONTRACTS VALUE
<S> <C> <C>
- ----------------------------------------------------
FUTURES CONTRACTS
Long, Standard & Poor's 500
Index Futures Contract,
face amount $56,204
expiring December 19,
1996 167 $59,256
- ----------------------------------------------------
Total Futures Contracts $59,256
- ----------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
93
<PAGE>
96
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
DIVERSIFIED STOCK FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------
COMMERCIAL PAPER (6.8%)
$ 39,390 General Elecric Capital
Corp.,
5.57%, 11/1/96 $ 39,390
- ----------------------------------------------------------
TOTAL COMMERCIAL PAPER 39,390
- ----------------------------------------------------------
- ----------------------------------------------------------
COMMON STOCKS (91.0%)
AEROSPACE/DEFENSE (4.0%):
96,100 AlliedSignal, Inc. 6,295
103,500 Boeing Co. 9,871
77,000 Textron, Inc. 6,834
--------
23,000
--------
AIRLINES (1.6%):
85,000 AMR Corp. Delaware (b) 7,140
32,700 Delta Air Lines, Inc. 2,318
--------
9,458
--------
BANKS (8.4%):
50,800 BankAmerica Corp. 4,648
70,000 Citicorp 6,930
130,000 First Union Corp. 9,457
102,000 Mellon Bank Corp. 6,643
75,000 NationsBank Corp. 7,069
160,100 Norwest Corp. 7,024
195,000 PNC Bank Corp. 7,069
--------
48,840
--------
BEVERAGES (2.7%):
255,000 Anheuser-Busch Co., Inc. 9,817
205,000 PepsiCo, Inc. 6,073
--------
15,890
--------
CHEMICALS (4.4%):
211,100 Air Products & Chemicals,
Inc. 12,666
193,900 Nalco Chemical Co. 7,053
326,750 RPM Inc., Ohio 5,473
--------
25,192
--------
COMPUTERS & PERIPHERALS (4.6%):
145,000 Bay Networks, Inc. (b) 2,936
125,000 Hewlett Packard Co. 5,516
140,000 International Business
Machines Corp. 18,060
--------
26,512
--------
CONGLOMERATES (0.7%):
49,500 Minnesota Mining &
Manufacturing Co. 3,793
--------
CONSUMER PRODUCTS (1.5%):
90,000 Procter & Gamble Co. 8,910
--------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C> <C>
ELECTRICAL EQUIPMENT (3.6%):
110,800 General Electric Co. $ 10,720
327,500 Westinghouse Electric Corp. 5,608
56,700 W.W. Grainger, Inc. 4,203
--------
20,531
--------
ELECTRONIC & ELECTRICAL -- GENERAL (0.7%):
90,000 Motorola, Inc. 4,140
--------
ENGINEERING & CONSTRUCTION (1.1%):
98,700 Fluor Corp. 6,465
--------
ENTERTAINMENT (1.3%):
110,000 Walt Disney Co. 7,246
--------
FINANCIAL SERVICES (2.3%):
213,265 Bear Stearns Cos., Inc. 5,038
150,000 Travelers, Inc. 8,137
--------
13,175
--------
FOOD PROCESSING & PACKAGING (2.2%):
125,300 ConAgra, Inc. 6,249
95,000 Pioneer Hi-Bred
International, Inc. 6,377
--------
12,626
--------
FOREST PRODUCTS (1.5%):
90,000 Kimberly-Clark Corp. 8,392
--------
HOTELS & MOTELS (0.5%):
140,000 Mirage Resorts, Inc. (b) 3,080
--------
HOUSEHOLD GOODS -- APPLIANCES, FURNISHINGS
(1.1%):
135,000 Whirlpool Corp. 6,379
--------
INSURANCE -- MULTI-LINE (1.7%):
65,350 American International
Group, Inc. 7,099
50,000 St. Paul Cos., Inc. 2,719
--------
9,818
--------
INSURANCE -- PROPERTY, CASUALTY, HEALTH (1.5%):
75,000 Allstate Corp. 4,209
147,000 Travelers/Aetna Property
Casualty Corp. 4,410
--------
8,619
--------
MEDICAL SUPPLIES (0.7%):
247,600 Biomet, Inc. 3,992
--------
METALS -- FABRICATION (0.6%):
100,000 Kennametal, Inc. 3,400
--------
NATURAL GAS (2.6%):
320,700 Enron Corp. 14,913
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
94
<PAGE>
97
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
DIVERSIFIED STOCK FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C> <C>
OIL & GAS EXPLORATION & PRODUCTION (1.2%):
140,000 Tenneco, Inc. $ 6,930
--------
OIL -- INTEGRATED COMPANIES (7.3%):
30,400 Atlantic Richfield Co. 4,028
190,500 Exxon Corp. 16,883
159,500 Phillips Petroleum Co. 6,539
40,000 Royal Dutch Petroleum Co. 6,615
80,500 Texaco, Inc. 8,181
--------
42,246
--------
OILFIELD EQUIPMENT & SERVICES (4.4%):
320,000 Baker Hughes, Inc. 11,400
195,600 Dresser Industries, Inc. 6,430
80,000 Schlumberger, Ltd. 7,930
--------
25,760
--------
PAPER (0.5%):
82,600 Bowater, Inc. 2,922
--------
PHARMACEUTICALS (5.2%):
90,000 Abbott Laboratories 4,556
150,000 Eli Lilly & Co. 10,575
80,000 Merck & Co., Inc. 5,930
110,000 Pfizer, Inc. 9,103
--------
30,164
--------
RADIO & TELEVISION (1.1%):
200,000 Viacom, Class B (b) 6,525
--------
RETAIL (6.1%):
210,800 Dayton Hudson Corp. 7,299
160,000 Lowes Cos., Inc. 6,460
270,000 Nordstrom, Inc. 9,737
275,000 Wal-Mart Stores, Inc. 7,322
125,000 Walgreen Co. 4,719
--------
35,537
--------
SEMICONDUCTORS (3.6%):
110,000 Intel Corp. 12,086
325,000 LSI Logic Corp. (b) 8,613
--------
20,699
--------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C> <C>
SOFTWARE & COMPUTER SERVICE (0.7%):
100,000 Oracle Systems Corp. (b) $ 4,231
--------
TOBACCO & TOBACCO RELATED (1.9%):
120,000 Philip Morris Cos., Inc. 11,115
--------
UTILITIES -- ELECTRIC (4.7%):
50,000 CINergy Corp. 1,656
570,300 Houston Industries 13,046
290,300 Southern Co. 6,423
153,500 Texas Utilities Co. 6,217
--------
27,342
--------
UTILITIES -- TELECOMMUNICATIONS (5.0%):
350,000 GTE Corp. 14,744
59,722 Lucent Technologies, Inc. 2,807
125,000 MCI Telecommunications Corp. 3,141
350,000 Worldcom, Inc. (b) 8,531
--------
29,223
- ----------------------------------------------------------
TOTAL COMMON STOCKS 527,065
- ----------------------------------------------------------
TOTAL (COST $483,043) (a) $566,455
- ---------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $579,381.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax reporting purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $260. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 90,530
Unrealized depreciation (7,378)
--------
Net unrealized appreciation $ 83,152
=========
</TABLE>
(b) Represents non-income producing securities.
SEE NOTES TO FINANCIAL STATEMENTS.
95
<PAGE>
98
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
VALUE FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ---------------------------------------------------------
COMMERCIAL PAPER (4.2%)
15,927 General Electric Capital
Corp., 5.57%, 11/1/96 $ 15,927
- ---------------------------------------------------------
TOTAL COMMERCIAL PAPER 15,927
- ---------------------------------------------------------
- ---------------------------------------------------------
COMMON STOCKS (96.0%)
AEROSPACE/DEFENSE (5.6%):
49,000 AlliedSignal, Inc. 3,210
65,500 Boeing Co. 6,247
56,000 Litton Industries, Inc. (b) 2,513
96,000 Raytheon Co. 4,728
55,000 Textron, Inc. 4,881
--------
21,579
--------
AUTOMOTIVE (1.6%):
110,000 Chrysler Corp. 3,699
82,400 Ford Motor Co. 2,575
--------
6,274
--------
AUTOMOTIVE PARTS (0.6%):
83,800 AutoZone, Inc. (b) 2,147
--------
BANKS (6.6%):
92,000 BankAmerica Corp. 8,418
74,800 Chase Manhattan Corp. 6,414
71,000 First Union Corp. 5,165
40,550 Mellon Bank Corp. 2,641
62,000 Norwest Corp. 2,720
--------
25,358
--------
BEVERAGES (0.9%):
92,000 Anheuser-Busch Co., Inc. 3,542
--------
CHEMICALS (2.3%):
53,000 Air Products &
Chemicals, Inc. 3,180
35,400 Dow Chemical Co. 2,752
42,000 Lubrizol Corp. 1,250
90,000 RPM, Inc., Ohio 1,507
--------
8,689
--------
COMPUTERS & PERIPHERALS (1.7%):
60,000 Hewlett Packard Co. 2,647
30,800 International Business
Machines Corp. 3,973
--------
6,620
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
COMPUTER SOFTWARE (2.1%):
103,000 Bay Networks, Inc. (b) $ 2,086
28,000 Microsoft Corp. (b) 3,843
52,350 Oracle Systems Corp. (b) 2,215
--------
8,144
--------
CONTAINERS & PACKAGING (1.2%):
102,000 Newell Co. 2,894
67,100 Sonoco Products Co. 1,787
--------
4,681
--------
COSMETICS & RELATED (1.0%):
71,400 Avon Products, Inc. 3,873
--------
ELECTRICAL EQUIPMENT (3.2%):
43,000 Emerson Electric Co. 3,827
86,000 General Electric Co. 8,320
--------
12,147
--------
FINANCIAL SERVICES (4.2%):
75,000 American Express Co. 3,525
124,000 Federal National
Mortgage Assoc. 4,851
100,400 H & R Block, Inc. 2,485
56,800 Household International,
Inc. 5,027
--------
15,888
--------
FOOD PROCESSING & PACKAGING (3.3%):
79,000 ConAgra, Inc. 3,940
54,500 Pioneer Hi-Bred
International, Inc. 3,658
136,100 Sara Lee Corp. 4,832
--------
12,430
--------
HEALTH CARE (0.9%):
94,200 Columbia HCA
Healthcare Corp. 3,368
--------
HOME PRODUCTS (0.5%):
36,800 Sherwin-Williams Co. 1,845
--------
INSURANCE-MULTI-LINE (4.1%):
66,000 Aetna Life & Casualty Co. 4,414
110,000 American General Corp. 4,097
106,300 Everest Re Holdings, Inc. 2,711
84,000 St. Paul Cos., Inc. 4,567
--------
15,789
--------
INSURANCE -- PROPERTY, CASUALTY, HEALTH (2.6%):
150,000 Allstate Corp. 8,419
50,000 Travelers/Aetna Property
Casualty Corp. 1,500
--------
9,919
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
96
<PAGE>
99
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
VALUE FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
MACHINERY & MANUFACTURING (1.0%):
62,000 Cooper Industries, Inc. $ 2,496
33,000 Deere & Co. 1,378
--------
3,874
--------
MEDIA (1.7%):
91,800 Cox Communications, Inc. (b) 1,698
47,000 Dow Jones & Co., Inc. 1,551
96,400 Viacom, Inc. Class B (b) 3,145
--------
6,394
--------
MEDICAL SUPPLIES (1.4%):
110,500 Biomet, Inc. 1,782
57,500 Medtronic, Inc. 3,702
--------
5,484
--------
METALS & MINING (1.3%):
48,000 Aluminum Co. of America 2,814
91,000 Cyprus Amax Minerals Co. 2,059
--------
4,873
--------
OIL -- INTEGRATED COMPANIES (11.5%):
28,600 Atlantic Richfield Co. 3,790
23,200 Exxon Corp. 2,056
103,000 Mobil Corp. 12,025
167,800 Phillips Petroleum Co. 6,880
52,000 Royal Dutch Petroleum Co. 8,600
105,200 Texaco, Inc. 10,691
--------
44,042
--------
OILFIELD WELL EQUIPMENT & SERVICES (2.0%):
113,000 Baker Hughes, Inc. 4,025
35,000 Schlumberger Ltd. 3,469
--------
7,494
--------
PAPER & FOREST PRODUCTS (1.5%):
50,100 Bowater, Inc. 1,772
27,100 International Paper Co. 1,159
46,000 Mead Corp. 2,610
--------
5,541
--------
PHARMACEUTICALS (7.3%):
89,000 Abbott Laboratories 4,506
70,000 American Home Products Corp. 4,288
48,300 Merck & Co., Inc. 3,580
104,500 Pfizer, Inc. 8,647
58,000 Pharmacia & Upjohn, Inc. 2,088
76,000 Schering-Plough Corp. 4,864
--------
27,973
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
POLLUTION CONTROL SERVICES & EQUIPMENT (0.5%):
56,000 WMX Technologies, Inc. $ 1,925
--------
PRIMARY METAL & MINERAL PRODUCTION (0.6%):
92,000 USX -- U.S. Steel Group,
Inc. 2,507
--------
RETAIL (3.7%):
160,500 Dayton Hudson Corp. 5,557
45,900 Lowes Cos., Inc. 1,853
84,550 Sears, Roebuck & Co. 4,090
103,000 Wal-Mart Stores, Inc. 2,742
--------
14,242
--------
RETAIL -- FOOD & DRUGS (1.5%):
85,000 Supervalu, Inc. 2,529
82,000 Walgreen Co. 3,096
--------
5,625
--------
SEMICONDUCTORS (2.2%):
50,000 Intel Corp. 5,494
106,800 LSI Logic Corp. (b) 2,830
--------
8,324
--------
SOAPS & PERSONAL CARE (1.0%):
41,000 Colgate-Palmolive, Inc. 3,772
--------
TOBACCO (1.5%):
60,000 Philip Morris Cos., Inc. 5,558
--------
TRANSPORTATION (1.0%):
30,900 Norfolk Southern Corp. 2,754
42,000 U.S. Freightways Corp. 919
--------
3,673
--------
UTILITIES -- ELECTRIC (5.4%):
45,300 CINergy Corp. 1,501
136,000 Consolidated Edison Co.
NY, Inc. 3,978
99,900 DQE, Inc. 2,872
39,200 FPL Group, Inc. 1,803
204,300 Houston Industries 4,673
144,000 Texas Utilities Co. 5,832
--------
20,659
--------
UTILITIES -- NATURAL GAS (2.2%):
62,500 Consolidated Natural Gas Co. 3,320
89,100 Enron Corp. 4,143
30,000 Peoples Energy Corp. 1,058
--------
8,521
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
97
<PAGE>
100
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
VALUE FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
UTILITIES -- TELECOMMUNICATIONS (6.3%):
112,000 AT&T Corp. $ 3,906
89,800 Ameritech Corp. 4,916
173,000 GTE Corp. 7,288
34,000 Lucent Technologies, Inc. 1,598
156,800 MCI Telecommunications Corp. 3,940
54,000 Nynex Corp. 2,403
--------
24,051
- ---------------------------------------------------------
TOTAL COMMON STOCKS 366,825
- ---------------------------------------------------------
TOTAL (COST $292,902) (a) $382,752
- ---------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $382,083.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax reporting purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $109. Cost for federal income tax puposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 95,376
Unrealized depreciation (5,635)
--------
Net unrealized appreciation $ 89,741
=========
</TABLE>
(b) Represents non-income producing securities.
SEE NOTES TO FINANCIAL STATEMENTS.
98
<PAGE>
101
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
GROWTH FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ---------------------------------------------------------
COMMERCIAL PAPER (3.6%)
FINANCIAL SERVICES (3.6%):
$ 5,354 General Electric Capital
Corp.,
5.57%, 11/01/96 $ 5,355
- ---------------------------------------------------------
TOTAL COMMERCIAL PAPER 5,355
- ---------------------------------------------------------
- ---------------------------------------------------------
COMMON STOCKS (96.9%)
AEROSPACE/DEFENSE (2.4%):
35,000 AlliedSignal, Inc. 2,293
12,500 Boeing Co. 1,192
--------
3,485
--------
AIRLINES (0.6%):
42,500 Southwest Airlines Co. 956
--------
ALUMINUM (0.4%):
10,000 Aluminum Co. of America 586
--------
AUTOMOTIVE PARTS (0.7%):
39,000 AutoZone, Inc. (b) 999
--------
BANKS (3.7%):
35,000 BankAmerica Corp. 3,202
50,000 Norwest Corp. 2,194
--------
5,396
--------
BEVERAGES (4.8%):
50,000 Anheuser-Busch Co., Inc. 1,925
80,000 Coca-Cola Co. 4,040
40,000 PepsiCo, Inc. 1,185
--------
7,150
--------
BROKERAGE SERVICES (0.7%):
12,500 J.P. Morgan & Co., Inc. 1,080
--------
CHEMICALS (2.9%):
35,000 Air Products &
Chemicals, Inc. 2,100
15,000 Dow Chemical Co. 1,166
65,000 RPM, Inc., Ohio 1,089
--------
4,355
--------
COMPUTERS & PERIPHERALS (3.5%):
17,500 Bay Networks (b) 354
20,000 Cisco Systems (b) 1,238
25,000 Electronic Data Systems 1,125
15,000 Hewlett Packard Co. 662
25,000 3Com Corp. (b) 1,691
--------
5,070
--------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
CONTAINERS -- METAL, GLASS, PAPER, PLASTIC
(1.4%):
50,000 Newell Co. $ 1,419
25,000 Sonoco Products Co. 666
--------
2,085
--------
COSMETICS & RELATED (1.8%):
35,000 Gillette Co. 2,616
--------
ELECTRONIC & ELECTRICAL -- GENERAL (7.4%):
5,000 Altera Corp. (b) 310
32,500 Emerson Electric Co. 2,893
67,500 General Electric Co. 6,530
17,500 W.W. Grainger, Inc. 1,297
--------
11,030
--------
ENTERTAINMENT (1.3%):
30,000 Walt Disney Co. 1,976
--------
FINANCIAL SERVICES (3.0%):
35,000 Automatic Data
Processing, Inc. 1,457
75,000 Federal National
Mortgage Assoc. 2,934
--------
4,391
--------
FOOD PROCESSING & PACKAGING (2.7%):
35,000 ConAgra, Inc. 1,746
63,000 Sara Lee Corp. 2,236
--------
3,982
--------
FOREST PRODUCTS -- LUMBER, PAPER (1.7%):
20,000 International Paper Co. 855
30,000 Mead Corp. 1,702
--------
2,557
--------
HEALTH CARE (2.3%):
71,250 Columbia HCA
Healthcare Corp. 2,547
40,000 Health Management
Assoc., Inc. (b) 880
--------
3,427
--------
HEAVY MACHINERY -- INDUSTRIAL, FARM,
CONSTRUCTION (0.6%):
25,000 Baker Hughes, Inc. 891
--------
INSURANCE (3.7%):
30,000 American International
Group, Inc. 3,258
42,500 Everest Re Holdings 1,084
4,000 General Re Corp. 589
10,000 St. Paul Cos., Inc. 544
--------
5,475
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
99
<PAGE>
102
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
GROWTH FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
MANUFACTURING-CAPITAL GOODS (1.3%):
25,000 Minnesota Mining &
Manufacturing Co. $ 1,916
--------
MEDICAL SUPPLIES (1.9%):
70,000 Biomet, Inc. 1,129
25,000 Medtronic, Inc. 1,609
--------
2,738
--------
OIL & GAS EXPLORATION, PRODUCTION, & SERVICES (8.0%):
15,000 Atlantic Richfield Co. 1,988
40,000 Chevron Corp. 2,630
57,500 Enron Corp. 2,674
27,500 Mobil Corp. 3,210
20,000 Phillips Petroleum Co. 820
5,000 Schlumberger, Ltd. 496
--------
11,818
--------
PHARMACEUTICALS (12.6%):
60,000 Abbott Laboratories 3,038
20,000 Alza Corp., Class A (b) 518
50,000 American Home
Products Corp. 3,063
20,000 Amgen, Inc. (b) 1,226
40,000 Johnson & Johnson, Inc. 1,970
35,000 Merck & Co., Inc. 2,594
52,000 Pfizer, Inc. 4,302
30,000 Schering-Plough Corp. 1,920
--------
18,631
--------
RADIO & TELEVISION (0.9%):
40,000 Viacom, Class B (b) 1,305
--------
RESTAURANTS (0.6%):
40,000 Wendy's International, Inc. 825
--------
RETAIL -- SPECIALTY STORES (5.2%):
30,000 Dayton Hudson Corp. 1,039
60,000 Home Depot, Inc. 3,285
50,000 Wal-Mart Stores, Inc. 1,331
55,000 Walgreen Co. 2,076
--------
7,731
--------
SEMICONDUCTORS (4.0%):
45,000 Intel Corp. 4,943
35,000 LSI Logic Corp. (b) 928
--------
5,871
--------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
SOAPS & CLEANING AGENTS (3.6%):
15,000 Colgate-Palmolive, Inc. $ 1,380
40,000 Procter & Gamble Co. 3,960
--------
5,340
--------
SOFTWARE & COMPUTER SERVICES (4.0%):
30,000 Microsoft Corp. (b) 4,119
42,500 Oracle Systems Corp. (b) 1,798
--------
5,917
--------
TOBACCO & TOBACCO PRODUCTS (3.2%):
42,500 Philip Morris Cos., Inc. 3,937
25,000 UST, Inc. 722
--------
4,659
--------
TRANSPORTATION-SHIPPING (0.5%):
35,000 US Freightways Corp. 766
--------
UTILITIES -- TELECOMMUNICATIONS (5.5%):
35,000 Airtouch Communications,
Inc. (b) 914
20,000 Ameritech Corp. 1,095
7,000 GTE Corp. 295
17,499 Lucent Technologies, Inc. 822
50,000 MCI Telecommunications Corp. 1,256
48,000 SBC Communications, Inc. 2,334
35,000 Sprint Corp. 1,374
--------
8,090
- ---------------------------------------------------------
TOTAL COMMON STOCKS 143,114
- ---------------------------------------------------------
TOTAL (COST $109,847) $148,469
- ---------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $147,753.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C> <C>
Unrealized appreciation $ 40,071
Unrealized depreciation (1,449)
--------
Net unrealized appreciation $ 38,622
=========
</TABLE>
(b) Represents non-income producing securities.
SEE NOTES TO FINANCIAL STATEMENTS.
100
<PAGE>
103
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
SPECIAL VALUE FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------
COMMERCIAL PAPER (2.7%)
$ 7,833 General Electric Capital
Corp.,
5.57%, 11/1/96 $ 7,833
- ------------------------------------------------------------
TOTAL COMMERCIAL PAPER 7,833
- ------------------------------------------------------------
- ------------------------------------------------------------
COMMON STOCKS (95.8%)
AEROSPACE/DEFENSE (3.4%):
140,900 GenCorp, Inc. 2,325
91,500 Gulfstream Aerospace (b) 2,162
59,400 Litton Industries, Inc. (b) 2,666
64,000 Thiokol Corp. Delaware 2,680
----------
9,833
----------
AIRLINES (0.5%):
18,000 Delta Air Lines, Inc. 1,276
----------
AUTOMOTIVE PARTS (2.6%):
115,500 Echlin Inc. 3,768
46,200 Genuine Parts Co. 2,021
79,700 ITT Industries 1,853
----------
7,642
----------
BANKS (6.7%):
49,550 Central Fidelity Banks, Inc. 1,257
79,000 First American Bank Corp. 4,295
109,700 First Security Corp. 3,222
84,400 First Tennessee National
Corp. 3,070
59,000 Northern Trust Corp. 4,086
86,700 Summit Bancorp 3,544
----------
19,474
----------
BEVERAGES (1.4%):
95,500 Coca-Cola Enterprises, Inc. 4,071
----------
CHEMICALS (4.1%):
87,600 Arcadian Corp. 2,157
35,900 Avery Dennison Corp. 2,365
97,000 Nalco Chemical Co. 3,528
158,100 RPM, Inc., Ohio 2,648
23,900 WD 40 Co. 1,195
----------
11,893
----------
CONSTRUCTION (0.5%):
31,400 Foster Wheeler Corp. 1,287
----------
CONSUMER GOODS (0.9%):
91,500 Newell Co. 2,596
----------
CONTAINERS (0.9%):
102,100 Sonoco Products Co. 2,718
----------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
ELECTRICAL EQUIPMENT (3.5%):
44,600 Arrow Electronics, Inc. (b) $ 2,124
45,200 Harris Corp. 2,830
165,000 Mark IV Industries 3,568
22,000 W.W. Grainger, Inc. 1,631
----------
10,153
----------
ELECTRONICS (0.7%):
55,525 Molex Corp. 1,999
----------
ENTERTAINMENT (0.8%):
99,000 Brunswick Corp. 2,326
----------
ENVIRONMENTAL CONTROL (0.9%):
221,450 Laidlaw, Inc., Class B 2,602
----------
FINANCIAL SERVICES (5.0%):
141,800 Bear Stearns Cos. Inc. 3,350
57,900 Donaldson Lufkin & Jenrette 1,860
117,800 Equifax, Inc. 3,505
90,300 H & R Block, Inc. 2,235
60,500 PMI Group, Inc. 3,456
----------
14,406
----------
FOOD PROCESSING & PACKAGING (3.5%):
109,800 Dole Food, Inc. 4,282
119,300 IBP, Inc. 2,983
115,000 McCormick & Co., Inc. 2,774
----------
10,039
----------
FURNITURE (0.8%):
75,200 Leggett & Platt, Inc. 2,247
----------
HEALTH & PERSONAL CARE (0.8%):
56,300 Tambrands, Inc. 2,400
----------
HOTELS & MOTELS (0.5%):
61,000 Mirage Resorts, Inc. (b) 1,342
----------
HOUSEHOLD GOODS -- APPLIANCES,
FURNISHING & ELECTRONICS, (0.9%):
105,000 Sunbeam Corp. 2,586
----------
INSURANCE (4.9%):
72,400 American Financial Group,
Inc. 2,597
124,900 Amerin Corp. (b) 2,467
156,600 Everest Re Holdings 3,993
61,300 Horace Mann Educators 2,100
21,600 Progressive Corp. 1,485
20,500 Transatlantic Holdings 1,476
----------
14,118
----------
LEISURE -- RECREATION, GAMING (1.6%):
217,900 International Game
Technology 4,603
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
101
<PAGE>
104
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
SPECIAL VALUE FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
MACHINE TOOLS (2.3%):
89,200 Albany International Corp. $ 2,007
135,500 Kennametal, Inc. 4,607
----------
6,614
----------
MANUFACURING -- CAPITAL GOODS (4.1%):
67,900 Hillenbrand 2,512
65,500 Kaydon Corp. 2,669
97,500 Pall Corp. 2,498
77,324 Pentair, Inc. 1,952
47,650 Tyco Laboratories, Inc. 2,365
----------
11,996
----------
MANUFACTURING -- CONSUMER GOODS (1.4%):
43,000 Briggs & Stratton Corp. 1,720
90,133 Federal Signal Corp. 2,321
----------
4,041
----------
MEDICAL SERVICES (4.0%):
187,600 Coventry Corp. (b) 1,899
183,000 Nellcor Puritan Bennett,
Inc. (b) 3,569
148,200 Quorum Health Group (b) 4,001
70,855 Vivra, Inc. (b) 2,259
----------
11,728
----------
MEDICAL SUPPLIES (1.2%):
224,300 Biomet, Inc. 3,617
----------
METALS -- NONFERROUS (2.6%):
102,200 Titanium Metal (b) 3,143
112,300 Ucar International (b) 4,394
----------
7,537
----------
MERCHANDISING (0.8%):
107,600 Lands End, Inc. (b) 2,313
----------
NEWSPAPERS (1.5%):
53,800 Tribune Co. 4,398
----------
OIL & GAS EXPLORATION, PRODUCTION
& SERVICES (2.8%):
70,900 Anadarko Petroleum 4,511
198,400 Enserch Exploration (b) 1,959
46,100 Vastar Resources, Inc. 1,711
----------
8,181
----------
OIL MARKETING & REFINING (0.4%):
43,600 Diamond Shamrock, Inc. 1,281
----------
OILFIELD WELL EQUIPMENT & SERVICES (1.7%):
141,500 Baker Hughes, Inc. 5,041
----------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
PRIMARY METAL & MINERAL PRODUCTION (0.8%):
59,700 Minerals Technologies, Inc. $ 2,343
----------
RADIO & TELEVISION (0.8%):
26,000 American Radio System (b) 793
51,000 Evergreen Media Corp. (b) 1,377
----------
2,170
----------
RAILROADS (2.0%):
115,000 Canadian National Railway
Co. 3,163
82,975 Illinois Central Corp. 2,686
----------
5,849
----------
REAL ESTATE INVESTMENT TRUSTS (3.5%):
91,900 Equity Residential
Properties Trust 3,377
116,300 Meditrust Corp. 4,187
127,100 Merry Land & Investment Co.,
Inc. 2,669
----------
10,233
----------
RESTAURANTS (1.5%):
209,200 Wendy's International, Inc. 4,315
----------
RETAIL (3.4%):
269,300 General Nutrition Co. (b) 4,915
102,900 Hannaford Brothers 3,100
64,000 Talbots, Inc. 1,824
----------
9,839
----------
SEMICONDUCTORS (3.4%):
41,000 Altera Corp.(b) 2,542
192,200 LSI Logic Corp. (b) 5,093
126,145 Vishay Intertechnology,
Inc. (b) 2,270
----------
9,905
----------
SOFTWARE & COMPUTER SERVICES (0.5%):
134,000 Symantec Corp. (b) 1,457
----------
STEEL (0.9%):
120,770 Worthington Industries, Inc. 2,506
----------
TEXTILE MANUFACTURING (1.5%):
179,200 Warnaco Group 4,458
----------
TRANSPORTATION LEASING & TRUCKING (2.0%):
69,550 GATX Corp. 3,321
89,500 Pittston Brinks Group 2,551
----------
5,872
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
102
<PAGE>
105
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
SPECIAL VALUE FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
UTILITIES -- ELECTRIC (7.1%):
92,000 CINergy Corp $ 3,048
72,100 DQE, Inc. 2,073
175,300 Florida Progress Corp. 5,851
104,000 PP&L Resources, Inc. 2,431
137,500 Public Service Co. of
Colorado 5,088
105,100 Public Service Co. of
New Mexico 1,971
----------
20,462
----------
UTILITIES -- NATURAL GAS (0.7%):
37,300 Brooklyn Union Gas Co. 1,082
41,900 Washington Gas Light Co. 938
----------
2,020
- ------------------------------------------------------------
TOTAL COMMON STOCKS 277,787
- ------------------------------------------------------------
TOTAL (COST $242,913)(a) $ 285,620
- ------------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $289,846.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax reporting purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $14. Cost for federal income tax puposes differs from value
by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $ 48,795
Unrealized depreciation (6,102)
----------
Net unrealized appreciation $ 42,693
==========
</TABLE>
(b) Non-income producing securities.
SEE NOTES TO FINANCIAL STATEMENTS.
103
<PAGE>
106
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
SPECIAL GROWTH FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- ---------------------------------------------------------
COMMERCIAL PAPER (5.2%)
FINANCIAL SERVICES (5.2%):
$ 4,444 General Electric Capital
Corp., 5.24%, 10/31/96 $ 4,606
- ---------------------------------------------------------
TOTAL COMMERCIAL PAPER 4,606
- ---------------------------------------------------------
- ---------------------------------------------------------
COMMON STOCKS (95.1%)
AEROSPACE/DEFENSE (0.9%):
35,000 BE Aerospace (b) 761
-------
APPAREL (2.1%):
25,000 Nautica Enterprises, Inc.
(b) 769
30,000 Tag Heuer ADR (b) 480
20,000 Unitog Co. 540
-------
1,789
-------
BANKS (0.1%):
4,456 Toronto-Dominion Bank 104
-------
COMMERCIAL SERVICES (4.1%):
20,000 Abacus Direct Corp. (b) 525
22,500 Concord EFS, Inc. (b) 653
40,000 Hooper Holmes, Inc. 595
40,000 Metzler Group, Inc. (b) 933
50,000 Sothebys Holdings, Class A 850
-------
3,556
-------
COMPUTERS & PERIPHERALS (9.6%):
35,000 Amati Communications Corp.
(b) 604
50,000 Bitstream, Inc. (b) 300
40,000 BBN Corp. (b) 855
40,000 Casino Data Systems (b) 575
50,000 Ciprico, Inc. (b) 800
60,000 Forefront Group, Inc. (b) 465
80,000 Interlink Computer Service
(b) 750
35,000 Netcom On-Line
Communications (b) 534
40,000 Network General Corp. (b) 965
40,000 Ontrack Data International
(b) 565
60,000 Splash Technology (b) 825
12,000 Sungard Data
Systems, Inc. (b) 513
40,000 Xcellenet Incorporated
Networking Products (b) 650
-------
8,401
-------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
ELECTRICAL EQUIPMENT (5.4%):
40,000 CIDCO, Inc. (b) $ 755
25,000 ITI Technologies, Inc. (b) 719
75,000 Printrak International (b) 731
25,000 Sipex Corp. Circuits (b) 659
20,000 Thermotrex Corp. (b) 710
25,000 Uniphase Corp. (b) 1,206
-------
4,780
-------
ENERGY (1.0%):
50,000 Global Industries Ltd. (b) 900
-------
ENVIRONMENTAL CONTROL (3.6%):
40,000 TETRA Technologies (b) 835
23,700 U.S.A. Waste
Services, Inc. (b) 758
30,000 United States Filter Corp.
(b) 1,035
15,600 United Waste
Systems, Inc. (b) 536
-------
3,164
-------
FINANCIAL SERVICES (3.6%):
12,500 Aames Financial Corp. 558
15,000 Eaton Vance Corp. 656
25,000 Envoy Corp. (b) 919
188 Investors Financial Services 5
10,000 U.S. Trust Corp. 622
12,100 Value Line, Inc. 442
-------
3,202
-------
FOOD DISTRIBUTORS (0.7%):
30,000 Dominick's Supermarket (b) 596
-------
HOUSEHOLD GOODS --
APPLIANCES, FURNISHINGS & ELECTRONICS (0.9%):
30,000 Williams-Sonoma Co. (b) 825
-------
INSURANCE (0.9%):
25,000 Allmerica Financial Corp. 759
-------
LEISURE -- RECREATION, GAMING (0.8%):
25,000 Family Golf Centers (b) 734
-------
MEDICAL SERVICES --
HOSPITAL MANAGEMENT & NURSING HOMES (1.6%):
50,000 Atria Communities, Inc. (b) 631
40,000 FPA Medical
Management, Inc. (b) 745
-------
1,376
-------
MEDICAL SUPPLIES (2.4%):
60,000 Cardiovascular Dynamics (b) 780
50,000 Staar Surgical Co. (b) 619
30,000 Ultrafem, Inc. (b) 675
-------
2,074
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
104
<PAGE>
107
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
SPECIAL GROWTH FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
MERCHANDISING (0.7%):
30,000 Lands End, Inc. (b) $ 645
-------
METALS -- FABRICATION (0.7%):
20,000 Oregon Metallurgical Corp.
(b) 630
-------
MINING (0.6%):
50,000 Uranium Resources (b) 563
-------
OFFICE EQUIPMENT & SUPPLIES
(NON-COMPUTER RELATED) (1.0%):
30,000 American Pad & Paper (b) 563
50,000 Faxsav Commercial Services
(b) 306
-------
869
-------
OIL & GAS EXPLORATION, PRODUCTION & SERVICES (16.6%):
35,000 Benton Oil & Gas (b) 858
20,000 Camco International, Inc. 775
50,000 Denbury Resources, Inc. (b) 653
25,000 Devon Energy Corp. 872
22,000 Energy Ventures, Inc. (b) 968
40,000 Forest Oil Corp. (b) 600
50,000 Midcoast Energy Resources 500
15,000 Newfield Exploration (b) 709
20,000 Newpark Resources, Inc. (b) 750
40,000 Noble Drilling Corp. (b) 745
25,000 Nuevo Energy Co. (b) 1,247
40,000 Oceaneering International
(b) 720
60,000 Pool Energy Services Co. (b) 885
50,000 Pride Petroleum Services (b) 875
20,000 Smith International, Inc.
(b) 760
40,000 Snyder Oil Corp. 610
45,000 Swift Energy Co. (b) 1,102
20,000 United Meridian Corp. (b) 942
-------
14,571
-------
PHARMACEUTICALS (3.9%):
15,000 Agouron Pharmaceuticals (b) 859
35,000 Curative Technologies (b) 796
15,000 INCYTE Pharmaceuticals, Inc.
(b) 607
25,000 Interneuron Pharmaceuticals
(b) 619
40,000 Pharmacyclics (b) 570
-------
3,451
-------
PUBLISHING (1.6%):
24,000 Harte-Hanks
Communications, Inc. 621
15,000 Meredith Corp. 754
-------
1,375
-------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
RADIO & TELEVISION (0.8%):
20,000 Renaissance Communications
Corp. (b) $ 708
-------
REAL ESTATE INVESTMENT TRUSTS (6.1%):
25,000 Beacon Corp. 734
25,000 Cali Realty Corp. 672
15,000 Crescent Real Estate
Equities, Inc. 626
15,000 Post Properties, Inc. 593
20,000 Reckson Associates
Realty Corp. 713
20,400 Simon Debartolo Group 538
20,000 Spieker Properties, Inc. 615
20,000 Starwood Lodging Trust 900
-------
5,391
-------
RESTAURANTS (0.9%):
25,000 Rainforest Cafe (b) 813
-------
RETAIL (2.3%):
25,000 Loehmann's, Inc. (b) 672
30,000 Stein Mart, Inc. (b) 536
25,000 Wet Seal (b) 788
-------
1,996
-------
RETAIL -- SPECIALTY STORES (2.9%):
25,000 The Sports Authority (b) 606
53,600 Travis Boats & Motors, Inc.
(b) 576
25,000 Wolverine World Wide 619
40,000 Zale Corp. (b) 775
-------
2,576
-------
SEMICONDUCTORS (1.0%):
40,000 Supertex, Inc. (b) 900
-------
SOFTWARE & COMPUTER SERVICES (13.6%):
20,000 Acxiom Corp. (b) 785
20,000 American Management Systems,
Inc. (b) 633
30,000 Analysts International Corp. 750
40,000 Axent Technologies (b) 715
40,000 Cotelligent Group, Inc. (b) 710
25,000 Dialogic Corp. (b) 856
35,000 Geoworks (b) 713
20,000 National Data Corp. 822
35,000 SPSS, Inc. (b) 1,089
50,000 Summit Design, Inc. (b) 531
50,000 Systemsoft Corp. (b) 1,413
50,000 Versant Object Technology
Corp. (b) 975
40,000 Viasoft, Inc. (b) 1,970
-------
11,962
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
105
<PAGE>
108
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
SPECIAL GROWTH FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
TECHNOLOGY (0.6%):
30,000 Premiere Technologies (b) $ 487
-------
TEXTILE MANUFACTURING (0.6%):
50,000 Cutter & Buck, Inc. (b) 531
-------
TRANSPORTATION (0.9%):
25,000 Air Express International 756
-------
UTILITIES -- TELECOMMUNICATIONS (2.6%):
20,000 Davox Corp. (b) 720
50,000 Pacific Gateway Exchange (b) 1550
-------
2,270
- ---------------------------------------------------------
TOTAL COMMON STOCKS 83,515
- ---------------------------------------------------------
TOTAL (COST $77,827) (a) $88,121
- ---------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $87,837.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $14,735
Unrealized depreciation (4,441)
-------
Net unrealized appreciation $10,294
========
</TABLE>
(b) Non-income producing securities.
ADR -- American Depository Receipt
SEE NOTES TO FINANCIAL STATEMENTS.
106
<PAGE>
109
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
OHIO REGIONAL STOCK FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
- --------------------------------------------------------
COMMERCIAL PAPER (3.3%)
ELECTRICAL & ELECTRONIC (3.3%):
$ 1,506 General Electric Capital
Corp., 5.57%, 11/1/96 $ 1,506
- --------------------------------------------------------
TOTAL COMMERCIAL PAPER 1,506
- --------------------------------------------------------
- --------------------------------------------------------
CONVERTIBLE BONDS (0.2%)
MEDICAL SUPPLIES (0.2%):
75 Meridian Diagnostics, Inc.
7.00%, 9/1/06 73
- --------------------------------------------------------
TOTAL CONVERTIBLE BONDS 73
- --------------------------------------------------------
- --------------------------------------------------------
COMMON STOCKS (96.6%)
AGRICULTURE & LIVESTOCK (0.1%):
5,000 Andersons, Inc. (b) 45
-------
AMUSEMENT & RECREATION SERVICES (0.8%):
10,000 Cedar Fair L.P. 350
-------
AUTOMOTIVE PARTS (5.2%):
24,000 Dana Corp. 711
19,800 Myers Industries Inc. 307
15,000 TRW, Inc. 1,357
-------
2,375
-------
BANKS (10.8%):
10,000 Banc First Ohio 283
25,200 Charter One Financial, Inc. 1,094
21,000 First Merit Corp. 683
10,827 Huntington Bancshares, Inc. 260
5,100 Mahoning National Bancorp 124
20,000 National City Corp. 868
22,500 Provident Bancorp 997
2,235 Second Bancorp 69
6,000 Star Bank 540
-------
4,918
-------
BROADCASTING (3.6%):
35,000 Scripps (E.W.) Co. 1,658
-------
BUILDING MATERIALS (1.8%):
5,000 Holophane Corp. (b) 95
10,000 Medusa Corp. 328
10,000 Owens Corning
Fiberglas Corp. 387
-------
810
-------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
CHEMICALS (5.7%):
15,000 Chemed Corp. $ 585
9,000 Chempower, Inc. (b) 51
20,000 Ferro Corp. 540
9,000 Lubrizol Corp. 268
10,000 OM Group, Inc. 410
32,812 RPM Inc., Ohio 550
12,500 A. Schulman, Inc. 264
-------
2,668
-------
COMPUTERS & PERIPHERALS (0.9%):
1,000 Lanvision (b) 9
34,000 Telxon Corp. 416
-------
425
-------
CONSUMER GOODS (2.5%):
14,000 American Greetings Corp. 410
15,000 Cincinnati Microwave, Inc.
(b) 37
43,000 Gibson Greetings, Inc. (b) 671
-------
1,118
-------
ELECTRONIC & ELECTRICAL -- GENERAL (2.5%):
20,000 Allen Group (b) 317
78,500 Pioneer-Standard
Electronics, Inc. 824
-------
1,141
-------
ENGINEERING, INDUSTRIAL CONSTRUCTION (0.2%):
10,000 Corrpro (b) 84
-------
ENVIRONMENTAL CONTROL (1.3%):
37,050 Cuno, Inc. (b) 593
-------
FINANCIAL SERVICES (2.9%):
16,500 Haverfield Corp. 305
18,000 McDonald & Co. Investments 438
40,500 State Auto Financial 567
-------
1,310
-------
FOOD DISTRIBUTORS (SUPERMARKETS)
& WHOLESALERS (1.0%):
10,000 Chiquita Brands
International 125
7,000 Kroger Co. (b) 312
-------
437
-------
FOOD PROCESSING & PACKAGING (0.2%):
5,000 Smuckers, Class A 82
-------
FOREST PRODUCTS -- LUMBER, PAPER (1.5%):
12,000 Mead Corp. 681
-------
HEALTH CARE (0.1%):
9,000 Health Power, Inc. (b) 31
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
107
<PAGE>
110
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO REGIONAL STOCK FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
HOSPITAL & NURSING EQUIPMENT & SUPPLIES (5.8%):
36,000 Invacare Corp. $ 1,008
60,000 Omnicare, Inc. 1,635
-------
2,643
-------
HOUSEHOLD GOODS --
APPLIANCES & FURNISHINGS (2.1%):
25,000 Lancaster Colony Corp. 937
10,000 Sun Television & Appliance 26
-------
963
-------
INDUSTRIAL SERVICES (1.0%):
22,000 Amcast Industrial Corp. 448
-------
INSURANCE (3.9%):
3,150 Cincinnati Financial Corp. 181
18,000 Ohio Casualty 585
15,000 Progressive Corp. 1,031
-------
1,797
-------
MACHINE TOOLS (5.3%):
23,625 Bearings, Inc. 614
17,000 Cincinnati Milacron, Inc. 325
37,050 Commercial Intertech Corp. 412
46,500 Gorman Rupp 639
14,000 Lincoln Electric Co. 385
5,000 Monarch Machine Tool Co. 49
-------
2,424
-------
MANUFACURING -- CAPITAL GOODS (2.6%):
10,000 Gradall Industries, Inc. (b) 109
15,000 Parker-Hannifin Corp. 568
20,000 Thor Industries, Inc. 500
-------
1,177
-------
MEDICAL SUPPLIES (0.3%):
12,000 Meridian Diagnostics 126
-------
MEDICAL-BIOTECHNOLOGY (0.1%):
5,000 Gliatech, Inc. (b) 41
-------
METALS -- FABRICATION (0.8%):
10,000 Brush Wellman, Inc. 189
7,000 Cold Metal Products, Inc.
(b) 41
10,000 Park-Ohio Industries, Inc.
(b) 150
-------
380
-------
OFFICE EQUIPMENT & SUPPLIES (6.1%):
34,500 Diebold, Inc. 1,984
30,000 Reynolds & Reynolds Co. 791
-------
2,775
-------
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
OIL & GAS EXPLORATION, PRODUCTION,
& SERVICES (3.7%):
5,000 Belden & Blake (b) $ 133
5,000 Lomak Petroleum, Inc. 82
68,000 USX-Marathon Group 1,488
-------
1,703
-------
PAINT, VARNISHES, ENAMELS (1.5%):
14,000 Sherwin-Williams Co. 702
-------
POLLUTION CONTROL SERVICES & EQUIPMENT (0.0%):
20,100 Mid American Waste Systems,
Inc. (b) 14
-------
PRECISION INSTRUMENTS & RELATED (3.0%):
60,000 Keithley Instruments, Inc. 465
40,000 Robbins & Myers, Inc. 900
-------
1,365
-------
REAL ESTATE INVESTMENT TRUSTS (0.8%):
16,000 Health Care REIT, Inc. 378
-------
RESTAURANTS (1.8%):
29,500 Bob Evans Farms, Inc. 369
22,000 Wendy's International, Inc. 454
-------
823
-------
RETAIL -- SPECIALTY STORES (1.9%):
17,000 Fabri-Centers of America
Class B (b) 221
17,000 Fabri-Centers of America
Inc. (b) 221
15,000 The Limited, Inc. 276
10,000 Value City Department
Stores, Inc. (b) 128
-------
846
-------
RUBBER & RUBBER PRODUCTS INCLUDING TIRES (1.4%):
5,000 Cooper Tire & Rubber Co. 98
12,000 Goodyear Tire & Rubber Co. 551
-------
649
-------
STEEL (3.3%):
35,000 Shiloh (b) 578
9,000 Timken Co. 402
25,000 Worthington Industries, Inc. 519
-------
1,499
-------
TEXTILE MANUFACTURING (1.0%):
25,000 Essef Corp. (b) 438
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
108
<PAGE>
111
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
OHIO REGIONAL STOCK FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
<S> <C> <C> <C>
TRANSPORTATION LEASING & TRUCKING (2.3%):
6,000 Caliber System, Inc. $ 101
45,000 Comair Holding, Inc. 906
3,000 Roadway Express, Inc. 48
-------
1,055
-------
TRANSPORTATION -- MARINE (0.3%):
3,000 Oglebay Norton Co. 131
-------
UTILITIES -- ELECTRIC (3.4%):
14,000 American Electric Power Co. 581
10,000 CINergy Corp. 331
22,500 D.P.L., Inc. 537
5,000 Ohio Edison 104
-------
1,553
-------
UTILITIES -- TELECOMMUNICATIONS (3.1%):
29,000 Cincinnati Bell 1,432
- --------------------------------------------------------
TOTAL COMMON STOCKS 44,088
- --------------------------------------------------------
SHARES OR
PRINCIPAL MARKET
AMOUNT SECURITY DESCRIPTION VALUE
- ---------------------------------------------
RIGHTS/WARRANTS (0.0%)
10,000 Cincinnati Microwave, Inc. (b)
Expires 12/31/98 $ 6
- --------------------------------------------------------
TOTAL RIGHTS/WARRANTS 6
- --------------------------------------------------------
TOTAL (COST $27,176) (a) $45,673
- --------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $45,620.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C> <C>
Unrealized appreciation $20,115
Unrealized depreciation (1,618)
-------
Net unrealized appreciation $18,497
========
</TABLE>
(b) Non-income producing securities.
SEE NOTES TO FINANCIAL STATEMENTS.
109
<PAGE>
112
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
INTERNATIONAL GROWTH FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------
COMMERCIAL PAPER (8.1%)
$ 9,823 General Electric Capital
Corp.,
5.57%, 11/1/96 $ 9,823
- ----------------------------------------------------------
TOTAL COMMERCIAL PAPER 9,823
- ----------------------------------------------------------
- ----------------------------------------------------------
COMMON STOCKS (91.0%)
AUSTRALIA (3.9%):
BANKS (1.4%):
150,400 National Australia Bank Ltd. 1,652
--------
BROADCASTING & PUBLISHING (0.6%):
175,500 Publishing & Broadcasting
Ltd. 790
--------
BUILDING MATERIALS (0.6%):
235,000 CSR Ltd. 790
--------
OIL & GAS PRODUCTION (1.3%):
380,000 Santos Ltd. 1,519
- ----------------------------------------------------------
TOTAL AUSTRALIA 4,751
- ----------------------------------------------------------
BRITAIN (16.3%):
AEROSPACE & DEFENSE (0.8%):
220,000 Rolls-Royce PLC 910
--------
BANKS (3.5%):
232,000 Allied Irish Bank PLC 1,471
244,371 National Westminster Bank
PLC 2,792
--------
4,263
--------
BUSINESS & PUBLIC SERVICES (0.8%):
122,500 Carlton Communications PLC 981
--------
COMPUTERS & PERIPHERALS (0.9%):
125,000 JBA Holdings PLC 1,038
--------
CONGLOMERATES (1.0%):
940,000 Hanson PLC 1,236
--------
FOOD DISTRIBUTORS-SUPERMARKETS &
WHOLESALERS (1.1%):
250,000 Tesco PLC 1,354
--------
FOOD PROCESSING & PACKAGING (1.1%):
175,000 Grand Metropolitan PLC 1,321
--------
INSURANCE (0.7%):
83,000 Commercial Union PLC 876
--------
LEISURE (1.4%):
172,000 Rank Group PLC 1,144
200,000 Ladbroke Group PLC 650
--------
1,794
--------
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C> <C>
OIL & GAS PRODUCTION (1.3%):
147,065 British Petroleum Co. PLC $ 1,583
--------
PHARMACEUTICALS (1.6%):
120,000 Glaxo Wellcome PLC 1,884
--------
TRANSPORTATION (1.0%):
125,000 Peninsular & Oriental Steam
Navigation Co. 1,228
--------
UTILITIES -- WATER (1.1%):
117,000 Hyder PLC 1,349
- ----------------------------------------------------------
TOTAL BRITAIN 19,817
- ----------------------------------------------------------
CANADA (0.6%):
FOREST PRODUCTS (0.6%):
56,100 Abitibi-Price, Inc. 784
- ----------------------------------------------------------
TOTAL CANADA 784
- ----------------------------------------------------------
DENMARK (0.4%):
BANKS (0.4%):
7,500 Den Danske Bank 538
- ----------------------------------------------------------
TOTAL DENMARK 538
- ----------------------------------------------------------
FINLAND (2.8%):
BANKS (2.0%):
836,000 Merita Ltd., Class A (b) 2,472
--------
RETAIL (0.8%):
61,000 Kesko 942
- ----------------------------------------------------------
TOTAL FINLAND 3,414
- ----------------------------------------------------------
FRANCE (7.6%):
AUTOMOTIVE PARTS (0.5%):
9,700 Valeo SA 583
--------
BANKS (1.3%):
14,800 Societe Generale 1,596
--------
BUILDING MATERIAL (0.8%):
6,950 Compagnie de Saint Gobain 939
--------
DIVERSIFIED (1.5%):
15,000 Compagnie Generale des Eaux 1,794
--------
ENERGY SOURCES (0.7%):
11,200 Elf Aquitaine SA 896
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
110
<PAGE>
113
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
INTERNATIONAL GROWTH FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C> <C>
FOOD DISTRIBUTORS-SUPERMARKETS &
WHOLESALERS (0.9%):
25,000 Etablissements Economiques
du Casino Guichard-
Perrichon $ 1,138
--------
FOOD PROCESSING & PACKAGING (1.3%):
1,250 Bongrain SA 507
6,600 Eridania Beghin-Say SA 1,052
--------
1,559
--------
INSURANCE (0.6%):
10,800 AXA SA 675
- ----------------------------------------------------------
TOTAL FRANCE 9,180
- ----------------------------------------------------------
GERMANY (7.0%):
BANKS (2.1%):
43,600 Bayerische Hypotheken-und
Wechsel-Bank AG 1,278
55,000 Commerzbank AG 1,234
--------
2,512
--------
CHEMICALS (3.3%):
98,500 BASF AG 3,151
18,000 Henkel KGAA 811
--------
3,962
--------
MACHINE TOOLS (0.3%):
1,000 Mannesmann AG 390
--------
MISCELLANEOUS MANUFACTURING (1.3%):
14,500 SGL Carbon AG 1,608
- ----------------------------------------------------------
TOTAL GERMANY 8,472
- ----------------------------------------------------------
HOLLAND (5.1%):
BANKS (0.7%):
25,915 ING Groep N.V. 808
--------
COMMERCIAL SERVICES (0.3%):
4,000 Randstad Holdings N.V. 324
--------
CONGLOMERATES (0.5%):
24,000 Internatio-Muller N.V. 579
--------
ELECTRICAL EQUIPMENT (1.3%):
46,000 Phillips Electronics N.V. 1,622
--------
OIL -- INTEGRATED COMPANIES (1.6%):
12,000 Royal Dutch Petroleum Co. 1,983
--------
TRANSPORTATION (0.7%):
36,000 Nedlloyd Groep N.V. 904
- ----------------------------------------------------------
TOTAL HOLLAND 6,220
- ----------------------------------------------------------
HONG KONG (5.3%):
BANKS (0.8%):
156,100 Wing Lung Bank 969
--------
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
DIVERSIFIED (1.3%):
220,000 Hutchison Whampoa Ltd. $ 1,536
--------
HOTELS & LODGING (0.5%):
2,150,000 Regal Hotels International 591
--------
REAL ESTATE (1.8%):
123,000 Sun Hung Kai Properties 1,400
914,000 Tai Cheung Holdings 745
--------
2,145
--------
TRANSPORTATION-MARINE (0.9%):
625,000 Hong Kong Ferry Holdings 1,164
- ----------------------------------------------------------
TOTAL HONG KONG 6,405
- ----------------------------------------------------------
ITALY (3.9%):
CONGLOMERATES (1.5%):
1,240,000 Parmalat Finanziaria SpA 1,779
--------
FINANCIAL SERVICES (0.9%):
143,000 Instituto Mobiliare Italiano
SpA 1,132
--------
UTILITIES -- TELECOMMUNICATIONS (1.5%):
967,000 Telecom Italia SpA 1,843
- ----------------------------------------------------------
TOTAL ITALY 4,754
- ----------------------------------------------------------
JAPAN (24.9%):
AEROSPACE/DEFENSE (0.9%):
140,000 Mitsubishi Heavy Industries
Ltd. 1,077
--------
AUTOMOBILES (1.9%):
66,000 Honda Motor Co. 1,578
30,000 Toyota Motor Co. 710
--------
2,288
--------
AUTOMOTIVE PARTS (1.6%):
94,000 Denso Corp. 1,950
--------
BANKS (2.5%):
197,000 77 Bank 1,853
164,000 Higo Bank 1,209
--------
3,062
--------
BREWERIES (0.9%):
110,000 Asahi Breweries Ltd. 1,131
--------
CONSTRUCTION & HOUSING (0.8%):
74,000 Daito Trust Construction Co.
Ltd. 937
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
111
<PAGE>
114
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
INTERNATIONAL GROWTH FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C> <C>
ELECTRICAL EQUIPMENT (3.5%):
134,000 Hitachi Ltd. $ 1,190
88,000 Makita Corp. 1,207
96,000 Matsushita Electric Works 928
16,000 Sony Corp. 961
--------
4,286
--------
ENTERTAINMENT (1.0%):
8,200 Toho Co. 1,262
--------
FOOD PROCESSING (1.2%):
70,000 Katokichi 1,397
--------
HEAVY MACHINERY (1.3%):
185,000 Komatsu Ltd. 1,516
--------
INSURANCE (0.9%):
213,000 Chiyoda Fire & Marine
Insurance Co. Ltd. 1,099
--------
PHOTOGRAPHY (1.5%):
65,000 Fuji Photo Film 1,869
--------
PRINTING (0.7%):
73,000 Toppan Printing Co. Ltd. 892
--------
REAL ESTATE (1.0%):
132,000 Daiwa Kosho Lease Co. Ltd. 1,207
--------
RETAIL (1.4%):
112,000 Mycal Corp. 1,723
--------
TELECOMMUNICATIONS (0.7%):
66,000 Nippon Comsys Corp. 847
--------
UTILITIES-ELECTRIC (1.2%):
71,000 Kansai Electric Power Co.,
Inc. 1,492
--------
WHOLESALE & INTERNATIONAL TRADE (1.9%):
43,000 Canon Sales Co., Inc. 1,093
255,000 Marubeni Corp. 1,181
--------
2,274
- ----------------------------------------------------------
TOTAL JAPAN 30,309
- ----------------------------------------------------------
MALAYSIA (0.9%):
AUTOMOBILES (0.9%):
163,800 Oriental Holdings Berhad 1,115
- ----------------------------------------------------------
TOTAL MALAYSIA 1,115
- ----------------------------------------------------------
NEW ZEALAND (1.3%):
AIRLINES (0.4%):
217,500 Air New Zealand Ltd.,
Class B 531
--------
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
HOUSEHOLD GOODS-APPLIANCES & FURNISHINGS (0.9%):
283,500 Fisher & Paykel Industries
Ltd. $ 1,037
- ----------------------------------------------------------
TOTAL NEW ZEALAND 1,568
- ----------------------------------------------------------
SINGAPORE (0.8%):
REAL ESTATE (0.8%):
305,000 Straits Steamship Land Ltd. 935
- ----------------------------------------------------------
TOTAL SINGAPORE 935
- ----------------------------------------------------------
SPAIN (1.4%):
INSURANCE-MULTILINE (0.7%):
18,000 Corporacion Mapfre 890
--------
UTILITIES-TELECOMMUNICATIONS (0.7%):
42,000 Telefonica de Espana 843
- ----------------------------------------------------------
TOTAL SPAIN 1,733
- ----------------------------------------------------------
SWEDEN (2.3%):
BANKS (0.9%):
70,000 Sparbanken Sverige AB,
Class A 1,109
--------
NEWSPAPERS (0.6%):
32,000 Marieberg Tidnings AB 780
--------
WHOLESALE & INTERNATIONAL TRADE (0.8%):
45,000 Dahl International AB (b) 846
- ----------------------------------------------------------
TOTAL SWEDEN 2,735
- ----------------------------------------------------------
SWITZERLAND (3.5%):
BANKS (1.4%):
17,530 CS Holding AG 1,758
--------
FOOD PROCESSING (0.7%):
800 Nestle SA-Registered 873
--------
INSURANCE (0.4%):
850 Winterthur Schweizerische
Versischerungs-Gesellschaft 509
--------
PHARMACEUTICALS (1.0%):
950 Ciba-Geigy AG -- Registered 1,175
- ----------------------------------------------------------
TOTAL SWITZERLAND 4,315
- ----------------------------------------------------------
THAILAND (0.4%):
MEDIA (0.4%):
250,000 Wattachack PLC 466
- ----------------------------------------------------------
TOTAL THAILAND 466
- ----------------------------------------------------------
UNITED STATES (2.6%):
COMMERCIAL SERVICES (0.9%):
108,000 Professional Staff PLC
ADR (b) 1,053
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
112
<PAGE>
115
Schedule of Investments -- Continued
THE VICTORY PORTFOLIOS October 31, 1996
INTERNATIONAL GROWTH FUND (Amounts in Thousands, except shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY MARKET
AMOUNT DESCRIPTION VALUE
<S> <C> <C> <C>
CONGLOMERATES (1.3%):
494,000 Jardine Strategic Holdings
Ltd. ADR $ 1,611
--------
TELECOMMUNICATIONS (0.4%):
5,000 Cia Telecommunicaciones de
Chile SA ADR 493
- ----------------------------------------------------------
TOTAL UNITED STATES 3,157
- ----------------------------------------------------------
TOTAL COMMON STOCKS 110,668
- ----------------------------------------------------------
- ----------------------------------------------------------
CONVERTIBLE BONDS (2.0%)
BANKS (0.8%):
$ 943 Mitsubishi Bank
International
Finance-Bermuda,
3.00%, 11/30/02 1,024
ELECTRONICS (0.7%):
720 United Microelectronics,
1.25%, 6/8/04 884
TELECOMMUNICATIONS (0.5%):
500 Bilboa Vizcaya Invest BV
3.50%, 7/12/06 558
- ----------------------------------------------------------
TOTAL CONVERTIBLE BONDS 2,466
- ----------------------------------------------------------
- ----------------------------------------------------------
PREFERRED STOCKS (1.3%)
5,000 CKAG Colonia Konzern AG 302
6,300 SAP AG 849
1,500 Volkswagen AG 455
- ----------------------------------------------------------
TOTAL PREFERRED STOCKS 1,606
- ----------------------------------------------------------
- ----------------------------------------------------------
RIGHTS & WARRANTS (0.1%)
59,318 Air New Zealand Ltd., Class
B Rights(b) 62
- ----------------------------------------------------------
TOTAL RIGHTS & WARRANTS 62
- ----------------------------------------------------------
TOTAL (COST $117,379) (a) $124,625
- ----------------------------------------------------------
</TABLE>
- ---------------
Percentages indicated are based on net assets of $121,635.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 9,476
Unrealized depreciation (2,230)
-------
Net unrealized
appreciation $ 7,246
========
</TABLE>
(b) Represents non-income producing securities.
ADR -- American Depository Receipts
SEE NOTES TO FINANCIAL STATEMENTS.
113
<PAGE>
116
Statements of Assets and Liabilities
October 31, 1996
(Amounts in thousands,
THE VICTORY PORTFOLIOS except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
GOVERNMENT PRIME FINANCIAL
OBLIGATIONS OBLIGATIONS RESERVES
FUND(a) FUND FUND
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS:
Investments, at amortized cost $ 301,211 $ 438,530 $ 726,738
Repurchase agreements, at cost 1,058,055 60,572 41,405
- ---------------------------------------------------------------------------------------------------------------
Total 1,359,266 499,102 768,143
Cash 1 -- --
Interest receivable 5,414 2,003 3,534
Prepaid expenses and other assets 3 6 3
- ---------------------------------------------------------------------------------------------------------------
Total Assets 1,364,684 501,111 771,680
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 6,025 1,870 3,184
Payable to brokers for investments purchased -- 2,850 --
Accrued expenses and other payables:
Investment advisory fees 444 144 292
Administration fees 190 62 99
Accounting and transfer agent fees 32 30 23
Shareholder service fees 25 92 --
Other 151 44 92
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities 6,867 5,092 3,690
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS:
Capital 1,357,990 496,006 768,187
Undistributed (distributions in excess of) net investment income (80) -- (173)
Accumulated undistributed net realized gains (losses) from
investment transactions (93) 13 (24)
- ---------------------------------------------------------------------------------------------------------------
Net Assets $1,357,817 $ 496,019 $ 767,990
- ---------------------------------------------------------------------------------------------------------------
Outstanding units of beneficial interest (shares) 1,357,969 496,006 767,905
- ---------------------------------------------------------------------------------------------------------------
Net asset value offering and redemption price per share $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Select shares. Investor shares have not commenced operations as of October
31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
114
<PAGE>
117
Statements of Assets and Liabilities
October 31, 1996
(Amounts in thousands,
THE VICTORY PORTFOLIOS except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OHIO
TAX-FREE MUNICIPAL
MONEY MARKET MONEY MARKET
FUND FUND
------------ ------------
<S> <C> <C>
ASSETS:
Investments, at amortized cost $343,513 $558,215
Interest and dividends receivable 2,418 4,676
Prepaid expenses and other assets 4 4
- ----------------------------------------------------------------------------------------------------------
Total Assets 345,935 562,895
- ----------------------------------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 879 1,407
Accrued expenses and other payables:
Investment advisory fees 102 132
Administration fees 45 72
Accounting and transfer agent fees 16 15
Shareholder service fees 59 78
Other 38 60
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 1,139 1,764
- ----------------------------------------------------------------------------------------------------------
NET ASSETS:
Capital 344,791 561,127
Undistributed net investment income -- 2
Accumulated undistributed net realized gains (losses) from investment
transactions 5 2
- ----------------------------------------------------------------------------------------------------------
Net Assets $344,796 $561,131
- ----------------------------------------------------------------------------------------------------------
Outstanding units of beneficial interest (shares) 344,791 561,127
- ----------------------------------------------------------------------------------------------------------
Net asset value
Offering and redemption price per share $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
115
<PAGE>
118
Statements of Assets and Liabilities
October 31, 1996
(Amounts in thousands,
THE VICTORY PORTFOLIOS except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED INVESTMENT GOVERNMENT
TERM INCOME INTERMEDIATE QUALITY GOVERNMENT MORTGAGE
FUND INCOME FUND BOND FUND BOND FUND FUND
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments, at value (Cost $88,344;
$270,156; $147,366; $25,335 & $126,359) $ 88,350 $ 271,279 $ 148,673 $ 25,771 $ 125,343
Interest and dividends receivable 1,645 3,144 2,127 392 772
Receivable for capital shares issued 107 4 156 -- --
Receivable from brokers for investments
sold -- 3,120 1,010 3 3
Prepaid expenses and other assets -- -- -- 2 1
- ----------------------------------------------------------------------------------------------------------------
Total Assets 90,102 277,547 151,966 26,168 126,119
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable to brokers for investments
purchased -- 5,100 996 -- --
Payable for capital shares redeemed -- -- 3 9 --
Accrued expenses and other payables:
Investment advisory fees 36 138 78 7 53
Administration fees 11 34 19 3 16
Accounting and transfer agent fees 9 10 11 9 10
Shareholder service fees 8 24 14 11
Shareholder service fees -- Class A 2
Other 19 154 38 8 37
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 83 5,460 1,159 38 127
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Capital 92,119 275,858 159,420 33,192 129,017
Undistributed (distributions in excess
of) net investment income 89 130 (11) 82 (1)
Net unrealized appreciation
(depreciation) from investments 6 1,123 1,307 436 (1,016)
Accumulated undistributed net realized
losses from investment transactions (2,195) (5,024) (9,909) (7,580) (2,008)
- ----------------------------------------------------------------------------------------------------------------
Net Assets $ 90,019 $ 272,087 $ 150,807 $ 26,130 $ 125,992
- ----------------------------------------------------------------------------------------------------------------
Net Assets
Class A $ 24,632
Class B 1,498
- ----------------------------------------------------------------------------------------------------------------
Total $ 26,130
- ----------------------------------------------------------------------------------------------------------------
Outstanding units of beneficial interest (shares)
Class A 2,553
Class B 155
- ----------------------------------------------------------------------------------------------------------------
Total 8,992 28,473 15,659 2,708 11,713
- ----------------------------------------------------------------------------------------------------------------
Net asset value
Redemption price per share $ 10.01 $ 9.56 $ 9.63 $ 10.76
Redemption price per share -- Class A $ 9.65
Offering price per share -- Class B* $ 9.64
- ----------------------------------------------------------------------------------------------------------------
Maximum sales charge 2.00% 4.75% 4.75% 4.75% 4.75%
- ----------------------------------------------------------------------------------------------------------------
Maximum offering price per share
(100%/(100%-maximum sales charge) of
net asset value adjusted to nearest
cent) $ 10.21 $ 10.04 $ 10.11 $ 11.30
Maximum offering price per share
(100%/(100%-maximum sales charge) of
net asset value adjusted to nearest
cent) -- Class A $ 10.13
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Redemption price per Class B Share varies based on length of time held.
SEE NOTES TO FINANCIAL STATEMENTS.
116
<PAGE>
119
Statements of Assets and Liabilities
October 31, 1996
(Amounts in thousands,
THE VICTORY PORTFOLIOS except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL NEW YORK OHIO
FUND FOR MUNICIPAL TAX-FREE MUNICIPAL
INCOME BOND FUND FUND BOND FUND
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (Cost $19,927; $39,189; $14,834 &
$69,716) $20,711 $39,495 $15,952 $72,277
Interest and dividends receivable 161 628 318 1,468
Receivable for capital shares issued -- 55 1 --
Receivable from brokers for investments sold 2 -- -- 2,733
Prepaid expenses and other assets 7 41 10 --
- ----------------------------------------------------------------------------------------------------------------
Total Assets 20,881 40,219 16,281 76,478
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable to brokers for investments purchased -- 1,378 -- 2,870
Payable for capital shares redeemed 37 33 -- --
Accrued expenses and other payables:
Investment advisory fees -- -- -- 29
Administration fees 1 5 1 9
Accounting and transfer agent fees 16 20 7 8
Shareholder service fees 4 -- -- 7
Shareholder service fees -- Class A 6 1
Shareholder service and 12b-1 fees -- Class B 1 --
Other 7 10 3 92
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 65 1,453 12 3,015
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Capital 21,752 38,843 15,033 70,863
Undistributed net investment income 1 17 62 39
Net unrealized appreciation from investments 784 306 1,118 2,561
Accumulated undistributed net realized gains (losses)
from investment transactions (1,721) (400) 56 --
- ----------------------------------------------------------------------------------------------------------------
Net Assets $20,816 $38,766 $16,269 $73,463
- ----------------------------------------------------------------------------------------------------------------
Net Assets
Class A $36,958 $13,754
Class B 1,808 2,515
- ----------------------------------------------------------------------------------------------------------------
Total $38,766 $16,269
- ----------------------------------------------------------------------------------------------------------------
Outstanding units of beneficial interest (shares)
Class A 3,638 1,080
Class B 178 197
- ----------------------------------------------------------------------------------------------------------------
Total 2,132 3,816 1,277 6,426
- ----------------------------------------------------------------------------------------------------------------
Net asset value
Redemption price per share $ 9.77 $ 11.43
Redemption price per share -- Class A $ 10.16 $ 12.73
Offering price per share -- Class B* $ 10.16 $ 12.74
- ----------------------------------------------------------------------------------------------------------------
Maximum sales charge 2.00% 4.75% 4.75% 4.75%
- ----------------------------------------------------------------------------------------------------------------
Maximum offering price per share (100%/(100% -- maximum
sales charges) of net asset value adjusted to nearest
cent) $ 9.97 $ 12.00
Maximum offering price per share (100%/(100% -- maximum
sales charge) of net asset value adjusted to nearest
cent) -- Class A $ 10.67 $ 13.36
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Redemption price per Class B Share varies based on length of time held.
SEE NOTES TO FINANCIAL STATEMENTS.
117
<PAGE>
120
Statements of Assets and Liabilities
October 31, 1996
(Amounts in thousands,
THE VICTORY PORTFOLIOS except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED STOCK INDEX DIVERSIFIED
FUND FUND STOCK FUND VALUE FUND GROWTH FUND
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments, at value (Cost $236,773;
$221,337; $483,043; $292,902 &
$109,847) $ 274,331 $ 276,335 $ 566,455 $ 382,752 $ 148,469
Interest and dividends receivable 1,555 341 701 598 166
Receivable for capital shares issued 6 -- 508 -- --
Receivable from brokers for investments
sold 608 118 13,484 340 1
Net variation margin on open futures
contracts -- 581 -- -- --
Prepaid expenses and other assets 16 2 2 3
- ----------------------------------------------------------------------------------------------------------------
Total Assets 276,516 277,375 581,150 383,692 148,639
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for capital shares redeemed 8 -- 56 -- --
Payable to brokers for investments
purchased 1,177 92 1,155 1,161 699
Accrued expenses and other payables:
Investment advisory fees 198 99 314 311 125
Administration fees 35 -- 72 48 19
Accounting and transfer agent fees 24 20 66 15 11
Shareholder service fees 30 12
Shareholder service fees -- Class A 26 54
Shareholder service and 12b-1 fees --
Class B 1 6
Other 62 40 46 44 20
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 1,531 251 1,769 1,609 886
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
Capital 229,498 215,551 428,203 274,254 102,775
Undistributed net investment income 123 555 291 416 53
Net unrealized appreciation from
investments 37,742 58,050 83,412 89,850 38,622
Net unrealized depreciation from
translation of assets and liabilities
in foreign currencies (180) -- -- -- --
Accumulated undistributed net realized
(losses) gains from investment
transactions 8,053 2,968 67,475 17,563 6,303
Accumulated undistributed net realized
gains (losses) from foreign currency
transactions (251) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Net Assets $ 274,985 $ 277,124 $ 579,381 $ 382,083 $ 147,753
- ----------------------------------------------------------------------------------------------------------------
Net Assets
Class A $ 273,553 $ 571,153
Class B 1,432 8,228
- ----------------------------------------------------------------------------------------------------------------
Total $ 274,985 $ 579,381
- ----------------------------------------------------------------------------------------------------------------
Outstanding units of beneficial interest (shares)
Class A 22,185 36,254
Class B 116 524
- ----------------------------------------------------------------------------------------------------------------
22,301 18,663 36,778 26,944 10,141
- ----------------------------------------------------------------------------------------------------------------
Net asset value
Redemption price per share $ 14.85 $ 14.18 $ 14.57
Redemption price per share -- Class A $ 12.33 $ 15.75
Offering price per share -- Class B* $ 12.34 $ 15.71
- ----------------------------------------------------------------------------------------------------------------
Maximum sales charge 4.75% 4.75% 4.75% 4.75% 4.75%
- ----------------------------------------------------------------------------------------------------------------
Maximum offering price per share
(100%/(100%-maximum sales charge) of
net asset value adjusted to nearest
cent) $ 15.59 $ 14.89 $ 15.30
Maximum offering price per share
(100%/(100%-maximum sales Charge) of
net asset value adjusted to nearest
cent) -- Class A $ 12.94 $ 16.54
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Redemption price per Class B Share varies based on length of time held.
SEE NOTES TO FINANCIAL STATEMENTS.
118
<PAGE>
121
Statements of Assets and Liabilities
October 31, 1996
(Amounts in thousands,
THE VICTORY PORTFOLIOS except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL SPECIAL OHIO REGIONAL INTERNATIONAL
VALUE GROWTH STOCK GROWTH
FUND FUND FUND FUND
-------- ------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (Cost $242,913; $77,827;
$27,176 & $117,379) $285,620 $88,121 $45,673 $ 124,625
Interest and dividends receivable 406 33 49 348
Receivable for capital shares issued 188 -- 2 1
Receivable from brokers for investments sold 5,076 2,606 -- 3,952
Reclaims receivable -- -- -- 308
Prepaid expenses and other assets 7 -- -- 6
- ---------------------------------------------------------------------------------------------------------------
Total Assets 291,297 90,760 45,724 129,240
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for capital shares redeemed 3 -- -- --
Payable to brokers for investments purchased 1,090 2,801 39 7,399
Accrued expenses and other payables:
Investment advisory fees 244 74 29 113
Administration fees 37 11 6 15
Accounting, and transfer agent fees 20 13 18 23
Shareholder service fees 7
Shareholder service fees -- Class A 28 5 11
Other 29 17 7 44
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities 1,451 2,923 104 7,605
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS:
Capital 226,652 73,476 26,252 110,033
Undistributed (distributions in excess of) net
investment income 658 (3) 1 128
Net unrealized appreciation from investments 42,707 10,294 18,497 8,204
Net unrealized depreciation from translation of
assets and liabilities in foreign currencies -- -- -- (952)
Accumulated undistributed net realized gains (losses)
from investment transactions 19,829 4,070 870 1,369
Accumulated undistributed net realized gains from
foreign currency transactions -- -- -- 2,853
- ---------------------------------------------------------------------------------------------------------------
Net Assets $289,846 $87,837 $45,620 $ 121,635
- ---------------------------------------------------------------------------------------------------------------
Net Assets
Class A $289,460 $45,294 $ 121,517
Class B 386 326 118
- ---------------------------------------------------------------------------------------------------------------
Total $289,846 $45,620 $ 121,635
- ---------------------------------------------------------------------------------------------------------------
Outstanding units of beneficial interest (shares)
Class A 20,450 2,523 9,343
Class B 27 18 9
- ---------------------------------------------------------------------------------------------------------------
Total 20,477 6,211 2,541 9,352
- ---------------------------------------------------------------------------------------------------------------
Net asset value
Redemption price per share $ 14.14
Redemption price per share-Class A $ 14.15 $ 17.95 $ 13.01
Offering and redemption price per share-Class B $ 14.09 $ 17.87 $ 12.93
- ---------------------------------------------------------------------------------------------------------------
Maximum sales charge 4.75% 4.75% 4.75% 4.75%
- ---------------------------------------------------------------------------------------------------------------
Maximum offering price per share
(100%/(100%-maximum sales charge) of net asset
value adjusted to nearest cent) $ 14.85
Maximum offering price per share
(100%/(100%-maximum sales charge) of net asset
value adjusted to nearest cent) -- Class A $ 14.86 $ 18.85 $ 13.66
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
119
<PAGE>
122
Statements of Operations
For the Year Ended October 31, 1996
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
GOVERNMENT PRIME FINANCIAL
OBLIGATIONS OBLIGATIONS RESERVES
FUND(a) FUND FUND
---------- ----------- ---------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 65,501 $26,000 $44,299
- ----------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 4,209 1,628 3,984
Administration fees 1,804 698 1,196
Shareholder service fees 280 1,080 --
Accounting fees 85 85 78
Custodian fees 237 103 160
Legal and audit fees 251 107 198
Trustees' fees and expenses 49 19 35
Transfer agent fees 55 71 43
Registration and filing fees 160 16 104
Printing fees 170 232 46
Other 17 8 104
- ----------------------------------------------------------------------------------------------------------------
Total Expenses 7,317 4,047 5,948
Expenses voluntarily reduced -- -- (582)
- ----------------------------------------------------------------------------------------------------------------
Net Expenses 7,317 4,047 5,366
- ----------------------------------------------------------------------------------------------------------------
Net Investment Income 58,184 21,953 38,933
- ----------------------------------------------------------------------------------------------------------------
REALIZED GAINS FROM INVESTMENTS:
Net realized gains from investment transactions 24 13 4
- ----------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations $ 58,208 $21,966 $38,937
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Select shares. Investor Shares have not commenced operations as of October
31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
120
<PAGE>
123
Statements of Operations
For the Year Ended October 31, 1996
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OHIO
TAX-FREE MUNICIPAL
MONEY MARKET MONEY MARKET
FUND FUND
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 12,018 $ 20,963
- ----------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 1,124 2,836
Administration fees 482 851
Shareholder service fees 567 1,234
Accounting fees 108 65
Custodian fees 68 116
Legal and audit fees 75 110
Trustees' fees and expenses 13 27
Transfer agent fees 25 36
Registration and filing fees 40 80
Printing fees 51 143
Other 5 9
- ----------------------------------------------------------------------------------------------------------
Total Expenses 2,558 5,507
Expenses voluntarily reduced (67) (1,706)
- ----------------------------------------------------------------------------------------------------------
Net Expenses 2,491 3,801
- ----------------------------------------------------------------------------------------------------------
Net Investment Income 9,527 17,162
- ----------------------------------------------------------------------------------------------------------
REALIZED GAINS FROM INVESTMENTS:
Net realized gains from investment transactions 3 --
- ----------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations $ 9,530 $ 17,162
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
121
<PAGE>
124
Statements of Operations
For the Year Ended October 31, 1996
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED
TERM INVESTMENT GOVERNMENT
INCOME INTERMEDIATE QUALITY GOVERNMENT MORTGAGE
FUND INCOME FUND BOND FUND BOND FUND FUND
------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 9,713 $ 14,112 $ 9,460 $ 1,802 $ 9,517
Dividend income -- 70 73 10 41
- --------------------------------------------------------------------------------------------------------------
Total Income 9,713 14,182 9,533 1,812 9,558
- --------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 718 1,576 1,022 150 650
Administration fees 216 315 205 41 195
Shareholder service fees 148 213 144 134
Shareholder service fees -- Class A 29
Shareholder service fees and 12b-1
fees -- Class B 10
Accounting fees 39 62 53 33 51
Custodian fees 33 45 37 9 36
Legal and audit fees 38 51 36 23 30
Trustees' fees and expenses 7 9 6 1 6
Transfer agent fees 20 18 17 22 30
Registration and filing fees 39 26 22 22 13
Printing fees 20 21 16 4 18
Other 1 3 1 -- 2
- --------------------------------------------------------------------------------------------------------------
Total Expenses 1,279 2,339 1,559 344 1,165
Expenses voluntarily reduced (47) (358) (185) (65) (3)
- --------------------------------------------------------------------------------------------------------------
Net Expenses 1,232 1,981 1,374 279 1,162
- --------------------------------------------------------------------------------------------------------------
Net Investment Income 8,481 12,201 8,159 1,533 8,396
- --------------------------------------------------------------------------------------------------------------
REALIZED/UNREALIZED GAINS (LOSSES) FROM
INVESTMENTS:
Net realized losses from investment
transactions (475) (1,103) (1,769) (271) (338)
Net change in unrealized appreciation
(depreciation) from investments (1,765) (428) 177 (334) (1,193)
- --------------------------------------------------------------------------------------------------------------
Net realized/unrealized gains (losses)
from investments (2,240) (1,531) (1,592) (605) (1,531)
- --------------------------------------------------------------------------------------------------------------
Change in net assets
resulting from operations $ 6,241 $ 10,670 $ 6,567 $ 928 $ 6,865
- --------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
122
<PAGE>
125
Statements of Operations
For the Year Ended October 31, 1996
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL NEW YORK OHIO
FUND FOR MUNICIPAL TAX-FREE MUNICIPAL
INCOME BOND FUND FUND BOND FUND
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income $1,782 $ 1,686 $1,006 $ 3,691
Dividend income -- 61 11 64
- ------------------------------------------------------------------------------------------------------------
Total Income 1,782 1,747 1,017 3,755
- ------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 110 206 91 401
Administration fees 33 55 25 100
Shareholder service fees 54 74
Shareholder service fees -- Class A 70 23
Shareholder service fees and 12b-1 fees -- Class B 10 20
Accounting fees 57 65 51 52
Custodian fees 20 15 5 15
Legal and audit fees 14 15 17 17
Trustees' fees and expenses 1 2 1 2
Transfer agent fees 44 41 21 19
Registration and filing fees 15 25 6 5
Printing fees 33 10 17 14
Other -- -- 1 1
- ------------------------------------------------------------------------------------------------------------
Total Expenses 381 514 278 700
Expenses voluntarily reduced (108) (242) (98) (103)
Expenses reimbursed by distributor (49) (153) (11) --
- ------------------------------------------------------------------------------------------------------------
Net Expenses 224 119 169 597
- ------------------------------------------------------------------------------------------------------------
Net Investment Income 1,558 1,628 848 3,158
- ------------------------------------------------------------------------------------------------------------
REALIZED/UNREALIZED GAINS (LOSSES) FROM INVESTMENTS:
Net realized gains (losses) from investment transactions 28 (400) 56 549
Net change in unrealized appreciation (depreciation) from
investments (261) (189) (194) 148
- ------------------------------------------------------------------------------------------------------------
Net realized/unrealized gains (losses) from investments (233) (589) (138) 697
- ------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations $1,325 $ 1,039 $ 710 $ 3,855
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
123
<PAGE>
126
Statements of Operations
For the Year Ended October 31, 1996
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED STOCK DIVERSIFIED GROWTH
FUND INDEX FUND STOCK FUND VALUE FUND FUND
-------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 6,860 $ 1,552 $ 713 $ 474 $ 123
Dividend income 3,662 4,412 11,388 9,454 2,343
Foreign tax withholding (10) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total Income 10,512 5,964 12,101 9,928 2,466
- ------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 2,382 1,319 3,204 3,441 1,252
Administration fees 357 330 739 516 188
Shareholder service fees 339 126
Shareholder service fees -- Class A 251 533
Shareholder service fees and 12b-1 fees --
Class B 6 21
Accounting fees 94 87 159 71 35
Custodian fees 64 89 105 70 27
Legal and audit fees 60 61 125 89 39
Amortization of organization costs 1 1 -- 2 --
Trustees' fees and expenses 10 9 20 13 4
Transfer agent fees 91 20 292 25 35
Registration and filing fees 58 26 53 32 16
Printing fees 32 20 78 29 17
Other 2 2 8 5 2
- ------------------------------------------------------------------------------------------------------------------
Total Expenses 3,408 1,964 5,337 4,632 1,741
Expenses voluntarily reduced (376) (712) (116) (62) (71)
- ------------------------------------------------------------------------------------------------------------------
Net Expenses 3,032 1,252 5,221 4,570 1,670
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income 7,480 4,712 6,880 5,358 796
- ------------------------------------------------------------------------------------------------------------------
REALIZED/UNREALIZED GAINS (LOSSES) FROM
INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gains from investment transactions 8,750 3,924 67,743 17,738 6,303
Net realized gains (losses) from foreign
currency transactions (289) -- -- -- --
Net change in unrealized appreciation from
investments 19,657 35,634 41,714 51,084 21,351
Net change in unrealized appreciation from
translation of assets and liabilities in
foreign currencies 56 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net realized/unrealized gains from investments
and foreign currencies 28,174 39,558 109,457 68,822 27,654
- ------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations $35,654 $ 44,270 $116,337 $ 74,180 $28,450
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
124
<PAGE>
127
Statements of Operations
For the Year Ended October 31, 1996
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL OHIO
SPECIAL GROWTH REGIONAL INTERNATIONAL
VALUE FUND FUND STOCK FUND GROWTH FUND
---------- ------- ---------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 331 $ 142 $ 62 $ 307
Dividend income 5,005 489 877 2,460
Foreign tax withholding -- -- -- (68)
- ------------------------------------------------------------------------------------------------------------------
Total Income 5,336 631 939 2,699
- ------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 2,376 745 323 1,255
Administration fees 356 113 65 171
Shareholder service fees 74
Shareholder service fees -- Class A 249 46 117
Shareholder service fees and 12b-1 fees -- Class B 1 1 --
Accounting fees 79 58 51 91
Custodian fees 63 44 15 201
Legal and audit fees 61 27 11 35
Amortization of organization costs 1 1 -- --
Trustees' fees and expenses 10 2 2 4
Transfer agent fees 68 25 59 75
Registration and filing fees 34 20 12 26
Printing fees 26 18 21 24
Other 2 1 1 2
- ------------------------------------------------------------------------------------------------------------------
Total Expenses 3,326 1,128 607 2,001
Expenses voluntarily reduced (71) (34) (5) (30)
- ------------------------------------------------------------------------------------------------------------------
Net Expenses 3,255 1,094 602 1,971
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 2,081 (463) 337 728
- ------------------------------------------------------------------------------------------------------------------
REALIZED/UNREALIZED GAINS (LOSSES) FROM INVESTMENTS AND
FOREIGN CURRENCIES:
Net realized gains from investment transactions 20,290 4,480 869 7,046
Net realized gains (losses) from foreign currency
transactions -- -- -- (1,537)
Net change in unrealized appreciation (depreciation) from
investments 21,511 7,642 5,662 2,689
Net change in unrealized appreciation (depreciation) from
translation of assets and liabilities in foreign
currencies -- -- -- (3,200)
- ------------------------------------------------------------------------------------------------------------------
Net realized/unrealized gains from investments and
foreign currencies 41,801 12,122 6,531 4,998
- ------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from operations $ 43,882 $11,659 $6,868 $ 5,726
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
125
<PAGE>
128
Statements of Changes in Net Assets
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT
OBLIGATIONS FUND PRIME OBLIGATIONS FUND FINANCIAL RESERVES FUND
-------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED
YEAR ENDED YEAR ENDED OCTOBER YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996(a) 1995(b) 1996 1995 1996 1995 (c)
----------- ----------- ---------- ----------- ----------- -----------
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 58,184 $ 33,876 $ 21,953 $ 27,763 $ 38,933 $ 38,318
Net realized gains (losses) from
investment transactions 24 113 13 -- 4 --
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from
operations 58,208 33,989 21,966 27,763 38,937 38,318
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (58,184) (33,876) (21,953) (27,763) (38,877) (38,264)
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets from
distributions to shareholders (58,184) (33,876) (21,953) (27,763) (38,877) (38,264)
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 3,877,755 1,782,066 1,282,599 1,719,347 2,348,380 4,803,998
Proceeds from shares issued in
connection with acquisition -- 242,973 -- -- -- --
Dividends reinvested 13,036 3,962 18,208 15,471 2,546 1,265
Cost of shares redeemed (3,497,927) (1,476,233) (1,261,067) (2,060,855) (2,345,866) (4,475,713)
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets from capital
transactions 392,864 552,768 39,740 (326,037) 5,060 329,550
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets 392,888 552,881 39,753 (326,037) 5,120 329,604
NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------
Beginning of period 964,929 412,048 456,266 782,303 762,870 433,266
End of period $ 1,357,817 $ 964,929 $ 496,019 $ 456,266 $ 767,990 $ 762,870
- ---------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Issued 3,877,755 1,782,107 1,282,599 1,719,347 2,348,379 4,803,998
Issued in connection with
acquisition -- 242,973 -- -- -- --
Reinvested 13,036 3,962 18,208 15,471 2,546 1,265
Redeemed (3,497,927) (1,476,233) (1,261,167) (2,060,755) (2,345,866) (4,475,713)
- ---------------------------------------------------------------------------------------------------------------------------
Change in shares 392,864 552,809 39,640 (325,937) 5,059 329,550
- ---------------------------------------------------------------------------------------------------------------------------
(a) Select shares. Investor shares have not commenced operations as of October
31, 1996.
(b) Effective June 5, 1995, the Victory U.S. Treasury Money Market Portfolio
merged into the U.S. Government Obligations Fund. Changes in net assets for
periods prior to June 5, 1995 represents the U.S. Government Obligations
Fund.
(c) Effective June 5, 1995, the Victory Financial Reserve Portfolio became the
Financial Reserves Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
126
<PAGE>
129
Statements of Changes in Net Assets
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OHIO MUNICIPAL MONEY MARKET FUND
-------------------------------------------
TAX-FREE MONEY MARKET FUND TWO
---------------------------- MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER AUGUST 31,
1996 1995 1996 31, 1995 1995(a)
----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 9,527 $ 8,303 $ 17,162 $ 2,859 $ 13,393
Net realized gains (losses) from
investment transactions 3 62 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from
operations 9,530 8,365 17,162 2,859 13,393
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (9,527) (8,303) (17,162) (2,859) (13,175)
In excess of net investment income -- -- (216) -- --
From net realized gains from investment
transactions (3) -- -- -- --
In excess of net realized gain from
investment transactions (57) -- (17) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Change in net assets from distributions to
shareholders (9,587) (8,303) (17,395) (2,859) (13,175)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 562,564 518,760 1,157,311 363,385 1,872,345
Dividends reinvested 3,035 900 10,022 472 945
Cost of shares redeemed (528,472) (410,557) (1,116,601) (355,896) (1,688,969)
- ----------------------------------------------------------------------------------------------------------------------------
Change in net assets from capital
transactions 37,127 109,103 50,732 7,961 184,321
- ----------------------------------------------------------------------------------------------------------------------------
Change in net assets 37,070 109,165 50,499 7,961 184,539
NET ASSETS:
Beginning of period 307,726 198,561 510,632 502,671 318,132
- ----------------------------------------------------------------------------------------------------------------------------
End of period $ 344,796 $ 307,726 $ 561,131 $ 510,632 $ 502,671
- ----------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Issued 562,564 518,760 1,157,311 363,385 1,872,345
Reinvested 3,035 900 10,022 472 945
Redeemed (528,472) (410,557) (1,116,601) (355,896) (1,688,969)
- ----------------------------------------------------------------------------------------------------------------------------
Change in shares 37,127 109,103 50,732 7,961 184,321
- ----------------------------------------------------------------------------------------------------------------------------
(a) Effective June 5, 1995, the Victory Ohio Municipal Money Market Portfolio
became the Ohio Municipal Money Market Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
127
<PAGE>
130
Statements of Changes in Net Assets
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED TERM INTERMEDIATE INVESTMENT QUALITY
INCOME FUND INCOME FUND BOND FUND
-------------------------- -------------------------- --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995(a) 1996 1995 1996 1995(a)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 8,481 $ 8,444 $ 12,201 $ 8,578 $ 8,159 $ 6,906
Net realized gains (losses) from
investment transactions (475) 292 (1,103) (1,399) (1,769) 44
Net change in unrealized appreciation
(depreciation) from investments (1,765) 4,613 (428) 7,769 177 6,997
- -------------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting
from operations 6,241 13,349 10,670 14,948 6,567 13,947
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (8,481) (8,403) (12,201) (8,578) (7,938) (6,906)
In excess of net investment income (125) -- (14) (56) -- (64)
In excess of net realized gains from
investment transactions (122) -- (52) -- -- --
Tax Return of Capital -- -- -- -- (122) --
- -------------------------------------------------------------------------------------------------------------------------------
Change in net assets from
distributions to shareholders (8,728) (8,403) (12,267) (8,634) (8,060) (6,970)
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 29,303 120,676 145,956 73,087 54,446 43,794
Proceeds from shares issued in
connection with acquisition -- 14,263 -- -- -- 27,853
Dividends reinvested 8,683 8,381 12,260 8,632 8,045 6,932
Cost of shares redeemed (117,482) (55,414) (47,813) (37,675) (35,439) (54,993)
- -------------------------------------------------------------------------------------------------------------------------------
Change in net assets from
capital transactions (79,496) 87,906 110,403 44,044 27,052 23,586
- -------------------------------------------------------------------------------------------------------------------------------
Change in net assets (81,983) 92,852 108,806 50,358 25,559 30,563
NET ASSETS:
Beginning of period 172,002 79,150 163,281 112,923 125,248 94,685
- -------------------------------------------------------------------------------------------------------------------------------
End of period $ 90,019 $ 172,002 $ 272,087 $ 163,281 $ 150,807 $ 125,248
- -------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Issued 2,898 12,215 15,335 7,738 5,668 4,675
Issued in connection with acquisition -- 1,398 -- -- -- 2,849
Reinvested 864 836 1,286 915 840 735
Redeemed (11,710) (5,518) (5,005) (4,005) (3,676) (5,833)
- -------------------------------------------------------------------------------------------------------------------------------
Change in shares (7,948) 8,931 11,616 4,648 2,832 2,426
- -------------------------------------------------------------------------------------------------------------------------------
(a) Effective June 5, 1995, the Victory Short-Term Government Income Portfolio
merged into the Limited Term Income Fund and the Victory Corporate Bond
Portfolio merged into the Investment Quality Bond Fund. Changes in net
assets for the period prior to June 5, 1995 represent the Limited Term
Income Fund and the Investment Quality Bond Fund, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
128
<PAGE>
131
Statements of Changes in Net Assets
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND
--------------------------------------- FUND FOR
SIX MONTHS GOVERNMENT MORTGAGE FUND INCOME
ENDED --------------------------- -----------
YEAR ENDED OCTOBER YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 31, APRIL 30, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995(a) 1995 1996 1995 1996
----------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 1,533 $ 1,716 $ 6,571 $ 8,396 $ 9,792 $ 1,558
Net realized gains (losses)
from investment
transactions (271) 3,139 (7,388) (338) (2,407) 28
Net change in unrealized
appreciation (depreciation)
from investments (334) (101) 5,974 (1,193) 11,075 (261)
- -----------------------------------------------------------------------------------------------------------------------
Change in net assets resulting
from operations 928 4,754 5,157 6,865 18,460 1,325
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (7,983) (9,746) (1,558)
From net investment income by
class:
Class A (1,470) (1,702) (6,395)
Class B (63) (14) (1)
In excess of net investment
income (16) (48) -- -- -- (65)
In excess of net realized
gains from investment
transactions -- -- -- -- (1,234) --
Tax return of capital -- -- -- (180) (218) (102)
- -----------------------------------------------------------------------------------------------------------------------
Change in net assets from
distributions to shareholders (1,549) (1,764) (6,396) (8,163) (11,198) (1,725)
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 6,505 3,800 13,782 22,111 36,846 4,189
Dividends reinvested 1,510 1,292 75 8,134 11,183 1,208
Cost of shares redeemed (10,029) (64,039) (48,532) (39,058) (67,356) (6,937)
- -----------------------------------------------------------------------------------------------------------------------
Change in net assets from
capital transactions (2,014) (58,947) (34,675) (8,813) (19,327) (1,540)
- -----------------------------------------------------------------------------------------------------------------------
Change in net assets (2,635) (55,957) (35,914) (10,111) (12,065) (1,940)
NET ASSETS:
Beginning of period 28,765 84,722 120,636 136,103 148,168 22,756
- -----------------------------------------------------------------------------------------------------------------------
End of period $26,130 $ 28,765 $ 84,722 $ 125,992 $ 136,103 $ 20,816
- ----------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Issued 671 390 1,475 2,051 3,517 425
Reinvested 156 132 8 758 1,065 124
Redeemed (1,035) (6,585) (5,266) (3,629) (6,399) (708)
- -----------------------------------------------------------------------------------------------------------------------
Change in shares (208) (6,063) (3,783) (820) (1,817) (159)
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUND FOR
INCOME
YEAR ENDED
OCTOBER 31,
1995(a)
-----------
<S> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 1,894
Net realized gains (losses)
from investment
transactions (328)
Net change in unrealized
appreciation (depreciation)
from investments 1,370
- --------------------------------------------
Change in net assets resulting
from operations 2,936
- --------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,704)
From net investment income by
class:
Class A
Class B
In excess of net investment
income --
In excess of net realized
gains from investment
transactions --
Tax return of capital --
- --------------------------------------------
Change in net assets from
distributions to shareholders (1,704)
- --------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 3,698
Dividends reinvested 569
Cost of shares redeemed (12,101)
- --------------------------------------------
Change in net assets from
capital transactions (7,834)
- --------------------------------------------
Change in net assets (6,602)
NET ASSETS:
Beginning of period 29,358
- --------------------------------------------
End of period $ 22,756
- --------------------------------------------
SHARE TRANSACTIONS:
Issued 382
Reinvested 58
Redeemed (1,261)
- --------------------------------------------
Change in shares (821)
- --------------------------------------------
(a) Effective June 5, 1995, the Victory Government Bond Portfolio and the
Victory Fund for Income Portfolio became the Government Bond Fund and Fund
for Income, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
129
<PAGE>
132
Statements of Changes in Net Assets
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL MUNICIPAL BOND FUND
---------------------------------- NEW YORK TAX-FREE FUND
SIX MONTHS ----------------------- OHIO MUNICIPAL BOND FUND
YEAR ENDED ENDED YEAR ENDED --------------------------
OCTOBER OCTOBER YEAR ENDED OCTOBER YEAR ENDED YEAR ENDED YEAR ENDED
31, 31, APRIL 30, 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995(a) 1995 1996 1995(a) 1996 1995
---------- ---------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 1,628 $ 242 $ 108 $ 848 $ 940 $ 3,158 $ 2,760
Net realized gains (losses) from
investment transactions (400) 35 10 56 10 549 (128)
Net change in unrealized appreciation
(depreciation) from investments (189) 326 179 (194) 740 148 5,317
- ------------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from
operations 1,039 603 297 710 1,690 3,855 7,949
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (3,158) (2,760)
From net investment income by class:
Class A (1,581) (221) (108) (744) (830)
Class B (43) (6) -- (104) (42)
In excess of net investment income -- -- (3) (6) -- (15) (41)
From net realized gains from
investment transactions -- -- -- (10) (10) (11) --
In excess of net realized gains from
investment transactions (45) -- -- -- (219) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Change in net assets from distributions
to shareholders (1,669) (227) (111) (864) (1,101) (3,184) (2,801)
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 64,998 6,782 4,792 3,250 5,457 23,494 15,932
Dividends reinvested 1,564 216 103 635 509 3,096 2,784
Cost of shares redeemed (39,586) (219) (310) (4,789) (7,068) (13,829) (21,537)
- ------------------------------------------------------------------------------------------------------------------------------
Change in net assets from capital
transactions 26,976 6,779 4,585 (904) (1,102) 12,761 (2,821)
- ------------------------------------------------------------------------------------------------------------------------------
Change in net assets 26,346 7,155 4,771 (1,058) (513) 13,432 2,327
NET ASSETS:
Beginning of period 12,420 5,265 494 17,327 17,840 60,031 57,704
- ------------------------------------------------------------------------------------------------------------------------------
End of period $ 38,766 $ 12,420 $5,265 $ 16,269 $17,327 $ 73,463 $ 60,031
- ------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Issued 6,352 685 519 248 443 2,070 1,474
Reinvested 156 21 11 50 39 273 257
Redeemed (3,926) (21) (33) (369) (574) (1,219) (2,014)
- ------------------------------------------------------------------------------------------------------------------------------
Change in shares 2,582 685 497 (71) (92) 1,124 (283)
- ------------------------------------------------------------------------------------------------------------------------------
(a) Effective June 5, 1995, the Victory National Municipal Bond Portfolio and
Victory New York Tax-Free Portfolio became the National Municipal Bond Fund
and New York Tax-Free Fund, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
130
<PAGE>
133
Statements of Changes in Net Assets
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED FUND STOCK INDEX FUND DIVERSIFIED STOCK FUND
------------------------------ ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER OCTOBER 31, OCTOBER OCTOBER 31, OCTOBER OCTOBER 31,
31, 1996 1995 31, 1996 1995 31, 1996 1995
---------- ----------------- ---------- --------------- ---------- --------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 7,480 $ 6,680 $ 4,712 $ 2,888 $ 6,880 $ 6,928
Net realized gains from
investment transactions 8,750 2,774 3,924 2,091 67,743 32,800
Net realized gains (losses)
from foreign currency
transactions (289) 11 -- -- -- --
Net change in unrealized
appreciation from
investments 19,657 20,046 35,634 20,860 41,714 29,446
Change in unrealized
appreciation (depreciation)
from translation of assets
and liabilities in foreign
currencies 56 (236) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting
from operations 35,654 29,275 44,270 25,839 116,337 69,174
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (6,680) (4,526) (2,709) (6,928)
From net investment income by
class:
Class A (7,390) (6,646)
Class B (12) (23)
In excess of net investment
income -- (73) -- -- -- (277)
From net realized gains from
investment transactions (1,376) -- (3,041) -- (33,023) (29,668)
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets from
distributions to shareholders (8,778) (6,753) (7,567) (2,709) (39,692) (36,873)
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 86,059 111,470 109,909 74,489 141,320 144,852
Dividends reinvested 8,753 6,726 7,563 2,709 39,534 36,846
Cost of shares redeemed (47,776) (66,930) (37,873) (29,192) (87,667) (67,677)
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets from
capital transactions 47,036 51,266 79,599 48,006 93,187 114,021
- ---------------------------------------------------------------------------------------------------------------------------
Change in net assets 73,912 73,788 116,302 71,136 169,832 146,322
NET ASSETS:
Beginning of period 201,073 127,285 160,822 89,686 409,549 263,227
- ---------------------------------------------------------------------------------------------------------------------------
End of period $274,985 $ 201,073 $277,124 $ 160,822 $579,381 $409,549
- ---------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Issued 7,405 11,125 7,985 6,638 9,901 11,560
Reinvested 754 659 563 241 3,022 3,276
Redeemed (4,113) (6,762) (2,755) (2,815) (6,214) (5,529)
- ---------------------------------------------------------------------------------------------------------------------------
Change in shares 4,046 5,022 5,793 4,064 6,709 9,307
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
131
<PAGE>
134
Statements of Changes in Net Assets
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE FUND GROWTH FUND SPECIAL VALUE FUND
-------------------------- -------------------------- --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995(a) 1996 1995(a) 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 5,358 $ 6,585 $ 796 $ 746 $ 2,081 $ 2,090
Net realized gains (losses) from
investment transactions 17,738 8,493 6,303 4,983 20,290 5,442
Net change in unrealized appreciation
(depreciation) from investments 51,084 39,805 21,351 15,906 21,511 18,049
- --------------------------------------------------------------------------------------------------------------------------------
Change in net assets resulting from
operations 74,180 54,883 28,450 21,635 43,882 25,581
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (5,326) (6,585) (765) (746) (2,090)
From net investment income by class:
Class A (1,910)
In excess of net investment income -- (81) -- (37) -- (36)
From net realized gains from
investment transactions (8,483) (3,145) (4,494) (298) (5,473) (588)
- --------------------------------------------------------------------------------------------------------------------------------
Change in net assets from
distributions to shareholders (13,809) (9,811) (5,259) (1,081) (7,383) (2,714)
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 66,804 169,259 39,189 10,047 88,238 87,892
Proceeds from shares issued in
connection with acquisition -- 423 -- 65,632 -- --
Dividends reinvested 13,808 9,809 5,250 1,067 7,377 2,712
Cost of shares redeemed (54,771) (116,876) (28,130) (55,968) (36,968) (37,371)
- --------------------------------------------------------------------------------------------------------------------------------
Change in net assets from capital
transactions 25,841 62,615 16,309 20,778 58,647 53,233
- --------------------------------------------------------------------------------------------------------------------------------
Change in net assets 86,212 107,687 39,500 41,332 95,146 76,100
NET ASSETS:
Beginning of period 295,871 188,184 108,253 66,921 194,700 118,600
- --------------------------------------------------------------------------------------------------------------------------------
End of period $ 382,083 $ 295,871 $ 147,753 $ 108,253 $ 289,846 $ 194,700
- --------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Issued 5,130 16,259 2,989 1,655 6,706 7,864
Issued in connection with acquisition -- 38 -- 5,881 -- --
Reinvested 1,101 940 425 100 591 246
Redeemed (4,214) (10,888) (2,183) (5,267) (2,846) (3,389)
- --------------------------------------------------------------------------------------------------------------------------------
Change in shares 2,017 6,349 1,231 2,369 4,451 4,721
- --------------------------------------------------------------------------------------------------------------------------------
(a) Effective June 5, 1995, the Victory Equity Income Portfolio and the Victory
Equity Portfolio merged into the Value Fund and Growth Fund, respectively.
Changes in net assets for periods prior to June 5, 1995 represent the Value
Fund and Growth Fund, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
132
<PAGE>
135
Statements of Changes in Net Assets
THE VICTORY PORTFOLIOS (Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OHIO REGIONAL STOCK INTERNATIONAL GROWTH
SPECIAL GROWTH FUND FUND FUND
------------------------------------------------ ----------------------- -----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER SIX MONTHS ENDED YEAR ENDED OCTOBER OCTOBER OCTOBER OCTOBER
31, OCTOBER 31, APRIL 30, 31, 31, 31, 31,
1996 1995(a) 1995 1996 1995 1996 1995(a)
---------- ---------------- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income
(loss) $ (463) $ (60) $ 49 $ 337 $ 402 $ 728 $ 696
Net realized gains (losses)
from investment
transactions 4,480 4,556 (2,209) 869 1,485 7,046 (6,203)
Net realized gains (losses)
from foreign currency
transactions -- -- -- -- -- (1,537) 4,365
Net change in unrealized
appreciation
(depreciation) from
investments 7,642 (358) 3,557 5,662 3,578 2,689 (1,929)
Change in unrealized
appreciation
(depreciation) from
translation of assets and
liabilities in foreign
currencies -- -- -- -- -- (3,200) 2,233
- ---------------------------------------------------------------------------------------------------------------------------------
Change in net assets
resulting from operations 11,659 4,138 1,397 6,868 5,465 5,726 (838)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment income -- -- (49) (402) --
From net investment income
by class:
Class A (337) (144)
In excess of net investment
income -- -- (4) -- (17) -- --
From net realized gains
from investment
transactions -- -- -- (869) (1,485) -- --
In excess of net realized
gains from investment
transactions -- -- -- (616) (214) -- (3,413)
Tax return of capital -- -- -- -- -- -- (512)
- ---------------------------------------------------------------------------------------------------------------------------------
Change in net assets from
distributions to
shareholders -- -- (53) (1,822) (2,118) (144) (3,925)
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 33,870 14,726 4,996 8,066 9,494 47,665 41,023
Proceeds from shares issued
in connection with
acquisition -- 19,565 -- -- -- -- 21,742
Dividends reinvested -- -- -- 1,805 2,114 144 3,922
Cost of shares redeemed (12,027) (4,890) (16,411) (8,345) (9,872) (38,233) (36,754)
- ---------------------------------------------------------------------------------------------------------------------------------
Change in net assets from
capital transactions 21,843 29,401 (11,415) 1,526 1,736 9,576 29,933
- ---------------------------------------------------------------------------------------------------------------------------------
Change in net assets 33,502 33,539 (10,071) 6,572 5,083 15,158 25,170
NET ASSETS:
Beginning of period 54,335 20,796 30,867 39,048 33,965 106,477 81,307
- ---------------------------------------------------------------------------------------------------------------------------------
End of period $ 87,837 $ 54,335 $ 20,796 $ 45,620 $ 39,048 $121,635 $106,477
- ---------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS:
Issued 2,512 1,241 530 473 1,143 3,700 3,463
Issued in connection with
acquisition -- 1,816 -- -- -- -- 1,797
Reinvested -- -- -- 111 109 11 337
Redeemed (902) (429) (1,701) (492) (1,297) (2,996) (3,065)
- ---------------------------------------------------------------------------------------------------------------------------------
Change in shares 1,610 2,628 (1,171) 92 (45) 715 2,532
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Effective June 5, 1995, the Victory Aggressive Growth Portfolio and Victory
Foreign Markets Portfolio merged into the Special Growth Fund and
International Growth Fund, respectively. Changes in net assets for periods
prior to June 5, 1995 represent the Aggressive Growth Portfolio and
International Growth Fund, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
133
<PAGE>
136
Notes to Financial Statements
THE VICTORY PORTFOLIOS October 31, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION:
The Victory Portfolios were organized on February 5, 1986, and are registered
under the Investment Company Act of 1940, as amended, (the "1940 Act") as an
open-end investment company established as a Delaware business trust. The Funds
are authorized to issue an unlimited number of shares which are units of
beneficial interest without par value. The Funds presently offer shares of the
U.S. Government Obligations Fund, Prime Obligations Fund, Financial Reserves
Fund, Institutional Money Market Fund, Tax-Free Money Market Fund, Ohio
Municipal Money Market Fund, Limited Term Income Fund, Intermediate Income Fund,
Investment Quality Bond Fund, Government Bond Fund, Government Mortgage Fund,
Fund for Income, National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Bond Fund, Balanced Fund, Stock Index Fund, Diversified Stock Fund,
Value Fund, Growth Fund, Special Value Fund, Special Growth Fund, Ohio Regional
Stock Fund, and International Growth Fund (collectively, the "Funds" and
individually, a "Fund"). The accompanying financial statements and financial
highlights are those of each Fund except the Institutional Money Market Fund.
The U.S. Government Obligations Fund is authorized to issue two classes of
shares: Investor Shares and Select Shares. As of October 31, 1996, the U.S.
Government Obligations Fund had not yet sold Investor Shares. The Government
Bond Fund, National Municipal Bond Fund, New York Tax-Free Fund, Balanced Fund,
Diversified Stock Fund, Special Value Fund, Ohio Regional Stock Fund and
International Growth Fund, are authorized to issue two classes of shares: Class
A Shares and Class B Shares. Each class of shares in a Fund has identical rights
and privileges except with respect to fees paid under shareholder servicing or
distribution plans, expenses allocable exclusively to each class of shares,
voting rights on matters affecting a single class of shares, and the exchange
privilege of each class of shares.
The U.S. Government Obligations Fund, and Prime Obligations Fund seek to provide
current income consistent with liquidity and stability of principal. The
Financial Reserves Fund seeks to obtain as high a level of current income as is
consistent with preserving capital and providing liquidity. The Tax-Free Money
Market Fund seeks to provide current interest income free from federal income
taxes consistent with relative liquidity and stability of principal. The Ohio
Municipal Money Market Fund seeks to provide current income exempt from federal
income tax and the personal income taxes imposed by the State of Ohio and Ohio
municipalities consistent with the stability of principal. The Limited Term
Income Fund seeks to provide income consistent with limited fluctuation of
principal. The Intermediate Income Fund and Investment Quality Bond Fund seek 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. The Government Mortgage Fund seeks to
provide a high level of current income consistent with safety of principal. The
Fund for Income seeks to provide a high level of current income consistent with
preservation of shareholders' capital. The National Municipal Bond Fund seeks to
provide a high level of current interest income exempt from federal income tax,
as is consistent with the preservation of capital. The New York Tax-Free Fund
seeks to provide a high level of current income exempt from federal, New York
State, and New York City income taxes, consistent with the preservation of
shareholders' capital. The Ohio Municipal Bond Fund seeks to produce a high
level of current interest income which is exempt from both federal income taxes
and Ohio personal income taxes. The Balanced Fund seeks to provide income and
long-term growth of capital. The Stock Index Fund seeks to provide long-term
capital appreciation by attempting to match the investment performance of the
Standard & Poor's 500 Composite Stock Index. The Diversified Stock Fund seeks to
provide long term growth of capital. The Value Fund seeks to provide long-term
growth of capital and dividend income. The Growth Fund seeks to provide
long-term growth of capital. The Special Value Fund seeks to provide long-term
growth of capital and dividend income. The Special Growth Fund and Ohio Regional
Stock Fund seek to provide capital appreciation. The International Growth Fund
seeks to provide capital growth consistent with reasonable investment risk.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION:
- --------------------
Investments of the U.S. Government Obligations Fund, Prime Obligations Fund,
Financial Reserves Fund, Tax-Free Money Market Fund, and Ohio Municipal Money
Market Fund (collectively "the money market funds") are valued at either
amortized cost which approximates market value, or at original cost which,
combined with accrued interest, approximates market value. Under the amortized
cost valuation method, discount or premium is amortized on a constant basis to
the maturity of the security. In addition, the money market funds may not (a)
purchase any instrument with a remaining maturity greater than 397 days unless
such instrument is subject to a demand feature, or (b) maintain a
dollar-weighted-average portfolio maturity which exceeds 90 days.
134
<PAGE>
137
Notes to Financial Statements--Continued
THE VICTORY PORTFOLIOS October 31, 1996
- --------------------------------------------------------------------------------
Investments in common and preferred stocks, corporate bonds, commercial paper,
municipal and foreign government bonds, U.S. Government securities and
securities of U.S. Government agencies of the Limited Term Income Fund,
Intermediate Income Fund, Investment Quality Bond Fund, Government Bond Fund,
Government Mortgage Fund, Fund for Income, National Municipal Bond Fund, New
York Tax-Free Fund, Ohio Municipal Bond Fund, Balanced Fund, Stock Index Fund,
Diversified Stock Fund, Value Fund, Growth Fund, Special Value Fund, Special
Growth Fund, Ohio Regional Stock Fund, and International Growth Fund
(collectively "the variable net asset value funds") are valued at their market
values determined on the basis of the latest available bid prices in the
principal market (closing sales prices if the principal market is an exchange)
in which such securities are normally traded or on the basis of valuation
procedures approved by the Board of Trustees. Investments in investment
companies are valued at their respective net asset values as reported by such
companies. Investments in foreign securities, currency holdings and other assets
and liabilities of the Balanced Fund and International Growth Fund are valued
based on quotations from the primary market in which they are traded and are
translated from the local currency into U.S. dollars using current exchange
rates. The differences between the cost and market values of investments held by
the variable net asset value funds are reflected as either unrealized
appreciation or depreciation.
SECURITIES TRANSACTIONS AND RELATED INCOME:
- -------------------------------------------
Securities transactions are accounted for on the date the security is purchased
or sold (trade date). Interest income is recognized on the accrual basis and
includes, where applicable, the pro rata amortization of premium or accretion of
discount. Dividend income is recorded on the ex-dividend date, net of foreign
taxes withheld, if any. Gains or losses realized from sales of securities are
determined by comparing the identified cost of the security lot sold with the
net sales proceeds.
FOREIGN CURRENCY TRANSLATION:
- -----------------------------
The accounting records of the Funds are maintained in U.S. dollars. Investment
securities and other assets and liabilities of the Balanced Fund and the
International Growth Fund denominated in a foreign currency are translated into
U.S. dollars at the current exchange rate. Purchases and sales of securities,
income receipts and expense payments are translated into U.S. dollars at the
exchange rate on the dates of the transactions.
The Funds isolate that portion of the results of operations resulting from
changes in foreign exchange rates from those resulting from changes in market
prices of securities held.
Realized foreign exchange gains or losses arise from sales and maturities of
securities, sales of foreign currencies, currency exchange fluctuations between
the trade and settlement dates of securities transactions, and the difference
between the amount of assets and liabilities recorded and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities, including investments in securities, resulting from changes in
currency exchange rates.
REPURCHASE AGREEMENTS:
- -----------------------
Each Fund may enter into repurchase agreements with financial institutions such
as banks and broker-dealers which the Funds' investment adviser deems
creditworthy under guidelines approved by the Board of Trustees, subject to the
seller's agreement to repurchase such securities at a mutually agreed-upon date
and price. The repurchase price generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates, which may be more
or less than the rate on the underlying Fund securities held as collateral. The
seller, under a repurchase agreement, is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). Securities subject to repurchase agreements are
held by the Funds' custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system.
FORWARD CURRENCY CONTRACTS:
- ----------------------------
A forward currency contract ("forward") is an agreement between two parties to
buy and sell a currency at a set price on a future date. The market value of the
forward fluctuates with changes in currency exchange rates. The forward is
marked-to-market daily and the change in market value is recorded by a Fund as
unrealized appreciation or depreciation. When the forward is closed, the Fund
records a realized gain or loss equal to the fluctuation in value during the
period the forward was open. A Fund could be exposed to risk if a counterparty
is unable to meet the terms of a forward or if the value of the currency changes
unfavorably.
FUTURES CONTRACTS
- -----------------
The Balanced Fund, Stock Index Fund, Diversified Stock Fund, Value Fund, Growth
Fund, Special Value Fund, Special Growth Fund, Ohio Regional Stock Fund, and
International Growth Fund may 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. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is
135
<PAGE>
138
Notes to Financial Statements--Continued
THE VICTORY PORTFOLIOS October 31, 1996
- --------------------------------------------------------------------------------
outstanding, cash payments based on the level of a specified securities index.
The Funds may enter into futures contracts in an effort to hedge against market
risks. The acquisition of put and call options on futures contracts will give
the Funds the right (but not the obligation), for a specified price, to sell or
to purchase the underlying futures contract, upon exercise of the option, at any
time during the option period. Futures transactions involve brokerage costs and
require the Funds to segregate assets to cover contracts that would require it
to purchase securities or currencies. A Fund may lose the expected benefit of
futures transactions if interest rates, exchange rates or securities prices
change in an unanticipated manner. Such unanticipated changes may also result in
lower overall performance than if the Fund had not entered into any futures
transactions. In addition, the value of a Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities or foreign currencies, limiting a 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.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS:
- ---------------------------------------------
Each Fund may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and/or yield, thereby, involving the risk that the price
and/or yield obtained may be more or less than those available in the market
when delivery takes place. At the time a Fund makes the commitment to purchase a
security on a when-issued basis, the Fund records the transaction and reflects
the value of the security in determining net asset value. Normally, the
settlement date occurs within one month of the purchase. A segregated account is
established and the Funds maintain cash and marketable securities at least equal
in value to commitments for when-issued securities. Securities purchased on a
when-issued basis do not earn income until settlement date.
DIVIDENDS TO SHAREHOLDERS:
- -------------------------
Dividends from net investment income are declared daily and paid monthly for the
money market funds. Dividends from net investment income are declared and paid
quarterly for the Stock Index Fund, Diversified Stock Fund, Value Fund, Growth
Fund, Special Value Fund, Special Growth Fund, Ohio Regional Stock Fund, and
International Growth Fund. Dividends from net investment income are declared and
paid monthly for the Limited Term Income Fund, Intermediate Income Fund,
Investment Quality Bond Fund, Government Bond Fund, Government Mortgage Fund,
Fund for Income, National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Bond Fund, and Balanced Fund. Distributable net realized capital
gains, if any, are declared and distributed at least annually.
Dividends from net investment income and from net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These differences are primarily
due to differing treatments for mortgage-backed securities, foreign currency
transactions, expiring capital loss carryforwards and deferrals of certain
losses. Permanent book and tax basis differences are reflected in the components
of net assets.
FEDERAL INCOME TAXES:
- ---------------------
It is the policy of each Fund to continue to qualify as a regulated investment
company by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Internal Revenue Code, and
to make distributions of net investment income and net realized capital gains
sufficient to relieve it from all, or substantially all, federal income taxes.
OTHER:
- ------
Expenses that are directly related to one of the Funds are charged directly to
that Fund. Other operating expenses of the Funds are prorated to each Fund on
the basis of relative net assets or other appropriate basis. Fees paid under a
Fund's shareholder servicing or distribution plans are borne by the specific
class of shares to which they apply.
All expenses in connection with Intermediate Income, Investment Quality Bond,
Balanced, Stock Index, Value, Growth, Special Value, and Special Growth Funds'
organization and registration under the 1940 Act and the Securities Act of 1933
were paid by those Funds. Such expenses are being amortized over a period of two
years commencing with the respective inception dates.
Certain prior year balances have been reclassified to be consistent with current
year presentation.
136
<PAGE>
139
Notes to Financial Statements--Continued
THE VICTORY PORTFOLIOS October 31, 1996
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 1996 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
PURCHASES SALES
-------- --------
<S> <C> <C>
Limited Term Income Fund.................... $311,330 $389,236
Intermediate Income Fund.................... 450,493 330,103
Investment Quality Bond Fund................ 274,028 238,506
Government Bond Fund........................ 100,091 101,177
Government Mortgage Fund.................... 160,676 169,880
Fund for Income............................. 5,337 6,769
National Municipal Bond Fund................ 70,469 47,351
New York Tax-Free Fund...................... -- 1,299
Ohio Municipal Bond Fund.................... 54,539 50,460
Balanced Fund............................... 223,058 179,402
Stock Index Fund............................ 56,496 6,816
Diversified Stock Fund...................... 467,596 437,607
Value Fund.................................. 108,780 91,008
Growth Fund................................. 41,892 33,042
Special Value Fund.......................... 181,859 122,815
Special Growth Fund......................... 128,355 108,962
Ohio Regional Equity Fund................... 2,945 2,601
International Growth Fund................... 207,789 193,703
</TABLE>
4. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to all the Funds by KeyCorp Mutual
Fund Advisers, Inc. ("the Adviser"), a wholly owned subsidiary of KeyCorp Asset
Management Holdings, Inc., which is a wholly owned subsidiary of KeyBank
National Association ("Key"), formerly Society National Bank, a wholly owned
subsidiary of KeyCorp. Under the terms of the investment advisory agreements,
the Adviser is entitled to receive fees based on a percentage of the average
daily net assets of the Funds. KeyTrust Company of Ohio, N.A., an affiliate of
the adviser, serving as custodian for all of the Funds, received custodian fees
in addition to reimbursement of actual out-of-pocket expenses incurred.
Key and its affiliated brokerage and banking companies also serve as Shareholder
Servicing Agent for all the Funds except the U.S. Government Obligations Funds,
Financial Reserves Fund, and Stock Index Fund. As such, Key and its affiliates
provides support services to their clients who are shareholders, which may
include establishing and maintaining accounts and records, processing dividend
and distribution payments, providing account information, assisting in
processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For providing such services, Key and its affiliates may receive an annual fee of
up to 0.25% of the average daily net assets of the Funds serviced.
BISYS Fund Services (the "Administrator"), an indirect, wholly-owned subsidiary
of The BISYS Group, Inc. ("BISYS") serves as the administrator and distributor
to the Funds. Certain officers of the Funds are affiliated with BISYS. Such
officers receive no direct payments or fees from the Fund for serving as
officers of the Funds.
Under the terms of the administration agreement, the Administrator's fees are
computed at the annual rate of 0.15% of the average daily net assets of the
Funds. Pursuant to a 12b-1 Plan, the Distributor may receive fees computed at
the annual rate of 0.75% of the average daily net assets of Class B Shares of
the Government Bond Fund, National Municipal Bond Fund, New York Tax-Free Fund,
Balanced Fund, Diversified Stock Fund, Special Value Fund, Ohio Regional Stock
Fund and International Growth Fund for providing distribution services and is
entitled to receive commissions on sales of shares of the variable net asset
value funds. For the year ended October 31, 1996, the Distributor received
approximately $828,000 from commissions earned on sales of shares of the
variable net asset value funds a portion of which the Distributor reallowed to
dealers of the Funds' shares including approximately $750,000 to affiliates of
the Funds. BISYS Fund Services, Ohio, Inc. (the Company), an affiliate of BISYS,
serves the Funds as Mutual Fund Accountant. Under the terms of the Fund
Accounting Agreement, the Company's fee is based on a percentage of average
daily net assets. During the year ended October 31, 1996, BISYS paid
approximately $34,000 and $83,000 to the Fund for Income and New York Tax Free
Fund, respectively, to relieve certain balances receivable.
137
<PAGE>
140
Notes to Financial Statements--Continued
THE VICTORY PORTFOLIOS October 31, 1996
- --------------------------------------------------------------------------------
Fees may be voluntarily reduced or reimbursed to assist the Funds in maintaining
competitive expense ratios. Additional information regarding related party
transactions is as follows for the year ended October 31, 1996:
<TABLE>
<CAPTION>
INVESTMENT
ADVISORY
FEES
-------------------------- MUTUAL
PERCENTAGES ADMINISTRATION FUND CUSTODIAN
OF AVERAGE FEES ACCOUNTANT FEES
DAILY -------------- FEES ---------
NET ASSETS VOLUNTARY VOLUNTARY ---------- ANNUAL
----------- FEE FEE ANNUAL FEES
REDUCTIONS REDUCTIONS FEES ---------
---------- -------------- ---------- (000)
(000) (000) (000)
<S> <C> <C> <C> <C> <C>
U.S. Government Obligations Fund.... 0.35% $ -- $ -- $ 85 $ 237
Prime Obligations Fund.............. 0.35% -- -- 85 103
Financial Reserves Fund............. 0.50% 582 -- 78 160
Tax-Free Money Market Fund.......... 0.35% 32 35 108 68
Ohio Municipal Money Market......... 0.50% 1,706 -- 65 116
Limited Term Income Fund............ 0.50% 47 -- 39 33
Intermediate Income Fund............ 0.75% 358 -- 62 45
Investment Quality Bond Fund........ 0.75% 185 -- 53 37
Government Bond Fund................ 0.55% 65 -- 33 9
Government Mortgage Fund............ 0.50% 3 -- 51 36
Fund for Income..................... 0.50% 88 20 57 20
National Municipal Bond Fund........ 0.55% 206 36 65 15
New York Tax-Free Fund.............. 0.55% 83 15 51 5
Ohio Municipal Bond Fund............ 0.60% 103 -- 52 15
Balanced Fund....................... 1.00% 376 -- 94 64
Stock Index Fund.................... 0.60% 382 330 87 89
Diversified Stock Fund.............. 0.65% 55 61 159 105
Value Fund.......................... 1.00% 62 -- 71 70
Growth Fund......................... 1.00% 71 -- 35 27
Special Value Fund.................. 1.00% 71 -- 79 63
Special Growth Fund................. 1.00% 34 -- 58 44
Ohio Regional Stock Fund............ 0.75% 5 -- 51 15
International Growth Fund........... 1.10% 30 -- 91 201
</TABLE>
5. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares for the Funds with multiple share classes were as
follows (amounts in thousands):
<TABLE>
<CAPTION>
NATIONAL MUNICIPAL
GOVERNMENT BOND FUND BOND FUND
----------------------------------- ----------------------------------- NEW YORK TAX-FREE FUND
SIX SIX ------------------------
YEAR MONTHS YEAR YEAR MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, APRIL 30, OCTOBER 31, OCTOBER 31 APRIL 30, OCTOBER 31, OCTOBER 31,
1996 1995 1995(a) 1996 1995 1995(a) 1996 1995
----------- ----------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares
issued.................... $ 5,625 $ 3,055 $ 13,632 $ 63,557 $ 6,441 $ 4,646 $ 2,391 $ 3,329
Dividends reinvested........ 1,466 1,283 73 1,520 211 102 547 468
Cost of shares redeemed..... (9,719) (64,259) (48,532) (39,445) (169) (310) (4,419) (6,784)
- -------------------------------------------------------------------------------------------------------------------------------
Total....................... $(2,628) $ (59,921) $(34,827) $ 25,632 $ 6,483 $ 4,438 $(1,481) $(2,987)
Class B Shares:
Proceeds from shares
issued.................... $ 880 $ 745 $ 150 $ 1,441 $ 341 $ 146 $ 859 $ 2,128
Dividends reinvested........ 44 9 2 44 5 1 88 41
Cost of shares redeemed..... (310) (10) -- (141) (50) -- (370) (284)
- -------------------------------------------------------------------------------------------------------------------------------
Total....................... $ 614 $ 744 $ 152 $ 1,344 $ 296 $ 147 $ 577 $ 1,885
SHARE TRANSACTIONS:
Class A Shares:
Issued...................... 580 314 1,459 6,209 651 504 181 271
Reinvested.................. 151 131 8 152 21 11 43 37
Redeemed.................... (1,002) (6,584) (5,266) (3,912) (17) (33) (341) (552)
- -------------------------------------------------------------------------------------------------------------------------------
Total....................... (271) (6,139) (3,799) 2,449 655 482 (117) (244)
Class B Shares:
Issued...................... 91 76 16 143 34 15 67 172
Reinvested.................. 5 1 -- 4 -- -- 7 2
Redeemed.................... (33) (1) -- (14) (4) -- (28) (22)
- -------------------------------------------------------------------------------------------------------------------------------
Total....................... 63 76 16 133 30 15 46 152
(a) Effective September 26, 1994, the Fund designated the existing shares as
Class A Shares and commenced offering Class B Shares.
</TABLE>
138
<PAGE>
141
Notes to Financial Statements--Continued
THE VICTORY PORTFOLIOS October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED FUND DIVERSIFIED STOCK FUND SPECIAL VALUE FUND
-------------------------- -------------------------- --------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996(a) 1995 1996(a) 1995 1996(a) 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares issued............ $ 84,671 $ 111,470 $ 133,383 $ 144,852 $ 87,823 $ 87,892
Dividends reinvested................... 8,742 6,726 39,512 36,846 7,377 2,712
Cost of shares redeemed................ (47,743) (66,930) (87,452) (67,677) (36,916) (37,371)
- --------------------------------------------------------------------------------------------------------------------------------
Total.................................. $ 45,670 $ 51,266 $ 85,443 $ 114,021 $ 58,284 $ 53,233
Class B Shares:
Proceeds from shares issued............ $ 1,388 $ 7,937 $ 415
Dividends reinvested................... 11 22 --
Cost of shares redeemed................ (33) (215) (52)
- --------------------------------------------------------------------------------------------------------------------------------
Total.................................. $ 1,366 $ 7,744 $ 363
SHARE TRANSACTIONS:
Class A Shares:
Issued................................. 7,287 11,125 9,364 11,560 6,676 7,864
Reinvested............................. 753 659 3,020 3,276 591 246
Redeemed............................... (4,110) (6,762) (6,199) (5,529) (2,842) (3,389)
- --------------------------------------------------------------------------------------------------------------------------------
Total.................................. 3,930 5,022 6,185 9,307 4,425 4,721
Class B Shares:
Issued................................. 118 537 30
Reinvested............................. 1 2 --
Redeemed............................... (3) (15) (4)
- --------------------------------------------------------------------------------------------------------------------------------
Total.................................. 116 524 26
</TABLE>
<TABLE>
<CAPTION>
OHIO REGIONAL INTERNATIONAL
STOCK FUND GROWTH FUND
-------------------------- --------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996(a) 1995 1996(a) 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Class A Shares:
Proceeds from shares issued.................................... $ 7,754 $ 9,494 $ 47,527 $ 41,023
Proceeds from shares issued in connection with acquisition..... -- -- -- 21,742
Dividends reinvested........................................... 1,805 2,114 144 3,922
Cost of shares redeemed........................................ (8,344) (9,872) (38,212) (36,754)
- --------------------------------------------------------------------------------------------------------------------------
Total.......................................................... $ 1,215 $ 1,736 $ 9,459 $ 29,933
Class B Shares:
Proceeds from shares issued.................................... $ 312 $ 138
Dividends reinvested........................................... -- --
Cost of shares redeemed........................................ (1) (21)
- --------------------------------------------------------------------------------------------------------------------------
Total.......................................................... $ 311 $ 117
SHARE TRANSACTIONS:
Class A Shares:
Issued......................................................... 455 630 3,689 3,463
Issued in connection with aquisition........................... -- -- -- 1,797
Reinvested..................................................... 111 156 11 337
Redeemed....................................................... (492) (670) (2,994) (3,065)
- --------------------------------------------------------------------------------------------------------------------------
Total.......................................................... 74 116 706 2,532
Class B Shares:
Issued......................................................... 18 11
Reinvested..................................................... -- --
Redeemed....................................................... -- (2)
- --------------------------------------------------------------------------------------------------------------------------
Total.......................................................... 18 9
(a) Effective March 1, 1996, the Fund designated the existing shares as Class A
Shares and commenced offering Class B Shares.
</TABLE>
139
<PAGE>
Notes to Financial Statements--Continued
THE VICTORY PORTFOLIOS October 31, 1996
- --------------------------------------------------------------------------------
6. CONCENTRATION OF CREDIT RISK:
The Ohio Municipal Money Market Fund, New York Tax-Free Fund, and Ohio Municipal
Bond Fund invest primarily in debt obligations issued by the respective States
and their political subdivisions, agencies and public authorities to obtain
funds for various public purposes and the Ohio Regional Stock Fund invests in
equity securities issued by organizations domiciled in Ohio. These Funds are
more susceptible to economic and political factors that may adversely affect
companies domiciled in these states and issuers of the States' specific
municipal securities than are municipal bond funds and stock funds that are not
geographically concentrated to the same extent.
7. FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the taxable year ended October 31, 1996, the following percentages of income
dividends paid by the following funds qualify for the dividends received
deduction available to corporations:
<TABLE>
<CAPTION>
QUALIFIED DIVIDEND INCOME
-------------------------
<S> <C>
Balanced Fund 47.4%
Stock Index Fund 68.3%
Diversified Stock Fund 38.1%
Value Fund 10.0%
Growth Fund 95.6%
Special Value Fund 43.0%
Ohio Regional Stock Fund 21.9%
</TABLE>
The Victory Portfolios designate the following exempt-interest dividends for the
year ended October 31, 1996:
<TABLE>
<CAPTION>
OHIO
TAX-FREE MUNICIPAL NATIONAL NEW YORK OHIO
MONEY MARKET MONEY MARKET MUNICIPAL TAX-FREE MUNICIPAL
FUND FUND BOND FUND FUND BOND FUND
------------ ------------ --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Exempt-interest dividends (000):
Fund Shares $9,527 $ 17,378 $ 3,158
Class A Shares $ 1,581 $ 750
Class B Shares 43 104
Exempt-interest dividends per share:
Fund Shares 0.030 0.031 0.540
Class A Shares 0.440 0.670
Class B Shares 0.350 0.570
</TABLE>
140
<PAGE>
143
Notes to Financial Statements--Continued
THE VICTORY PORTFOLIOS October 31, 1996
- --------------------------------------------------------------------------------
The percentage break-down of exempt-interest income by state for the period
ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
TAX-FREE OHIO MUNICIPAL NATIONAL NEW YORK OHIO
MONEY MARKET MONEY MARKET MUNICIPAL TAX-FREE MUNICIPAL
FUND FUND BOND FUND FUND BOND FUND
------------ -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Alabama 0.79% 0.03% 6.38% -- 0.14%
Alaska 0.16% -- 1.29% -- --
Arizona 1.76% -- 3.86% -- --
Arkansas 0.37% -- -- -- --
California 4.91% -- 0.01% -- --
Colorado 0.42% -- 3.94% -- --
Connecticut -- -- 0.69% -- --
District of Columbia 0.26% -- 0.14% -- --
Florida 7.87% -- 9.05% -- --
Georgia 3.23% -- 6.95% -- --
Hawaii -- -- 5.95% -- --
Illinois 7.19% -- 4.88% -- --
Indiana 12.76% -- 6.21% -- --
Iowa 1.69% -- 0.66% -- --
Kansas 1.52% -- 2.12% -- --
Kentucky 5.78% -- 0.09% -- --
Louisiana 2.22% -- -- -- --
Maine 1.67% -- 0.02% -- --
Massachusetts 0.30% -- 0.12% -- --
Michigan 1.25% -- 8.68% -- --
Minnesota 1.94% -- 5.57% -- --
Missouri 4.95% -- 2.40% -- --
Montana 0.11% -- 4.56% -- --
Nebraska 0.81% -- -- -- --
Nevada 0.87% -- 0.07% -- --
New Hampshire 0.57% -- -- -- --
New Jersey -- -- 0.04% -- --
New York 0.78% -- 1.76% 97.64% --
North Carolina 1.47% -- 0.21% -- --
North Dakota 0.27% -- -- -- --
Ohio 12.59% 99.97% 11.11% -- 99.86%
Oklahoma -- -- 0.06% -- --
Oregon 0.73% -- -- -- --
Pennsylvania 0.50% -- 0.08% -- --
Puerto Rico -- -- 1.26% 2.36% --
Rhode Island -- -- 0.01% -- --
South Carolina 0.32% -- 0.14% -- --
South Dakota -- -- 2.42% -- --
Tennessee 2.13% -- 0.36% -- --
Texas 7.30% -- 3.33% -- --
Utah 0.57% -- 0.90% -- --
Virginia 0.08% -- -- -- --
Washington 0.39% -- 1.25% -- --
West Virginia -- -- 0.46% -- --
Wisconsin 8.44% -- 2.00% -- --
Wyoming 1.03% -- 0.97% -- --
----- ----- ----- ----- -----
100.00% 100.00% 100.00% 100.00% 100.00%
===== ===== ===== ===== =====
</TABLE>
The International Growth Fund elected to pass the following benefits of the
foreign tax credit to shareholders for the year ended October 31, 1996.
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH FUND
-------------------------
<S> <C>
Gross income from foreign countries (000) $ 2,745
Income taxes paid to foreign countries (000) 68
Income taxes paid to foreign countries per share 0.02
</TABLE>
141
<PAGE>
Notes to Financial Statements--Continued
THE VICTORY PORTFOLIOS October 31, 1996
- --------------------------------------------------------------------------------
The following table presents capital gain dividend distributions from long-term
capital gains for the following Funds for the year ended October 31, 1996
(amounts in thousands):
<TABLE>
<S> <C>
New York Tax-Free Fund $ 10
Balanced Fund 309
Stock Index Fund 2,161
Diversified Stock Fund 11,448
Value Fund 2,957
Growth Fund 3,794
Special Value Fund 4,885
Ohio Regional Equity Fund 1,341
</TABLE>
As of October 31, 1996, for Federal income tax purposes, the following funds
have capital loss carryforwards available to offset future capital gains, if any
(amounts in thousands):
<TABLE>
<CAPTION>
AMOUNT EXPIRES
------ -------
<S> <C> <C>
U.S. Government Obligations Fund $ 94 2002
Financial Reserves Fund 24 2001
Limited Term Income Fund 1,642 2002
Limited Term Income Fund 553 2003
Intermediate Income Fund 2,498 2001
Intermediate Income Fund 1,386 2002
Intermediate Income Fund 869 2003
Investment Quality Bond Fund 9,100 2002
Government Bond Fund 36 2002
Government Bond Fund 3,898 2003
Government Bond Fund 2,723 2004
Government Mortgage Fund 1,977 2002
Fund for Income 806 2001
Fund for Income 588 2002
Fund for Income 328 2003
</TABLE>
142
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS FUND
----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
1996(a) 1995(b) 1994 1993 1992
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- -----------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.049 0.052 0.032 0.026 0.036
Distributions
Net investment income (0.049) (0.052) (0.032) (0.026) (0.036)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- -----------------------------------------------------------------------------------------------------------
Total Return 4.96% 5.38% 3.30% 2.62% 3.66%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $1,357,817 $964,929 $412,048 $515,734 $579,836
Ratio of expenses to average net assets 0.61% 0.58% 0.63% 0.60% 0.60%
Ratio of net investment income to average
net assets 4.84% 5.28% 3.20% 2.57% 3.50%
Ratio of expenses to average net assets* 0.60% 0.80%
Ratio of net investment income to average
net assets* 5.26% 3.03%
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Select Shares. Investor Shares have not commenced operations as of October
31, 1996.
(b) Effective June 5, 1995, the Victory U.S. Treasury Money Market Portfolio
merged into the U.S. Government Obligations Fund. Financial highlights for
the periods prior to June 5, 1995 represent the U.S. Government Obligation
Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
143
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIME OBLIGATIONS FUND
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ---------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.047 0.051 0.035 0.030 0.037
Net realized losses from investment
transactions -- -- (0.003) -- --
- ---------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.047 0.051 0.032 0.030 0.037
- ---------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.047) (0.051) (0.035) (0.030) (0.037)
- ---------------------------------------------------------------------------------------------------------
Capital transactions -- -- 0.003(a) -- --
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ---------------------------------------------------------------------------------------------------------
Total Return 4.81% 5.26% 3.57% 3.05% 3.77%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $496,019 $456,266 $782,303 $720,024 $524,338
Ratio of expenses to average net assets 0.87% 0.74% 0.62% 0.60% 0.61%
Ratio of net investment income to average
net assets 4.72% 5.09% 3.52% 2.96% 3.68%
Ratio of expenses to average net assets* 0.79%
Ratio of net investment income to average
net assets* 3.35%
- ---------------------------------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) During 1994, KeyCorp made a capital contribution of approximately $2,506,000
for losses realized from the disposition of certain securities.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
144
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL RESERVES FUND
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1996 1995(b) 1994 1993(a) 1992(a)
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ---------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.049 0.054 0.035 0.030 0.040
Distributions
Net investment income (0.049) (0.054) (0.035) (0.030) (0.040)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ---------------------------------------------------------------------------------------------------------
Total Return 5.00% 5.50% 3.57% 2.81% 3.76%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $767,990 $762,870 $433,266 $457,872 $523,889
Ratio of expenses to average net assets 0.67% 0.60% 0.57% 0.55% 0.55%
Ratio of net investment income to average
net assets 4.89% 5.40% 3.48% 2.78% 3.67%
Ratio of expenses to average net assets* 0.75% 0.76% 0.73% 0.70% 0.70%
Ratio of net investment income to average
net assets* 4.81% 5.24% 3.32% 2.63% 3.52%
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Effective May 16, 1991, Ameritrust Company National Association became
investment adviser to the Fund. Effective March 16, 1992 Ameritrust was
acquired by Society Corporation and merged into Society National Bank, a
wholly-owned subsidiary of Society Corporation, on July 13, 1992. On January
7, 1993, Society Asset Management, Inc., a wholly-owned subsidiary of
Society Corporation, was named investment adviser to the Fund.
(b) Effective June 5, 1995, the Victory Financial Reserves Portfolio became the
Financial Reserves Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
145
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET FUND
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ---------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.030 0.034 0.021 0.020 0.027
Distributions
Net investment income (0.030) (0.034) (0.021) (0.020) (0.027)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ---------------------------------------------------------------------------------------------------------
Total Return 3.04% 3.42% 2.17% 2.06% 2.77%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $344,796 $307,726 $198,561 $189,351 $151,012
Ratio of expenses to average net assets 0.78% 0.61% 0.60% 0.59% 0.61%
Ratio of net investment income to average
net assets 2.97% 3.36% 2.14% 2.04% 2.70%
Ratio of expenses to average net assets* 0.80% 0.62% 0.79% 0.60%
Ratio of net investment income to average
net assets* 2.95% 3.35% 1.95% 2.02%
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
146
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OHIO MUNICIPAL MONEY MARKET FUND
--------------------------------------------------------------------------------------
YEAR ENDED TWO MONTHS ENDED YEAR ENDED AUGUST 31,
OCTOBER 31, OCTOBER 31, -----------------------------------------------------
1996 1995 1995(b) 1994 1993(a) 1992(a)
----------- ---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.030 0.006 0.033 0.021 0.021 0.031
Distributions
Net investment income (0.030) (0.006) (0.033) (0.021) (0.021) (0.031)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ------------------------------------------------------------------------------------------------------------------
Total Return 3.11% 0.55%(c) 3.33% 2.10% 2.14% 3.18%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(000) $ 561,131 $510,632 $ 502,453 $ 318,132 $ 262,681 $ 252,705
Ratio of expenses to
average net assets 0.67% 0.64%(d) 0.63% 0.65% 0.65% 0.65%
Ratio of net investment
income to average net
assets 3.03% 3.31%(d) 3.33% 2.08% 2.12% 3.13%
Ratio of expenses to
average net assets* 0.97% 0.92%(d) 0.94% 0.76% 0.72% 0.68%
Ratio of net investment
income to average net
assets* 2.73% 3.03%(d) 3.02% 1.97% 2.05% 3.10%
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Effective February 27, 1991, Ameritrust Company National Association became
investment adviser to the Fund. Effective March 16, 1992, was acquired by
Society Corporation and merged into Society National Bank, a wholly-owned
subsidiary of Society Corporation, on July 13, 1992. Effective February 3,
1993, Society Asset Management, Inc. a wholly-owned subsidiary of Society
Corporation was named investment adviser to the Fund.
(b) Effective June 5, 1995, the Victory Ohio Municipal Money Market Portfolio
became the Ohio Municipal Money Market Fund.
(c) Not annualized.
(d) Annualized.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
147
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED TERM INCOME FUND
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1996 1995(a) 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.15 $ 9.88 $ 10.53 $ 10.45 $ 10.33
- ---------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.63 0.57 0.54 0.57 0.64
Net realized and unrealized gains
(losses) from investments (0.14) 0.27 (0.61) 0.08 0.13
- ---------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.49 0.84 (0.07) 0.65 0.77
- ---------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.62) (0.57) (0.54) (0.57) (0.64)
In excess of net investment income (0.01) -- -- -- --
Net realized gains -- -- (0.04) -- (0.01)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.63) (0.57) (0.58) (0.57) (0.65)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.01 $ 10.15 $ 9.88 $ 10.53 $ 10.45
- ---------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 4.94% 8.77% (0.66)% 6.39% 7.77%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 90,019 $172,002 $ 79,150 $ 81,771 $ 55,565
Ratio of expenses to average net assets 0.86% 0.78% 0.79% 0.77% 0.78%
Ratio of net investment income to average
net assets 5.90% 5.77% 5.29% 5.49% 6.18%
Ratio of expenses to average net assets* 0.89% 0.79% 0.97% 0.78%
Ratio of net investment income to average
net assets* 5.87% 5.76% 5.10% 5.48%
Portfolio turnover 221% 97% 41% 50% 15%
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Effective June 5, 1995, the Victory Short-Term Government Income Portfolio
merged into the Limited Term Income Fund. Financial highlights for the
periods prior to June 5, 1995 represent the Limited Term Income Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
148
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERMEDIATE INCOME FUND INVESTMENT QUALITY BOND FUND
----------------------------------------------- -----------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 30, 1993 YEAR ENDED YEAR ENDED DECEMBER 30, 1993
OCTOBER 31, OCTOBER 31, TO OCTOBER 31, OCTOBER 31, OCTOBER 31, TO OCTOBER 31,
1996 1995 1994(a) 1996 1995(d) 1994(a)
----------- ----------- ----------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.69 $ 9.25 $ 10.00 $ 9.76 $ 9.10 $ 10.00
- ----------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.56 0.60 0.52 0.57 0.62 0.53
Net realized and
unrealized gains
(losses) from
investments (0.13) 0.44 (0.76) (0.13) 0.67 (0.92)
- ----------------------------------------------------------------------------------------------------------------------------
Total from
Investment
Activities 0.43 1.04 (0.24) 0.44 1.29 (0.39)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.56) (0.60) (0.51) (0.56) (0.62) (0.51)
In excess of net
investment income -- -- -- -- (0.01) --
Tax return of capital -- -- -- (0.01) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.60) (0.51) (0.57) (0.63) (0.51)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.56 $ 9.69 $ 9.25 $ 9.63 $ 9.76 $ 9.10
- ----------------------------------------------------------------------------------------------------------------------------
Total Return(excludes
sales charges) 4.56% 11.65% (2.48)%(b) 4.65% 14.63% (3.92)%(b)
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000) $ 272,087 $ 163,281 $ 112,923 $ 150,807 $ 125,248 $ 94,685
Ratio of expenses to
average net assets 0.94% 0.82% 0.79%(c) 1.01% 0.88% 0.79%(c)
Ratio of net
investment income to
average net assets 5.81% 6.32% 6.23%(c) 5.99% 6.59% 6.33%(c)
Ratio of expenses to
average net assets* 1.11% 1.06% 1.25%(c) 1.14% 1.10% 1.25%(c)
Ratio of net
investment income to
average net assets* 5.64% 6.08% 5.77%(c) 5.86% 6.37% 5.87%(c)
Portfolio turnover 164% 98% 55% 182% 160% 90%
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Corporate Bond Portfolio merged into the
Investment Quality Bond Fund. Financial highlights for the periods prior to
June 5, 1995 represent the Investment Quality Bond Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
149
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND
------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------- -----------------------------------------
SIX MONTHS SIX MONTHS SEPTEMBER 26, MAY 3, 1993
YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED 1994 TO TO APRIL
OCTOBER 31, OCTOBER 31, APRIL 30, OCTOBER 31, OCTOBER 31, APRIL 30, 30,
1996 1995(d) 1995(e) 1996 1995(d) 1995(e) 1994(a)
----------- ----------- ---------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.87 $ 9.44 $ 9.45 $ 9.85 $9.43 $9.25 $ 10.00
- ----------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.55 0.33 0.55 0.46 0.25 0.31 0.45
Net realized and
unrealized gains
(losses) from
investments (0.22) 0.40 (0.02) (0.20) 0.45 0.17 (0.54)
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 0.33 0.73 0.53 0.26 0.70 0.48 (0.09)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.55) (0.29) (0.54) (0.46) (0.22) (0.30) (0.45)
In excess of net
investment income -- (0.01) -- (0.01) (0.06) -- --
Net realized gains -- -- -- -- -- -- (0.01)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.30) (0.54) (0.47) (0.28) (0.30) (0.46)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.65 $ 9.87 $ 9.44 $ 9.64 $9.85 $9.43 $ 9.45
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (excludes
sales charges) 3.52% 7.86%(b) 5.87% 2.77% 7.47%(b) 5.26%(b) (1.06)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (000) $24,632 $27,856 $ 84,567 $ 1,498 $ 909 $ 155 $ 120,636
Ratio of expenses to
average net assets 0.98% 0.92%(c) 0.63% 1.84% 1.82%(c) 1.43%(c) 0.38%(c)
Ratio of net investment
income to average net
assets 5.64% 6.04%(c) 5.97% 4.78% 4.98%(c) 5.03%(c) 4.61%(c)
Ratio of expenses to
average net assets* 1.22% 1.06%(c) 0.98% 2.06% 2.12%(c) 1.60%(c) 0.96%(c)
Ratio of net investment
income to average net
assets* 5.40% 5.90%(c) 5.62% 4.56% 4.68%(c) 4.86%(c) 4.03%(c)
Portfolio turnover(f) 378% 69% 127% 378% 69% 127% 121%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Government Bond Portfolio became the Government Bond Fund.
(e) Effective September 26, 1994, the Fund designated the existing shares as Class A Shares and commenced offering
Class B Shares.
(f) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of
shares issued.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
150
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT MORTGAGE FUND
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.86 $ 10.33 $ 11.36 $ 11.07 $ 10.73
- ---------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.70 0.72 0.68 0.66 0.74
Net realized and unrealized gains
(losses) from investments (0.12) 0.62 (1.02) 0.32 0.34
- ---------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.58 1.34 (0.34) 0.98 1.08
Distributions
Net investment income (0.67) (0.71) (0.67) (0.66) (0.74)
Net realized gains -- -- (0.02) (0.03) --
In excess of net realized gains -- (0.08) -- -- --
Tax return of capital (0.01) (0.02) -- -- --
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.68) (0.81) (0.69) (0.69) (0.74)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.76 $ 10.86 $ 10.33 $ 11.36 $ 11.07
- ---------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 5.54% 13.55% (3.01)% 9.05% 10.34%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $125,992 $136,103 $148,168 $132,738 $ 73,660
Ratio of expenses to average net assets 0.89% 0.77% 0.76% 0.75% 0.77%
Ratio of net investment income to average
net assets 6.46% 6.81% 6.38% 5.92% 6.82%
Ratio of expenses to average net assets* 0.90% 0.79% 0.96% 0.76%
Ratio of net investment income to average
net assets* 6.45% 6.80% 6.18% 5.92%
Portfolio turnover 127% 59% 132% 50% 11%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
151
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FUND FOR INCOME
----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, FEBRUARY 1, 1994 YEAR ENDED JANUARY 31,
----------------------- THROUGH OCTOBER -----------------------------
1996 1995(c) 31, 1994 1994 1993 1992
---------- ---------- ---------------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.93 $ 9.43 $ 10.14 $ 10.57 $ 10.55 10.19
- -----------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.68 0.73 0.52 0.80 0.80 0.85
Net realized and unrealized gains
(losses) on investments (0.08) 0.43 (0.71) (0.41) 0.06 0.36
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.60 1.16 (0.19) 0.39 0.86 1.21
- -----------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.68) (0.66) (0.51) (0.80) (0.80) (0.85)
In excess of net investment income (0.03) -- (0.01) -- -- --
Net realized gains -- -- -- (0.02) (0.04) --
Tax return of capital (0.05) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.76) (0.66) (0.52) (0.82) (0.84) (0.85)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.77 $ 9.93 $ 9.43 $ 10.14 $ 10.57 10.55
- -----------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 6.35% 12.75% (1.99)%(a) 3.75% 8.45% 12.34%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 20,816 $ 22,756 $ 29,358 $46,632 $55,075 58,055
Ratio of expenses to average net assets 1.02% 1.12% 1.12%(b) 1.13% 1.12% 0.92%
Ratio of net investment income to average
net assets 7.05% 7.62% 7.21%(b) 7.65% 7.56% 8.18%
Ratio of expenses to average net assets* 1.73% 1.58% 1.26%(b)
Ratio of net investment income to average
net assets* 6.34% 7.16% 7.07%(b)
Portfolio turnover 25% 35% 18% 47% 23% 24%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
(a) Not annualized.
(b) Annualized.
(c) Effective June 5, 1995, the Victory Fund for Income Portfolio became the Fund for Income.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
152
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL MUNICIPAL BOND FUND
----------------------------------------------------------------------------------------
CLASS A
-------------------------------------- CLASS B
YEAR ---------------------------------------------
SIX MONTHS ENDED SIX MONTHS SEPTEMBER 26,
YEAR ENDED ENDED APRIL YEAR ENDED ENDED 1994 TO
OCTOBER 31, OCTOBER 31, 30, OCTOBER 31, OCTOBER 31, APRIL 30,
1996 1995(d) 1995(e) 1996 1995(d) 1995(e)
----------- ----------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.06 9.59 $ 9.64 $ 10.07 $ 9.59 $9.53
Investment Activities
Net investment income 0.44 0.24 0.44 0.35 0.20 0.28
Net realized and unrealized
gains (losses) from
investments 0.13 0.46 (0.05) 0.13 0.47 0.05
- -------------------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 0.57 0.70 0.39 0.48 0.67 0.33
- -------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.44) (0.23) (0.44) (0.35) (0.19) (0.27)
In excess of net investment
income -- -- -- (0.01) -- --
Net realized gains -- -- -- (0.03) -- --
In excess of net realized
gains (0.03) -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.47) (0.23) (0.44) (0.39) (0.19) (0.27)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.16 $ 10.06 $ 9.59 $ 10.16 $ 10.07 $9.59
- -------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 5.83% 7.39%(b) 4.21% 4.85% 6.99%(b) 3.54%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $36,958 $11,964 $5,118 $ 1,808 $ 456 $ 147
Ratio of expenses to average
net assets 0.29% 0.02%(c) 0.20% 1.20% 0.96%(c) (0.05)%(c)
Ratio of net investment income
(loss) to average net assets 4.37% 5.11%(c) 5.01% 3.50% 4.15%(c) 4.35%(c)
Ratio of expenses to average
net assets* 1.35% 2.57%(c) 3.95% 2.17% 3.67%(c) 2.63%(c)
Ratio of net investment income
(loss) to average net assets* 3.31% 2.56%(c) 1.26% 2.53% 1.44%(c) 1.67%(c)
Portfolio turnover (f) 143% 72% 52% 143% 72% 52%
<CAPTION>
CLASS B
FEBRUARY 3,
1994 TO
APRIL 30,
1994(e)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.00
Investment Activities
Net investment income 0.08
Net realized and unrealized
gains (losses) from
investments (0.36)
- ----------------------------------------------
Total from Investment
Activities (0.28)
- ----------------------------------------------
Distributions
Net investment income (0.08)
In excess of net investment
income --
Net realized gains --
In excess of net realized
gains --
- ----------------------------------------------
Total Distributions (0.08)
- ----------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.64
- ----------------------------------------------
Total Return (excludes sales
charges) 2.82%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 494
Ratio of expenses to average
net assets 0.65%(c)
Ratio of net investment income
(loss) to average net assets 3.15%(c)
Ratio of expenses to average
net assets* 26.10%(c)
Ratio of net investment income
(loss) to average net assets* (22.30)%(c)
Portfolio turnover (f) 13%
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory National Municipal Bond Portfolio became
the National Municipal Bond Fund.
(e) Effective September 26, 1994, the Fund designated the existing shares as
Class A Shares and commenced offering Class B Shares.
(f) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
153
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK TAX-FREE FUND
-------------------------------------------------------------------------------------------
CLASS A CLASS B
------------------------------------ -------------------------------------- YEAR
ENDED
YEAR ENDED JANUARY 1, YEAR ENDED SEPTEMBER 26, DECEMBER
OCTOBER 31, 1994 TO OCTOBER 31, 1994 TO 31,
------------------- OCTOBER 31, ------------------- OCTOBER 31, -------
1996 1995(a) 1994(d) 1996 1995(d) 1994(d) 1993
------- ------- ------------ ------- ------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.85 $ 12.39 $ 13.54 $ 12.86 $ 12.39 $ 12.62 $ 12.76
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.68 0.87 0.57 0.57 0.85 0.07 0.70
Net realized and unrealized gains
(losses) from investments (0.11) 0.42 (1.15) (0.10) 0.36 (0.23) 0.84
- -----------------------------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 0.57 1.29 (0.58) 0.47 1.21 (0.16) 1.54
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.68) (0.83) (0.57) (0.57) (0.74) (0.07) (0.70)
In excess of net investment income -- -- -- (0.01) -- -- --
Net realized gains (0.01) -- -- (0.01) -- -- (0.06)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.69) (0.83) (0.57) (0.59) (0.74) (0.07) (0.76)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.73 $ 12.85 $ 12.39 $ 12.74 $ 12.86 $ 12.39 $ 13.54
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return(excludes sales charges) 4.53% 10.82% (4.31)%(b) 3.72% 10.18% (1.25)%(b) 12.34%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $13,754 $15,374 $ 17,840 $ 2,515 $ 1,953 $ (e) $28,530
Ratio of expenses to average net
assets 0.93% 1.16% 0.91%(c) 1.65% 2.02% 0.52%(c) 0.87%
Ratio of net investment income
(loss) to average net assets 5.25% 5.50% 5.33%(c) 4.52% 5.94% 5.94%(c) 5.28%
Ratio of expenses to average net
assets* 1.58% 1.96% 1.25%(c) 2.34% 2.25% 0.86%(c) 0.96%
Ratio of net investment income
(loss) to average net assets* 4.60% 4.70% 4.99%(c) 3.83% 5.71% 5.60%(c) 5.19%
Portfolio turnover (f) 0% 18% 18% 0% 18% 18% 12%
<CAPTION>
YEAR
ENDED
DECEMBER 31,
1992
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50
- ------------------------------------------------
Investment Activities
Net investment income 0.74
Net realized and unrealized gains
(losses) from investments 0.26
- ------------------------------------------------
Total from Investment
Activities 1.00
- ------------------------------------------------
Distributions
Net investment income (0.74)
In excess of net investment income --
Net realized gains --
- ------------------------------------------------
Total Distributions (0.74)
- ------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.76
- ------------------------------------------------
Total Return(excludes sales charges) 8.26%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $26,034
Ratio of expenses to average net
assets 0.66%
Ratio of net investment income
(loss) to average net assets 5.89%
Ratio of expenses to average net
assets* 0.96%
Ratio of net investment income
(loss) to average net assets* 5.59%
Portfolio turnover (f) 14%
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Effective June 5, 1995, the Victory New York Tax-Free Portfolio became the
New York Tax-Free Fund.
(b) Not annualized.
(c) Annualized.
(d) Effective September 26, 1994, the Fund designated the existing shares as
Class A Shares and commenced offering Class B Shares.
(e) Amount is less than $1,000.
(f) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
154
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OHIO MUNICIPAL BOND FUND
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.32 $ 10.33 $ 11.52 $ 10.52 $ 10.37
- ----------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.54 0.52 0.49 0.52 0.60
Net realized and unrealized
gains(losses) from investments 0.11 1.00 (0.94) 1.00 0.15
- ----------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.65 1.52 (0.45) 1.52 0.75
- ----------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.54) (0.52) (0.49) (0.52) (0.60)
In excess of net investment income -- (0.01) -- -- --
Net realized gains -- -- (0.25) -- --
- ----------------------------------------------------------------------------------------------------------
Total Distributions (0.54) (0.53) (0.74) (0.52) (0.60)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.43 $ 11.32 $ 10.33 $ 11.52 $ 10.52
- ----------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 5.87% 15.03% (4.08)% 14.75% 7.34%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 73,463 $60,031 $ 57,704 $ 50,676 $ 17,676
Ratio of expenses to average net assets 0.89% 0.66% 0.51% 0.42% 0.09%
Ratio of net investment income to
average net assets 4.72% 4.78% 4.58% 4.77% 5.76%
Ratio of expenses to average net
assets* 1.05% 0.94% 1.09% 0.86% 0.84%
Ratio of net investment income to
average net assets* 4.56% 4.49% 4.01% 4.33% 5.01%
Portfolio turnover 81% 125% 53% 151% 47%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
155
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED FUND
-------------------------------------------------------
CLASS B STOCK INDEX FUND
CLASS A SHARES ---------------------------------
SHARES -------------
----------- MARCH 1, 1996 YEAR ENDED DECEMBER 10, YEAR ENDED OCTOBER DECEMBER 3,
YEAR ENDED THROUGH OCTOBER 1993 TO 31, 1993 TO
OCTOBER 31, OCTOBER 31, 31, OCTOBER 31, ------------------- OCTOBER 31,
1996(d) 1996(d) 1995 1994(a) 1996 1995 1994(a)
----------- ------------- ---------- ------------ -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.01 $ 11.51 $ 9.62 $ 10.00 $ 12.50 $ 10.18 $ 10.00
- -------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.36 0.14 0.41 0.33 0.28 0.27 0.20
Net realized and unrealized
gains (losses) from
investments and foreign
currencies 1.39 0.85 1.40 (0.39) 2.58 2.31 0.16
- -------------------------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 1.75 0.99 1.81 (0.06) 2.86 2.58 0.36
- -------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.36) (0.14) (0.41) (0.32) (0.28) (0.26) (0.18)
In excess of net investment
income -- (0.02) (0.01) -- -- -- --
Net realized gains (0.07) -- -- -- (0.23) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.43) (0.16) (0.42) (0.32) (0.51) (0.26) (0.18)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.33 $ 12.34 $ 11.01 $ 9.62 14.85 $ 12.50 $ 10.18
- -------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 16.27% 15.73%(e) 19.24% (0.57)%(b) 23.38% 25.72% 3.66%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 273,553 $ 1,432 $201,073 $127,285 $277,124 $160,822 $89,686
Ratio of expenses to average net
assets 1.27% 2.46%(c) 0.98% 0.87%(c) 0.57% 0.55% 0.58%(c)
Ratio of net investment income to
average net assets 3.14% 1.78%(c) 4.05% 3.97%(c) 2.14% 2.53% 2.35%(c)
Ratio of expenses to average net
assets* 1.43% 2.67%(c) 1.36% 1.49%(c) 0.89% 0.87% 1.10%(c)
Ratio of net investment income to
average net assets* 2.98% 1.57%(c) 3.67% 3.35%(c) 1.82% 2.21% 1.82%(c)
Portfolio turnover(f) 80% 80% 69% 118% 4% 12% 1%
Average commission rate paid(g) $ 0.0084 $0.0084 $ 0.0186
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective March 1, 1996, the Fund designated the existing shares as Class A Shares and commenced offering Class B
Shares.
(e) Represents total return for the Fund for the period November 1, 1995 through February 29, 1996 plus total return
for Class B Shares for the period March 1, 1996 through October 31, 1996.
(f) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of
shares issued.
(g) Represents the total dollar amount of commissions paid on portfolio security transactions divided by total number
of shares purchased and sold by the Fund for which commissions were charged.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
156
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIVERSIFIED STOCK FUND
---------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES
-------------- --------------
MARCH 1, 1996
YEAR ENDED THROUGH YEAR ENDED OCTOBER 31,
OCTOBER 31, OCTOBER 31, -----------------------------------------
1996(a) 1996(a) 1995 1994 1993 1992
-------------- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.62 $ 14.18 $ 12.68 $ 13.39 $ 12.16 $ 11.44
- ------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.20 0.07 0.27 0.25 0.18 0.19
Net realized and unrealized gains
from investments 3.21 1.57 2.33 0.64 1.50 1.11
- ------------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 3.41 1.64 2.60 0.89 1.68 1.30
- ------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.19) (0.07) (0.27) (0.23) (0.21) (0.19)
In excess of net investment income -- (0.04) (0.01) -- -- --
Net realized gains (1.09) -- (1.38) (1.37) (0.24) (0.39)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (1.28) (0.11) (1.66) (1.60) (0.45) (0.58)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.75 $ 15.71 $ 13.62 $ 12.68 $ 13.39 $ 12.16
- ------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 27.16% 26.61%(c) 23.54% 7.39% 14.04% 11.57%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $571,153 $ 8,228 $409,549 $263,227 $257,405 $227,839
Ratio of expenses to average net
assets 1.05% 2.07%(b) 0.92% 0.89% 0.89% 0.91%
Ratio of net investment income to
average net assets 1.40% 0.11%(b) 2.11% 2.06% 1.45% 1.63%
Ratio of expenses to average net
assets* 1.08% 2.08%(b) 0.95% 1.10% 0.90%
Ratio of net investment income to
average net assets* 1.37% 0.10%(b) 2.07% 1.86% 1.43%
Portfolio turnover (d) 94% 94% 75% 104% 86% 75%
Average commission rate paid (e) $ 0.0504 $ 0.0504
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Effective March 1, 1996, the Fund designated the existing shares as Class A
Shares and commenced offering Class B Shares.
(b) Annualized.
(c) Represents total return for the Fund for the period November 1, 1995 through
February 29, 1996 plus total return for Class B Shares for the period March
1, 1996 through October 31, 1996.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on portfolio security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
157
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE FUND
-------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 3, 1993
OCTOBER OCTOBER 31, TO OCTOBER 31,
31, 1996 1995(d) 1994 (a)
---------- ----------- ----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.87 $ 10.13 $ 10.00
- -------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.20 0.27 0.21
Net realized and unrealized gains from investments 2.65 1.92 0.11
- -------------------------------------------------------------------------------------------------------------
Total from Investment Activities 2.85 2.19 0.32
- -------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.20) (0.27) (0.19)
In excess of net investment income -- (0.01) --
Net realized gains (0.34) (0.17) --
- -------------------------------------------------------------------------------------------------------------
Total Distributions (0.54) (0.45) (0.19)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.18 $ 11.87 $ 10.13
- -------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 24.66% 22.28% 3.27%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $382,083 $ 295,871 $188,184
Ratio of expenses to average net assets 1.33% 0.99% 0.92%(c)
Ratio of net investment income to average net assets 1.56% 2.55% 2.32%(c)
Ratio of expenses to average net assets* 1.35% 1.30% 1.48%(c)
Ratio of net investment income to average net assets* 1.54% 2.24% 1.76%(c)
Portfolio turnover 28% 23% 39%
Average commission rate paid(e) $ 0.0524
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Equity Income Portfolio merged into the
Value Fund. Financial highlights for the periods prior to June 5, 1995
represent the Value Fund.
(e) Represents the total dollar amount of commissions paid on portfolio security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
158
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL VALUE FUND
------------------------------------------------------------
CLASS B
GROWTH FUND CLASS A SHARES
-------------------------------------------- SHARES -------------
----------- MARCH 1, 1996
YEAR ENDED OCTOBER 31, DECEMBER 3, 1993 YEAR ENDED THROUGH YEAR ENDED DECEMBER 3, 1993
------------------------- TO OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, TO OCTOBER 31,
1996 1995(d) 1994 (a)(e) 1996(f) 1996(f) 1995 1994(a)
----------- ----------- ---------------- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.15 $ 10.23 $ 10.00 $ 12.15 $ 12.89 $ 10.49 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------------
Investment
Activities
Net investment
income (loss) 0.08 0.11 0.10 0.12 0.01 0.15 0.11
Net realized and
unrealized gains
(losses) on
investments 2.93 1.97 0.22 2.33 1.23 1.71 0.48
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
Investment
Activities 3.01 2.08 0.32 2.45 1.24 1.86 0.59
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment
income (0.08) (0.11) (0.09) (0.11) (0.01) (0.15) (0.10)
In excess of net
investment income -- -- -- -- (0.03) -- --
Net realized gains (0.51) (0.05) -- (0.34) -- (0.05) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total
Distributions (0.59) (0.16) (0.09) (0.45) (0.04) (0.20) (0.10)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD $ 14.57 $ 12.15 $ 10.23 $ 14.15 $ 14.09 $ 12.15 $ 10.49
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return
(excludes sales
charges) 25.66% 20.54% 3.22%(b) 20.60% 19.80%(g) 18.01% 5.92%(b)
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, End of
Period (000) $ 147,753 $ 108,253 $ 66,921 $ 289,460 $ 386 $ 194,700 $118,600
Ratio of expenses
to average net
assets 1.33% 1.07% 0.94%(c) 1.37% 2.51%(c) 1.04% 1.00%(c)
Ratio of net
investment income
to average net
assets 0.64% 1.00% 1.10%(c) 0.88% (0.31)%(c) 1.35% 1.23%(c)
Ratio of expenses
to average net
assets* 1.39% 1.42% 1.51%(c) 1.40% 3.75%(c) 1.30% 1.49%(c)
Ratio of net
investment income
(loss) to average
net assets* 0.58% 0.65% 0.52%(c) 0.85% (1.55)%(c) 1.09% 0.74%(c)
Portfolio turnover
(h) 27% 107% 28% 55% 55% 39% 18%
Average commission
rate paid (i) $ 0.0618 $ 0.0501 $0.0501
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Equity Portfolio merged into the Growth Fund. Financial highlights for the
periods prior to June 5, 1995 represent the Growth Fund.
(e) Effective March 17, 1994, the Society Earnings Momentum Fund merged into the Growth Fund. Financial highlights for
the period prior to March 17, 1994 represent the Growth Fund.
(f) Effective March 1, 1996, the Fund designated the existing shares as Class A Shares and commenced offering Class B
Shares.
(g) Represents total return for the Fund for the period November 1, 1995 through February 29, 1996 plus total return
for Class B Shares for the period March 1, 1996 through October 31, 1996.
(h) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of
shares issued.
(i) Represents the total dollar amount of commissions paid on portfolio security transactions divided by total number
of shares purchased and sold by the Fund for which commissions were charged.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
159
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SPECIAL GROWTH FUND
-------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED YEAR ENDED JANUARY 11, 1994
OCTOBER OCTOBER 31, APRIL 30, TO APRIL 30,
31, 1996 1995 1995(d) 1994 (a)
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.81 $ 10.54 $ 9.82 $ 10.00
- -------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income (loss) (0.07) 0.00 0.02 (0.01)
Net realized and unrealized gains (losses)
on investments 2.40 1.27 0.72 (0.17)
- -------------------------------------------------------------------------------------------------------------
Total from Investment Activities 2.33 1.27 0.74 (0.18)
- -------------------------------------------------------------------------------------------------------------
Distributions
Net investment income -- -- (0.02) --
- -------------------------------------------------------------------------------------------------------------
Total Distributions (0.02)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.14 $ 11.81 $ 10.54 $ 9.82
- -------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charges) 19.73% 12.05%(b) 7.51% (1.80)%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 87,837 $ 54,335 $ 20,796 $ 30,867
Ratio of expenses to average net assets 1.47% 0.65%(c) 1.04% 0.82%(c)
Ratio of net investment income (loss) to
average net assets (0.62%) (0.13%)(c) 0.17% (0.27%)(c)
Ratio of expenses to average net assets* 1.51% 1.40%(c) 1.35% 1.47%(c)
Ratio of net investment income (loss) to
average net assets* (0.66%) (0.88%)(c) (0.14%) (0.92%)(c)
Portfolio turnover 152% 54% 102% 61%
Average commisson rate paid(e) $ 0.0468
</TABLE>
- ---------------
<TABLE>
<C> <S>
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Aggressive Growth Portfolio merged into the Special Growth Fund. Financial
highlights for the periods prior to June 5, 1995 represent the Aggressive Growth Portfolio.
(e) Represents the total dollar amount of commissions paid on portfolio security transactions divided by total number
of shares purchased and sold by the Fund for which commissions were charged.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
160
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OHIO REGIONAL STOCK FUND
----------------------------------------------------------------------------
CLASS A CLASS B
SHARES SHARES
----------- -------------
YEAR MARCH 1, 1996
ENDED THROUGH YEAR ENDED OCTOBER 31,
OCTOBER 31, OCTOBER 31, -------------------------------------------
1996(a) 1996(a) 1995 1994 1993 1992
----------- ------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 15.94 $ 16.43 $ 14.56 $ 14.69 $ 12.12 $ 11.15
Investment Activities
Net investment income (loss) 0.14 (0.03) 0.17 0.18 0.16 0.20
Net realized and unrealized gains
from investments 2.62 1.51 2.13 0.39 2.63 1.07
- -----------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 2.76 1.48 2.30 0.57 2.79 1.27
- -----------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.14) -- (0.17) (0.17) (0.18) (0.21)
In excess of net investment
income -- (0.04) (0.01) -- -- --
Net realized gains (0.36) -- (0.65) (0.53) (0.04) (0.09)
In excess of net realized gains (0.25) -- (0.09) -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (0.75) (0.04) (0.92) (0.70) (0.22) (0.30)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 17.95 $ 17.87 $ 15.94 $ 14.56 $ 14.69 $ 12.12
- -----------------------------------------------------------------------------------------------------------------
Total Return (excludes sales
charges) 17.79% 16.95%(b) 16.93% 3.96% 23.16% 11.50%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $45,294 $ 326 $39,048 $33,965 $34,926 $36,115
Ratio of expenses to average net
assets 1.39% 2.61%(c) 1.20% 1.04% 1.04% 1.04%
Ratio of net investment income
(loss) to average net assets 0.79% (0.60%)(c) 1.13% 1.27% 1.17% 1.73%
Ratio of expenses to average net
assets* 1.40% 3.50%(c) 1.24% 1.27% 1.06%
Ratio of net investment income
(loss) to average net assets* 0.78% (1.49%)(c) 1.09% 1.04% 1.15%
Portfolio turnover (d) 6% 6% 11% 14% 7% 8%
Average commission rate paid(e) $0.0513 $0.0513
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Effective March 1, 1996, the Fund designated the existing shares as Class A
Shares and commenced offering Class B Shares.
(b) Represents total return for the Fund for the period November 1, 1995 through
February 29, 1996 plus total return for Class B Shares for the period March
1, 1996 through October 31, 1996.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on portfolio security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
161
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH FUND
-----------------------------------------------------------------------------
CLASS A CLASS B
SHARES SHARES
----------- -------------
YEAR MARCH 1, 1996
ENDED THROUGH YEAR ENDED OCTOBER 31,
OCTOBER 31, OCTOBER 31, --------------------------------------------
1996(a) 1996(a) 1995(b) 1994 1993 1992
----------- ------------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.33 $ 12.79 $ 13.32 $ 11.93 $ 8.93 $ 9.20
Investment Activities
Net investment income (loss) 0.08 -- 0.05 (0.01) (0.03) (0.02)
Net realized and unrealized
gains (losses) from
investments and foreign
curriencies 0.62 0.14 (0.42) 1.40 3.03 (0.17)
- -----------------------------------------------------------------------------------------------------------------
Total from Investment
Activities 0.70 0.14 (0.37) 1.39 3.00 (0.19)
Distributions
Net investment income (0.02) -- -- -- -- (0.01)
Net realized gains -- -- (0.55) -- -- (0.07)
Tax return of capital -- -- (0.07) -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (0.02) -- (0.62) (0.08)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.01 $ 12.93 $ 12.33 $ 13.32 $ 11.93 $ 8.93
- -----------------------------------------------------------------------------------------------------------------
Total Return(excludes sales
charges) 5.65% 4.89%(c) (2.50%) (11.65%) 33.59% (2.08%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $ 121,517 $ 118 $106,477 $81,307 $30,629 $11,091
Ratio of expenses to average net
assets 1.73% 2.91%(d) 1.53% 1.48% 1.46% 1.56%
Ratio of net investment income
(loss) to average net assets 0.64% (0.10%)(d) 0.75% (0.51%) (0.74%) (0.20%)
Ratio of expenses to average net
assets* 1.75% 6.46%(d) 1.65% 1.83% 1.63% 1.72%
Ratio of net investment loss to
average net assets* 0.62% (3.65%)(d) 0.63% (0.86%) (0.91%) (0.35%)
Portfolio turnover (e) 178% 178% 68% 51% 45% 92%
Average commission rate paid (f) $ 0.0242 $0.0242
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Effective March 1, 1996, the Fund designated the existing shares as Class A
Shares and commenced offering Class B Shares.
(b) Effective June 5, 1995, the Victory Foreign Markets Portfolio merged into
the International Growth Fund. Financial highlights for the periods prior to
June 5, 1995 represent the International Growth Portfolio.
(c) Represents total return for the Fund for the period November 1, 1995 through
February 29, 1995 plus total return for Class B Shares for the Period March
1, 1995 through October 31, 1996.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(f) Represents the total dollar amount of commissions paid on portfolio security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
162
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
The Victory Portfolios
We have audited the accompanying statements of assets and liabilities of The
Victory Portfolios (comprising, respectively, the U.S. Government Obligations
Fund, Prime Obligations Fund, Financial Reserves Fund, Tax-Free Money Market
Fund, Ohio Municipal Money Market Fund, Limited Term Income Fund, Intermediate
Income Fund, Investment Quality Bond Fund, Government Bond Fund, Government
Mortgage Fund, Fund for Income, National Municipal Bond Fund, New York Tax-Free
Fund, Ohio Municipal Bond Fund, Balanced Fund, Stock Index Fund, Diversified
Stock Fund, Value Fund, Growth Fund, Special Value Fund, Special Growth Fund,
Ohio Regional Stock Fund, and International Growth Fund), including the
schedules of investments, as of October 31, 1996, and the related statements of
operations and changes in net assets, and the financial highlights for each
period presented except as noted in the next paragraph. These financial
statements and financial highlights are the responsibility of The Victory
Portfolios' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
The Financial Reserves Fund's financial highlights for each of the three
years in the period ended October 31, 1994 were audited by other auditors, whose
reports dated December 2, 1994 and December 17, 1993, respectively, expressed
unqualified opinions on those financial highlights. The Ohio Municipal Money
Market Fund's financial highlights for each of the three years in the period
ended August 31, 1994 were audited by other auditors, whose reports dated
October 7, 1994 and October 13, 1993, respectively, expressed unqualified
opinions on those financial highlights. The Government Bond Fund's statement of
changes in net assets for the period ended April 30, 1995 and financial
highlights for the periods ended April 30, 1995 and 1994 were audited by other
auditors, whose report dated June 20, 1995 expressed an unqualified opinion on
those financial statements and financial highlights. The Fund for Income's
financial highlights for the period ended October 31, 1994 and for each of the
three years in the period ended January 31, 1994 were audited by other auditors,
whose reports dated December 2, 1994 and February 28, 1994, respectively,
expressed unqualified opinions on those financial highlights. The National
Municipal Bond Fund's statements of changes in net assets for the period ended
April 30, 1995 and financial highlights for the periods ended April 30, 1995 and
1994 were audited by other auditors, whose report dated June 20, 1995 expressed
an unqualified opinion on those financial statements and financial highlights.
The New York Tax-Free Fund's financial highlights for the period ended October
31, 1994 and two years in the period ended December 31, 1993 were audited by
other auditors, whose reports dated December 2, 1994 and January 31, 1994,
respectively, expressed unqualified opinions on those financial highlights. The
Special Growth Fund's statement of changes in net assets for the period ended
April 30, 1995 and financial highlights for each of the periods ended April 30,
1995 and 1994 were audited by other auditors, whose report dated June 20, 1995
expressed an unqualified opinion on those financial statements and financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation and verification by examination
of securities owned as of October 31, 1996, by correspondence with the
custodians and brokers or other auditing procedures where confirmations from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above, except as noted in the second paragraph, present fairly, in all
material respects, the financial position of each of the respective funds
comprising The Victory Portfolios as of October 31, 1996, and the results of
their operations, the changes in their net assets and the financial highlights
for the periods then ended in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
December 13, 1996
163
<PAGE>
SPECIAL SHAREHOLDER MEETING
THE VICTORY PORTFOLIOS (UNAUDITED)
- --------------------------------------------------------------------------------
On December 1, 1995, a special meeting of the shareholders of The Victory
Portfolios was held to consider various proposals. The shareholders approved
each of the following proposals (with actual vote tabulations):
With respect to all of the Funds:
1. To convert The Victory Portfolios to a Delaware business trust.
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,249,856 396,342 1,026,115 1,627,876
Diversified Stock Fund 24,659,415 57,627 1,745,723 3,244,162
Financial Reserves Fund 435,468,657 6,803,167 3,645,911 331,139,633
Fund for Income 1,062,403 11,928 93,088 1,121,270
Government Bond Fund 2,065,064 38,895 506,255 325,396
Government Mortgage Fund 11,335,804 115,319 129,579 1,024,445
Growth Fund 8,403,699 35,860 126,551 362,482
Intermediate Income Fund 11,130,361 169,748 4,463,734 911,459
International Growth Fund 7,462,788 0 343,540 846,934
Investment Quality Bond Fund 10,248,527 203,067 1,573,959 653,664
Limited Term Income Fund 15,845,870 23,527 658,301 493,463
National Municipal Bond Fund 617,944 0 22,346 588,955
New York Tax-Free Fund 753,835 11,293 43,559 544,915
Ohio Municipal Bond Fund 4,027,726 253,514 376 1,049,764
Ohio Municipal Money Market Fund 272,562,299 5,628,207 12,714,448 219,117,050
Ohio Regional Stock Fund 2,036,503 3,192 29,387 364,895
Prime Obligations Fund 231,998,103 6,243,503 17,774,269 203,677,006
Special Growth Fund 4,347,989 0 41,335 188,802
Special Value Fund 14,838,524 925 205,629 863,793
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 161,628,767 707,076 7,364,096 141,893,010
U.S. Government Obligations Fund 507,284,588 4,793,247 7,974,717 389,003,370
Value Fund 24,222,240 0 56,101 595,888
</TABLE>
2. To designate KeyCorp Mutual Fund Advisers, Inc. as investment adviser
pursuant to a new Investment Advisory agreement between each of the
Funds and KeyCorp Mutual Fund Advisers, Inc.
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,250,970 394,786 1,026,556 1,627,877
Diversified Stock Fund 24,667,732 56,435 1,738,600 3,244,160
Financial Reserves Fund 436,491,146 6,226,943 3,199,645 331,139,634
Fund for Income 1,063,792 7,979 95,648 1,121,270
Government Bond Fund 2,056,618 47,341 506,255 325,394
Government Mortgage Fund 11,331,948 115,319 133,436 1,024,444
Growth Fund 8,403,438 36,214 126,458 362,482
Intermediate Income Fund 11,135,822 169,748 4,458,273 911,459
International Growth Fund 7,462,530 272 343,524 846,936
Investment Quality Bond Fund 10,253,892 197,703 1,573,960 653,662
Limited Term Income Fund 15,835,583 23,527 668,588 493,463
National Municipal Bond Fund 618,009 0 22,282 588,954
New York Tax-Free Fund 754,311 10,879 43,497 544,915
Ohio Municipal Bond Fund 4,027,719 253,520 377 1,049,764
Ohio Municipal Money Market Fund 273,698,727 4,863,247 12,342,980 219,117,050
Ohio Regional Stock Fund 2,036,276 3,037 29,769 364,895
Prime Obligations Fund 235,671,425 4,468,852 15,875,598 203,677,006
Special Growth Fund 4,348,687 0 40,637 188,802
Special Value Fund 14,843,666 894 200,518 863,793
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 161,795,646 727,330 7,176,961 141,893,012
U.S. Government Obligations Fund 507,342,913 4,716,161 7,993,478 389,003,370
Value Fund 24,211,318 11,682 55,341 595,888
</TABLE>
164
<PAGE>
SPECIAL SHAREHOLDER MEETING -- CONTINUED
THE VICTORY PORTFOLIOS (UNAUDITED)
- --------------------------------------------------------------------------------
3a. To elect the following trustees:
<TABLE>
<CAPTION>
TRUSTEE NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED
- ---------------------------------------------- -------------- ------------- ---------------
<S> <C> <C> <C>
Robert G. Brown 2,080,048,334 0 81,016,242
Edward P. Campbell 2,085,377,298 0 75,687,281
Dr. Harry Gazelle 2,084,165,281 0 76,899,296
Dr. Thomas F. Morrissey 2,084,083,891 0 76,980,686
Stanley I. Landgraf 2,081,571,794 0 79,492,783
Leigh A. Wilson 2,084,944,888 0 76,119,690
Dr. H. Patrick Swygert 2,083,840,673 0 77,223,904
</TABLE>
3b. To select Coopers & Lybrand L.L.P. as independent accountants:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,253,772 392,460 1,026,080 1,627,877
Diversified Stock Fund 24,659,302 57,252 1,746,213 3,244,160
Financial Reserves Fund 437,057,481 5,294,868 3,565,385 331,139,634
Fund for Income 1,072,743 5,739 88,939 1,121,268
Government Bond Fund 2,057,699 46,260 506,255 325,396
Government Mortgage Fund 11,345,250 110,751 124,702 1,024,444
Growth Fund 8,403,792 35,860 126,458 362,482
Intermediate Income Fund 11,139,860 164,567 4,459,416 911,459
International Growth Fund 7,462,628 0 343,700 846,934
Investment Quality Bond Fund 10,252,737 0 1,772,818 653,662
Limited Term Income Fund 15,845,828 23,568 658,301 493,464
National Municipal Bond Fund 618,009 0 22,282 588,954
New York Tax-Free Fund 762,436 1,784 44,467 544,915
Ohio Municipal Bond Fund 4,037,833 243,407 376 1,049,764
Ohio Municipal Money Market Fund 275,587,599 3,592,920 11,724,435 219,117,050
Ohio Regional Stock Fund 2,031,116 7,775 30,192 364,894
Prime Obligations Fund 238,399,335 1,899,541 15,716,999 203,677,006
Special Growth Fund 4,347,886 0 41,438 188,802
Special Value Fund 14,843,599 961 200,518 863,793
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 161,869,350 672,469 7,158,120 141,893,010
U.S. Government Obligations Fund 507,255,539 4,714,501 8,082,510 389,003,372
Value Fund 24,223,000 0 55,341 595,888
</TABLE>
165
<PAGE>
SPECIAL SHAREHOLDER MEETING -- CONTINUED
THE VICTORY PORTFOLIOS (UNAUDITED)
- --------------------------------------------------------------------------------
4. With respect to all of the Funds other than the Fund for Income and
Special Growth Fund, to designate Society Asset Management, Inc. as
Sub-Investment Adviser pursuant to a new sub-investment advisory
agreement between Society Asset Management, Inc. and KeyCorp Mutual Fund
Advisers, Inc.:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,247,252 395,254 1,029,806 1,627,877
Diversified Stock Fund 24,655,653 67,755 1,739,358 3,244,161
Financial Reserves Fund 437,057,481 5,294,868 3,565,385 331,139,634
Government Bond Fund 2,057,539 46,420 506,255 325,396
Government Mortgage Fund 11,331,948 115,319 133,436 1,024,444
Growth Fund 8,403,792 35,860 126,458 362,482
Intermediate Income Fund 11,121,619 183,951 4,458,273 911,459
International Growth Fund 7,462,493 223 343,612 846,934
Investment Quality Bond Fund 10,248,527 203,067 1,573,960 653,663
Limited Term Income Fund 15,835,583 23,527 668,588 493,463
National Municipal Bond Fund 618,009 0 22,282 588,954
New York Tax-Free Fund 752,942 10,879 44,866 544,915
Ohio Municipal Bond Fund 4,037,696 243,414 506 1,049,764
Ohio Municipal Money Market Fund 272,043,356 6,129,782 12,731,816 219,117,050
Ohio Regional Stock Fund 2,032,057 7,632 29,394 364,894
Prime Obligations Fund 233,928,943 5,303,393 16,783,539 203,677,006
Special Value Fund 14,841,714 2,848 200,516 863,793
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 161,633,285 661,303 7,405,350 141,893,011
U.S. Government Obligations Fund 506,137,566 5,037,622 8,877,362 389,003,372
Value Fund 24,208,887 14,113 55,341 595,888
</TABLE>
5. With respect to the Fund for Income, [1,063,505] Shares were voted in
favor, [11,378] Shares against, [92,537] Shares abstained, [1,121,269]
Shares were not voted and the resolution that the Investment
Sub-Advisory Agreement between KeyCorp Mutual Fund Advisers, Inc. and
First Albany Asset Management Corporation with respect to the fund was
approved.
6. With respect to the Special Growth Fund, [4,348,089] Shares were voted
in favor, [0] Shares against, [41,235] Shares abstained, [188,802]
Shares were not voted and the resolution that the Investment
Sub-Advisory Agreement between KeyCorp Mutual Fund Advisers, Inc. and T.
Rowe Price Associates, Inc. with respect to the fund was approved.
7. With respect to the Funds listed below to increase the maximum remaining
maturity for the securities which may be purchased to 397 days:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Prime Obligations Fund 235,772,947 2,932,947 17,309,982 203,677,005
Tax-Free Money Market Fund 161,669,975 663,624 7,366,339 141,893,011
U.S. Government Obligations Fund 506,957,927 5,114,709 7,979,914 389,003,372
</TABLE>
8. With respect to the Funds listed below to restate each Fund's investment
objective:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,243,053 403,349 1,025,909 1,627,878
Diversified Stock Fund 24,655,521 66,204 1,741,041 3,244,161
Government Mortgage Fund 11,338,300 114,785 127,618 1,024,444
Growth Fund 8,403,699 35,860 126,551 362,482
Intermediate Income Fund 11,139,860 164,567 4,459,416 911,459
International Growth Fund 7,462,071 406 343,849 846,936
Investment Quality Bond Fund 10,252,737 197,703 1,575,114 653,663
Limited Term Income Fund 15,827,899 29,848 669,950 493,464
Ohio Regional Stock Fund 2,028,976 8,435 31,671 364,895
Prime Obligations Fund 235,133,881 4,440,019 16,441,974 203,677,007
Special Value Fund 14,843,011 895 201,171 863,794
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 161,157,811 1,709,991 6,832,137 141,893,010
U.S. Government Obligations Fund 505,098,842 7,220,486 7,733,223 389,003,371
Value Fund 24,208,887 2,431 67,023 595,888
</TABLE>
166
<PAGE>
SPECIAL SHAREHOLDER MEETING -- CONTINUED
THE VICTORY PORTFOLIOS (UNAUDITED)
- --------------------------------------------------------------------------------
9. Amendments as listed below to fundamental investment restrictions were
approved by the designated Funds as follows:
a. To amend the Fund's fundamental investment restrictions concerning
borrowing and senior securities:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 14,968,144 586,169 1,117,998 1,627,878
Diversified Stock Fund 24,624,847 70,395 1,767,525 3,244,160
Government Mortgage Fund 11,321,071 107,835 151,797 1,024,444
Growth Fund 8,402,966 35,953 127,191 362,482
Intermediate Income Fund 11,117,387 179,914 4,466,542 911,459
International Growth Fund 7,462,050 665 343,612 846,935
Investment Quality Bond Fund 10,253,779 197,703 1,574,073 653,662
Limited Term Income Fund 15,825,765 30,230 671,701 493,465
Ohio Municipal Bond Fund 4,020,814 259,780 1,022 1,049,764
Ohio Regional Stock Fund 2,023,706 11,211 34,356 364,894
Prime Obligations Fund 229,910,065 2,359,558 23,746,253 203,677,006
Special Value Fund 14,828,941 2,832 213,304 863,794
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 161,290,130 1,009,137 7,400,672 141,893,010
U.S. Government Obligations Fund 503,242,895 7,179,868 9,629,787 389,003,372
Value Fund 24,220,569 2,431 55,341 595,888
</TABLE>
b. To eliminate the Fund's fundamental investment restriction concerning
investment for the purpose of exercising control:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,236,372 401,796 1,034,144 1,627,877
Diversified Stock Fund 24,662,015 65,605 1,735,147 3,244,160
Government Mortgage Fund 11,332,247 108,369 140,087 1,024,444
Growth Fund 8,404,044 35,860 126,206 362,482
Intermediate Income Fund 11,122,987 179,914 4,460,942 911,459
International Growth Fund 7,461,744 567 344,016 846,935
Investment Quality Bond Fund 10,254,099 197,703 1,573,753 653,662
Limited Term Income Fund 15,844,438 24,916 658,342 493,465
Ohio Municipal Bond Fund 4,020,177 244,240 17,199 1,049,764
Ohio Regional Stock Fund 2,035,326 5,365 28,392 364,894
Prime Obligations Fund 228,730,449 3,538,972 23,746,454 203,677,006
Special Value Fund 14,837,873 2,847 204,357 863,794
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 158,733,438 1,825,385 9,141,115 141,893,011
U.S. Government Obligations Fund 503,081,628 7,341,136 9,629,787 389,003,371
Value Fund 24,220,569 2,431 55,341 595,888
</TABLE>
167
<PAGE>
SPECIAL SHAREHOLDER MEETING -- CONTINUED
THE VICTORY PORTFOLIOS (UNAUDITED)
- --------------------------------------------------------------------------------
c. To amend the Fund's fundamental investment restriction concerning the
making of loans:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,048,272 589,517 1,034,524 1,627,876
Diversified Stock Fund 24,663,323 65,002 1,734,442 3,244,160
Government Mortgage Fund 11,332,245 108,369 140,089 1,024,444
Growth Fund 8,404,044 35,953 126,113 362,482
Intermediate Income Fund 11,117,807 185,094 4,460,942 911,459
International Growth Fund 7,457,916 830 347,580 846,936
Investment Quality Bond Fund 10,254,099 197,703 1,573,753 653,662
Limited Term Income Fund 15,837,753 31,601 658,342 493,465
Ohio Municipal Bond Fund 4,035,941 244,653 1,022 1,049,764
Ohio Regional Stock Fund 2,033,295 8,108 27,680 364,894
Prime Obligations Fund 229,214,144 3,055,478 23,746,253 203,677,006
Special Value Fund 14,837,887 2,833 204,357 863,794
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 158,962,635 1,596,188 9,141,115 141,893,011
U.S. Government Obligations Fund 505,808,304 4,614,460 9,629,787 389,003,371
Value Fund 24,220,569 2,431 55,341 595,888
</TABLE>
d. To amend the Fund's fundamental investment restriction concerning
purchases of securities on margin:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,057,489 589,656 1,025,167 1,627,877
Diversified Stock Fund 24,648,359 79,909 1,734,499 3,244,160
Government Mortgage Fund 11,318,815 121,801 140,087 1,024,444
Growth Fund 8,403,959 35,953 126,198 362,482
Intermediate Income Fund 11,122,987 179,914 4,460,942 911,459
International Growth Fund 7,457,796 782 347,748 846,936
Investment Quality Bond Fund 10,254,099 197,703 1,573,753 653,662
Limited Term Income Fund 15,832,469 23,527 671,701 493,464
Ohio Municipal Bond Fund 4,014,229 244,016 23,321 1,049,764
Ohio Regional Stock Fund 2,030,486 10,878 27,719 364,894
Prime Obligations Fund 228,334,743 3,934,880 23,746,253 203,677,005
Special Value Fund 14,837,886 2,834 204,357 863,794
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 158,849,817 1,709,006 9,141,115 141,893,011
U.S. Government Obligations Fund 502,301,964 8,120,799 9,629,787 389,003,372
Value Fund 24,220,569 2,431 55,341 595,888
</TABLE>
e. To amend the Fund's fundamental investment restriction concerning
underwriting the securities of other issuers:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,236,695 402,540 1,033,077 1,627,877
Diversified Stock Fund 24,662,893 69,998 1,729,876 3,244,160
Government Mortgage Fund 11,332,247 108,369 140,087 1,024,444
Growth Fund 8,403,690 36,306 126,113 362,483
Intermediate Income Fund 11,122,987 179,914 4,460,942 911,459
International Growth Fund 7,453,258 5,369 347,700 846,935
Investment Quality Bond Fund 10,254,099 197,703 1,573,753 653,662
Limited Term Income Fund 15,839,124 30,230 658,342 493,465
Ohio Municipal Bond Fund 4,030,595 243,827 7,194 1,049,764
Ohio Regional Stock Fund 2,033,994 7,409 27,680 364,894
Prime Obligations Fund 229,405,927 2,863,695 23,746,253 203,677,006
Special Value Fund 14,837,890 2,831 204,357 863,793
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 157,957,149 2,601,674 9,141,115 141,893,011
U.S. Government Obligations Fund 505,584,181 4,838,582 9,629,787 389,003,372
Value Fund 24,220,569 2,431 55,341 595,888
</TABLE>
168
<PAGE>
SPECIAL SHAREHOLDER MEETING -- CONTINUED
THE VICTORY PORTFOLIOS (UNAUDITED)
- --------------------------------------------------------------------------------
f. To amend the Fund's fundamental investment restriction concerning
diversification:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,246,174 400,971 1,025,167 1,627,877
Diversified Stock Fund 24,668,741 61,984 1,732,042 3,244,160
Growth Fund 8,404,137 35,860 126,113 362,482
Intermediate Income Fund 11,122,987 179,914 4,460,942 911,459
International Growth Fund 7,458,202 750 347,375 846,935
Investment Quality Bond Fund 10,254,099 197,703 1,573,753 653,662
Limited Term Income Fund 15,845,828 23,527 658,342 493,464
Ohio Municipal Bond Fund 4,014,831 243,414 23,371 1,049,764
Ohio Regional Stock Fund 2,037,359 4,044 27,680 364,894
Prime Obligations Fund 230,944,771 1,324,851 23,746,253 203,677,006
Special Value Fund 14,837,890 2,831 204,357 863,793
Stock Index Fund 10,217,072 0 0 2,388,453
Value Fund 24,220,569 2,431 55,341 595,888
</TABLE>
g. To amend the Fund's fundamental investment restriction concerning
concentration of investment:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,242,545 402,410 1,027,358 1,627,876
Diversified Stock Fund 24,670,186 63,695 1,728,886 3,244,160
Growth Fund 8,404,137 35,860 126,113 362,482
Intermediate Income Fund 11,122,987 179,914 4,460,942 911,459
International Growth Fund 7,458,430 522 347,375 846,935
Investment Quality Bond Fund 10,254,099 197,703 1,573,753 653,662
Limited Term Income Fund 15,845,828 23,527 658,342 493,464
Ohio Municipal Bond Fund 4,014,831 243,414 23,371 1,049,764
Ohio Regional Stock Fund 2,035,582 5,821 27,680 364,894
Prime Obligations Fund 230,585,953 1,683,669 23,746,253 203,677,006
Special Value Fund 14,837,890 2,831 204,357 863,793
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 159,384,834 1,173,989 9,141,115 141,893,011
Value Fund 24,220,569 2,431 55,341 595,888
</TABLE>
h. To amend the Fund's fundamental investment restrictions concerning
commodities and real estate:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balanced Fund 15,242,490 404,655 1,025,167 1,627,877
Diversified Stock Fund 24,670,186 63,695 1,728,886 3,244,160
Government Mortgage Fund 11,318,815 121,801 140,087 1,024,444
Growth Fund 8,401,362 38,550 126,198 362,482
Intermediate Income Fund 11,122,987 179,914 4,460,942 911,459
International Growth Fund 7,458,039 828 347,459 846,936
Investment Quality Bond Fund 10,254,099 197,703 1,573,753 653,662
Limited Term Income Fund 15,845,828 23,527 658,342 493,464
Ohio Municipal Bond Fund 4,019,764 260,641 1,211 1,049,764
Ohio Regional Stock Fund 2,033,991 7,339 27,753 364,894
Prime Obligations Fund 228,781,079 3,488,543 23,746,253 203,677,006
Special Value Fund 14,837,890 2,831 204,357 863,793
Stock Index Fund 10,217,072 0 0 2,388,453
Tax-Free Money Market Fund 158,707,651 1,851,172 9,141,115 141,893,011
U.S. Government Obligations Fund 503,239,625 7,183,138 9,629,787 389,003,372
Value Fund 24,220,569 2,431 55,341 595,888
</TABLE>
169
<PAGE>
SPECIAL SHAREHOLDER MEETING -- CONTINUED
THE VICTORY PORTFOLIOS (UNAUDITED)
- --------------------------------------------------------------------------------
i. To amend the Fund's fundamental investment restriction concerning
investments in other investment companies:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Diversified Stock Fund 24,657,575 66,029 1,739,162 3,244,161
International Growth Fund 7,456,925 1,940 347,461 846,936
Limited Term Income Fund 15,839,124 30,230 658,342 493,465
Ohio Municipal Bond Fund 4,030,819 243,603 7,194 1,049,764
Ohio Regional Stock Fund 2,033,729 7,601 27,753 364,894
Prime Obligations Fund 277,288,741 4,987,230 23,741,905 203,677,005
Tax-Free Money Market Fund 159,380,403 1,178,420 9,141,115 141,893,011
U.S. Government Obligations Fund 503,239,625 7,183,138 9,629,787 389,003,372
</TABLE>
j. To amend the Fund's fundamental investment restriction regarding
securities in which affiliates have invested:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Diversified Stock Fund 24,663,329 63,122 1,736,316 3,244,160
International Growth Fund 7,457,708 830 347,788 846,936
Limited Term Income Fund 15,845,828 23,527 658,342 493,464
Ohio Municipal Bond Fund 4,020,814 243,603 17,199 1,049,764
Ohio Regional Stock Fund 2,031,727 8,964 28,392 364,894
Prime Obligations Fund 229,153,125 3,116,497 23,746,253 203,677,006
Tax-Free Money Market Fund 159,817,495 741,327 9,141,115 141,893,012
U.S. Government Obligations Fund 503,239,625 7,183,138 9,629,787 389,003,372
</TABLE>
k. To reclassify the Fund's fundamental investment restriction regarding
securities of unseasoned issuers:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Diversified Stock Fund 24,657,237 73,560 1,731,969 3,244,161
International Growth Fund 7,457,869 758 347,700 846,935
Limited Term Income Fund 15,845,828 23,527 658,342 493,464
Ohio Municipal Bond Fund 4,014,229 260,193 7,194 1,049,764
Ohio Regional Stock Fund 2,031,347 10,056 27,680 364,894
Prime Obligations Fund 225,084,903 7,184,719 23,746,253 203,677,006
Tax-Free Money Market Fund 158,251,329 2,307,494 9,141,115 141,893,011
U. S. Government Obligations Fund 503,239,625 7,183,138 9,629,787 389,003,372
</TABLE>
l. To amend the Fund's fundamental investment restriction regarding
investments in restricted and illiquid securities:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Limited Term Income Fund 7,457,250 1,701 347,375 846,936
Ohio Municipal Bond Fund 4,030,406 244,016 7,194 1,049,764
Prime Obligations Fund 225,387,957 6,881,665 23,746,253 203,677,006
Tax-Free Money Market Fund 158,400,192 2,158,631 9,141,115 141,893,011
U.S. Government Obligations Fund 503,239,625 7,183,138 9,629,787 389,003,372
</TABLE>
m. With respect to the Tax-Free Money Market Fund [158,400,192] Shares
were voted in favor, [2,158,631] Shares against, [9,141,115] Shares
abstained, [141,893,011] Shares were not voted and the resolution that
the reclassification of certain restrictions with respect to the Fund
was voted on and approved by the Shareholders.
n. To reclassify the Fund's fundamental investment restriction concerning
the use of options:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Diversified Stock Fund 24,655,013 72,357 1,735,397 3,244,160
Limited Term Income Fund 15,845,828 23,527 658,342 493,464
Ohio Municipal Bond Fund 4,013,592 244,653 23,371 1,049,764
Ohio Regional Stock Fund 2,029,612 11,079 28,392 364,894
Tax-Free Money Market Fund 158,400,192 2,158,631 9,141,115 141,893,011
</TABLE>
o. With respect to the U.S. Government Obligations Fund [503,239,625]
Shares were voted in favor, [7,183,138] Shares against, [9,629,787]
Shares abstained, [389,003,372] Shares were not voted and the
amendment of the fundamental restrictions of the Fund concerning
permissible investment in government securities was voted on and
approved by the Shareholders.
p. To change the status of the Ohio Municipal Bond Fund from a
diversified to a nondiversified fund:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
- ---------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Ohio Municipal Bond Fund 4,014,229 260,193 7,194 1,049,764
</TABLE>
170
<PAGE>
Make the dreams of
your youth become the
realities of your future.
What you want to be when you grow up may require some financial assistance. To
learn more about how the Victory Funds may help make your dreams come true,
call 1-800-KEY-FUND. Because at Victory, we know dreaming about the future
isn't just kid's stuff.
The Victory Funds are distributed by BISYS Fund Services which is not
affiliated with KeyCorp. Certain subsidiaries of KeyCorp provide services to
the Victory Funds, including advisory services, and receive fees from the funds
for their services, as set forth in the prospectus.
For more information about
the Victory Funds, including
charges and expenses, request
a prospectus by calling
1-800-KEY-FUND
(1-800-539-3863).
Please read the prospectus
carefully before investing
or sending money.
- - NOT FDIC INSURED
- - NO BANK GUARANTEE
- - MAY LOSE VALUE
LOGO
VICTORY FUNDS
<PAGE>
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
LOGO
VICTORY FUNDS
1-800-KEY-FUND(SM)
(1-800-539-3863)
[LOGO] PRINTED ON RECYCLED PAPER AR/VP-001 10/96
<PAGE>
THE INSTITUTIONAL MONEY MARKET FUND
[GRAPHIC]
ANNUAL
REPORT
OCTOBER 31,
1996
[VICTORY FUNDS LOGO]
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C>
Shareholder Letter 2
Investment Review and Outlook 3
Fund Review and Commentary
- ---------------------------------------------------------
Introduction to Victory Institutional
Money Market Fund 4
Portfolio Manager Comments 5
Glossary of Investment Terms 6
Schedule of Investments 7
Statement of Assets and Liabilities 10
Statement of Operations 11
Statement of Changes in Net Assets 12
Notes to Financial Statements 13
Financial Highlights 15
Report of Independent Accountants 16
Special Shareholder Meeting inside back cover
</TABLE>
NOT FDIC INSURED
Shares of The Victory Funds are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, any KeyCorp bank, KeyCorp Mutual Fund
Advisers, Inc., or their affiliates, and are subject to investment risks,
including possible loss of the principal amount invested.
KeyCorp Mutual Fund Advisers, Inc. ("KMFA"), a subsidiary of KeyCorp, is the
investment adviser to The Victory Portfolios ("The Victory Funds"). The Victory
Funds are sponsored and distributed by BISYS Fund Services, which is not
affiliated with KeyCorp or its subsidiaries. KMFA receives a fee for its
services from The Victory Funds.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus for The Victory Funds.
1
<PAGE>
LETTER TO OUR SHAREHOLDERS
Welcome to the Victory Institutional Money Market Fund's annual report for the
fiscal year ended October 31, 1996. This period has seen a remarkably good
investment climate, although uncertainty about interest rate movements
introduced some uncertainty into the markets. In the pages that follow, your
portfolio manager discusses his investment strategy and the resulting
performance. This commentary, along with the related financial data, provides
comprehensive information about your investments.
Assets in the Victory Institutional Money Market Fund increased by an impressive
102.4% over the past year. A sizeable portion of this increase was in the Select
Share Class, which stood at $373.1 million at fiscal year ended October 31,
1996. This growth in Fund assets is a testimony of your confidence in Victory.
We encourage you to read the annual report carefully and share any comments you
may have. Thank you for choosing to invest in the Victory Funds and best wishes
for a healthy and prosperous New Year.
/s/ Leigh A. Wilson
- --------------------------
Leigh A. Wilson, President
The Victory Funds
2
<PAGE>
INVESTMENT REVIEW AND OUTLOOK
In our opinion, as of November 12, 1996
Over the past year, the economy grew at a moderate pace overall. Despite a hefty
4.8% annualized increase in GDP (Gross Domestic Product) in the second quarter
of 1996, the pace of economic growth slowed in the third quarter settling to a
more moderate and sustainable level of approximately 2%. This slowdown helped
ease concerns of rising inflation which, despite a tight labor market and rising
wages, has remained tamed. Job growth was one of the bright stars in the economy
this past year, driving unemployment to a seven year low of 5.1%. A tight labor
market nudged average hourly earnings to its highest rate of increase during the
current expansion and helped boost consumer confidence considerably in the final
months of the year.
Intensifying domestic and foreign competition prevented most companies from
passing higher wage costs on to the final consumer in the form of higher prices.
Corporate margins have experienced some pressure as a result, but companies have
tried to offset this squeeze by better managing their employee benefits' costs.
Overall, cost control and limited increases in consumer prices have helped keep
inflation at bay.
Should sluggish growth in corporate profits continue, it could lead to fewer new
jobs and higher unemployment in 1997, which could, in turn, limit income growth
and restrain consumption. Under this scenario, we think real GDP growth is
likely to slow to 1.0%-2.0%, with a bias towards the lower end of the range.
Despite higher labor costs, other factors will likely keep inflation at moderate
levels. We expect the Consumer Price Index will be approximately 2.5% in the
next twelve to eighteen months.
Should this economic scenario prove correct, long-term interest rates are likely
to move lower in fiscal 1997, to a new range between 6.25% and 7.00%. Short-term
interest rates have room to move lower as well, and we think that the Federal
Reserve may ease interest rates sometime in the first half of 1997. Keeping in
mind that 1996 was the sixth year of the current economic expansion, 1997 is
likely to bring continuing volatility as both the fixed income and equity
markets wait and prepare for a slowing economy.
3
<PAGE>
INTRODUCTION TO THE VICTORY INSTITUTIONAL MONEY MARKET FUND
ITS OBJECTIVES AND PERMISSIBLE INVESTMENTS
THE INVESTMENT PROCESS
Money market funds may be most appropriate for investors looking for stability
of principal and income. They are sometimes used by investors who have
short-term investment goals and for individuals who need quick and easy access
to their funds.
Depending on the objectives of each fund, money market mutual funds usually
invest in shorter-term securities such as U.S. Treasury bills, Commercial Paper,
Certificates of Deposit and Repurchase Agreements.
[GRAPHIC]
CREDIT REVIEW
INTEREST RATE ENVIRONMENT
SECTOR SCREEN
DIVERSIFIED FUND
The Victory Institutional
Money Market FUnd
Michael Gabriel
Portfolio Manager
Portfolio Manager Michael Gabriel joined Society Asset Management, Inc. ("SAM")
in March, 1995 as a Vice President of Fixed Income Management. He was previously
with Boston Safe Deposit & Trust Company. Mr. Gabriel received a B.S. in
Marketing and an MBA from Fordham University.
4
<PAGE>
VICTORY
INSTITUTIONAL
MONEY MARKET
FUND
WHAT WAS THE INTEREST RATE ENVIRONMENT FACING THE FUND FOR THE PAST FISCAL
YEAR?
While the Federal Reserve engaged in an easy money policy in 1995, the
first three quarters of 1996 reflected a dramatic shift in expectations
toward a tightened monetary policy. While economic news supported the
expectation of rising interest rates, the Fed refrained from increasing
rates through the third quarter of 1996, due to the positive trends of
various inflation indicators.
HOW DOES THIS TRANSLATE TO STRATEGY AS FAR AS THE FUND YOU MANAGE IS CONCERNED?
I shorted the Funds weighted average maturity in anticipation of a tightening
monetary policy. Remember, any change from expected monetary policy can have an
immediate impact on a money market portfolio. A Fund with a shorter average
weighted maturity can shift strategies quicker in times of uncertain economic
monetary policy.
DESPITE THE SHORTER AVERAGE WEIGHTED MATURITY OF THE FUND, YOU WERE STILL ABLE
TO OFFER YIELDS THAT WERE COMPETITIVE RELATIVE TO SIMILAR FUNDS. HOW DID YOU
ACHIEVE THIS?
First, I used floating rate securities, which offered higher yields without
exposing the Fund to extended maturity risk. In addition, I made timely
purchases of longer term securities and avoided high priced securities early in
1996.
WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD?
I intend to shift the portfolios' average weighted maturity in line with peer
group averages. The current Federal monetary policy should allow the Fund to
acquire longer term securities in a positive yield curve environment. As long as
the reported inflation numbers remain at 3% or less, monetary policy should
remain constant, because inflation fears prompt Fed action much more so than
economic growth indicators do. If these expectations hold true, investors may
continue to receive competitive short term rates on their portfolios.
The Victory Institutional Money Market Fund
<TABLE>
<CAPTION>
As of October 31, 1996
INSTITUTIONAL
MONEY MARKET INSTITUTIONAL
INVESTOR CLASS SELECT CLASS
<S> <C> <C>
Seven-Day Yield 5.21% 4.97%
Seven-Day Effective Yield 5.35% 5.10%
One Year Total Return 5.41% 5.16%
</TABLE>
<TABLE>
<CAPTION>
Maturity Schedule(1)
As of 10/31/96
Days to INSTITUTIONAL
Maturity MONEY MARKET
<S> <C>
Less than 30 Days 66.1%
31 to 60 Days 17.3%
61 to 90 Days 1.8%
Greater than 90 Days 14.8%
The performance data quoted represent past performance and are not indicative of
future results. Yields will fluctuate with market conditions. The Institutional
Money Market Fund and Select and Investor Class yields reflect the waiver of a
portion of certain fees for various periods. In such instances and without such
waiver of fees, the current 7-day yields would have been 5.00%, and 4.73% and
the 7 day effective yield would have been 5.14% and 4.85%, for the Investor and
Select Classes, respectively. There can be no assurance that the Victory
Institutional Money Market Fund will be able to maintain a stable net asset
value of $1.00 per share. An investment in the Victory Institutional Money
Market Fund is neither insured nor guaranteed by the U.S. Government.
(1)The Funds' Maturity Schedule presented may not be representative of current
or future investment strategies. Fund strategies may change at any time.
</TABLE>
5
<PAGE>
GLOSSARY OF OFTEN-USED INVESTMENT TERMS
BOND RATING
An indication of the risk of a bond issue, as determined by a bond rating
service (such as Moody's or Standard & Poor's). Bonds with the highest ratings
generally (AAA) have the lowest credit risk.
PAR VALUE
The face value of a security. A bond selling at par is worth the same dollar
amount it was issued for or at which it will be redeemed at maturity--typically,
$1000 per bond.
PORTFOLIO
Any combination of more than one security. A mutual fund typically has a large,
diversified portfolio of securities or investments in order to help reduce
investment risks.
SETTLEMENT DATE
Date by which an executed order must be settled, either by a buyer paying for
the securities with cash or by a seller delivering the securities and receiving
the proceeds of the sale for them. In a "regular way" delivery of stocks and
bonds, the settlement date is three business days after the trade was executed.
For listed options and government securities, settlement is required by the next
business day.
SHORT-TERM CAPITAL GAIN (LOSS)
A capital gain (loss) arises from an asset which was held six months or less.
Short-term capital gains are taxed at the taxpayer's ordinary tax rate.
CALL OPTIONS
A contract for the right to buy a specified number of shares at a predetermined
price on or before a stated date. The purchaser of a call option believes the
underlying stock price will rise, and he purchases the call option from an
investor equally convinced the underlying stock price will either stay the same
or fall.
PUT OPTION
A specified contract for the right to sell a specified number of shares at a
predetermined price on or before a stated date. The purchaser of a put option
believes the underlying stock price will fall, and he purchases the put option
from an investor equally convinced the price will stay the same or rise.
PROSPECTUS
A document providing investors information about the fund's investment
objective, policies, and risks. It also provides the basic information and
details of the funds operations and services; information on sales charges;
redemption rights; tax status of the dividends and income; expenses; the fund
custodian and other service providers; and how to buy and sell shares.
DOLLAR COST AVERAGING OR CONSTANT DOLLAR PLAN*
A method of accumulating assets by investing a fixed amount of dollars in
securities at set intervals. The result is that more shares are purchased when
the price is low and fewer shares are purchased when the price is high. The
overall cost is lower than it would be if a constant number of shares were
bought at set intervals.
CONVERTIBLE SECURITIES
Corporate bonds and preferred stocks that carry an option to be exchanged for,
or "converted" into, a set number of shares of common stock.
* This strategy does not assure a profit and does not protect against loss in
declining markets. An investor should be prepared to continue the program
of investing at regular intervals, even during economic downturns, in order
to fully utilize a dollar cost averaging program.
6
<PAGE>
Schedule of Investments
THE VICTORY PORTFOLIOS October 31, 1996
INSTITUTIONAL MONEY MARKET FUND (Amounts in Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C>
Banker's Acceptances (1.0%)
$10,000 FNB Chicago,
5.50%, 12/27/96 $ 9,914
- -------------------------------------------------------------------------------
TOTAL BANKER'S ACCEPTANCES 9,914
- -------------------------------------------------------------------------------
Certificates Of Deposit (1.6%)
2,000 Deutsche Bank,
5.94%, 6/10/97 1,998
15,000 Dresdner Bank,
5.43%, 12/27/96 15,002
- -------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT 17,000
- -------------------------------------------------------------------------------
Commercial Paper (48.0%)
5,500 Ameritech Corp., 5.40%, 1/30/97 5,426
13,219 Arizona Higher Education Loan Program,
5.30%, 12/18/96 13,128
25,000 Asset Securitization Co-op Corp.,
5.35%, 12/9/96 24,859
5,000 Avco Financial Services,
5.31%, 1/29/97 4,934
5,000 Banco Nacional de Comercio Exterior,
5.40%, 12/5/96, LOC Societe Generale 4,974
5,000 Banco Nacional de Comercio Exterior,
5.40%, 12/9/96, LOC Societe Generale 4,972
9,000 CIMC,
5.45%, 1/9/97, LOC Societe Generale 8,906
5,000 Coca-Cola Co.,
5.22%, 11/12/96 4,992
20,000 Coca-Cola Co.,
5.23%, 12/2/96 19,910
23,000 Fleet Funding Corp.,
5.30%, 11/15/96 22,953
18,000 Fleet Funding Corp.,
5.27%, 12/2/96 17,918
7,000 Ford Motor Credit Corp.,
5.26%, 12/18/96 6,952
35,000 Ford Motor Credit Corp.,
5.44%, 1/29/97 34,529
50,000 General Electric Capital Corp.,
5.57%, 11/1/96 50,000
10,000 Merrill Lynch Corp.,
5.26%, 11/15/96 9,980
5,000 Merrill Lynch Corp.,
5.28%, 12/2/96 4,977
15,000 Morgan Stanley Group, Inc.,
5.70%, 11/1/96 15,000
13,877 Nebraska Higher Education Loan Program,
5.35%, 11/4/96 13,871
$ 4,020 Nebraska Higher Education Loan Program,
5.28%, 11/25/96 $ 4,006
20,000 Pemex,
5.33%, 12/27/96 19,834
10,131 Retailer Funding Corp.,
5.33%, 11/5/96 10,125
30,850 Sanwa Business Credit Corp.,
5.37%, 11/4/96 30,836
15,000 Sanwa Business Credit Corp.,
5.37% 11/6/96 14,989
10,000 Sharp Electronics Corp.,
5.42%, 11/22/96 9,968
31,400 Sheffield Receivables Corp.,
5.27%, 11/8/96 31,368
15,000 Smith Barney, Inc.,
5.26%, 11/14/96 14,972
10,000 Sony Capital Corp.,
5.26%, 12/23/96 9,924
10,000 Toshiba America, Inc.,
5.47%, 1/2/97 9,906
6,000 Toshiba Capital,
5.35% 11/19/96 5,984
10,000 Toyota Motor Credit Corp.,
5.23%, 11/15/96 9,980
10,000 Toyota Motor Credit Corp.,
5.24%, 12/20/96 9,929
8,000 Unibanco,
5.48%, 1/31/97,
LOC Westdeutsche Landsbank 7,889
10,000 Vehicle Services,
5.52%, 12/5/96 9,948
9,500 Vehicle Services,
5.34%, 11/15/96,
LOC Nationsbank Texas 9,480
24,400 WMX Technologies, Inc.,
5.28%, 11/4/96 24,389
- -------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER 501,808
- -------------------------------------------------------------------------------
Corporate Bonds (0.3%)
1,515 Professional Center Associates Ltd.,
5.50%, 8/1/15 1,515
2,073 Sedlak Interiors, Inc.,
5.43%, 5/1/10 2,073
- -------------------------------------------------------------------------------
Total Corporate Bonds 3,588
- -------------------------------------------------------------------------------
Corporate Notes (23.7%)
2,025 Akron Welding,
5.50%*, 12/1/01**,
LOC National City Bank 2,025
5,000 American Express Centurion,
5.38%*, 1/13/97 5,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Schedule of Investments - Continued
THE VICTORY PORTFOLIOS October 31, 1996
INSTITUTIONAL MONEY MARKET FUND (Amounts in Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C>
$ 10,000 Anne Arundel Medical,
5.45%*, 7/1/24** $ 10,000
10,000 Armstrong County St. Francis Hospital,
5.45%*, 9/1/17** 10,000
3,000 Associates Corp.,
6.75%, 6/13/97 3,016
4,000 Associates Corp.,
5.88%, 8/15/97 3,990
7,000 AT&T Capital Corp.,
5.45%*, 11/1/96 7,000
14,000 AT&T Capital Corp.,
5.41%*, 11/29/96 14,000
2,220 Automated Packaging System,
5.50%*, 10/1/08**,
LOC National City Bank 2,220
7,000 Bear Stearns Co.,
5.44%*, 5/14/97 7,000
6,000 Bear Stearns Co.,
5.91%*, 12/16/96 6,002
1,400 Buckeye Corrugated, Inc. Project,
5.50%*, 1/3/05**,
LOC National City Bank 1,400
3,090 Burton I Saltzman,
5.50%*, 8/1/08** 3,090
5,000 Dean Witter Discover & Co.,
5.69%*, 2/3/97 5,002
1,250 Fairborn Christel Mann,
5.40%*, 6/10/10** 1,250
25,000 General American Life Insurance,
5.70%*, 12/31/89, GIC** 25,000
4,875 Hannah Blvd. Limited Partnership,
5.39%*, 9/1/15**,
LOC Comerica Bank 4,875
5,000 Huntington National Bank,
5.40%*, 11/13/96 5,000
7,000 Huntington National Bank,
5.36%*, 6/27/97 6,995
9,000 Huntington National Bank,
5.85%, 9/30/97 9,000
6,000 Industrial Development Authority
of Bedford, VA,
5.70%*, 12/12/96 6,000
1,680 Industrial Dimensions, Inc.,
5.50%*, 1/1/00**,
LOC National City Bank 1,680
25,000 Lehman Government Securities Master Note,
5.71%*, 1/1/99** 25,000
6,000 Lexington Financial Services,
5.45%*, 2/1/26** 6,000
2,050 Maximum Principal Mubea Project,
5.50%*, 12/1/04** 2,050
1,000 Miami Valley Steel,
5.50%*, 2/1/16** 1,000
$ 2,340 Monticello Investments,
5.50%*, 7/1/04** $ 2,340
7,000 Morgan Stanley Group, Inc.,
5.66%*, 1/31/97 7,001
13,000 Morgan Stanley Group, Inc.,
5.73%*, 3/15/01** 13,000
500 Perfection Corp.,
5.50%*, 4/1/09** 500
3,000 Phillip Morris Cos., Inc.,
8.75%, 6/15/97 3,050
6,000 PNC Bank,
5.28%*, 3/4/97 5,998
2,250 Pomeroy Investments,
5.40%*, 9/1/15** 2,250
25,000 Republic New York Corp.,
5.53%*, 1/1/99** 25,000
14,600 Sea River Maritime, Inc.,
5.42%*, 10/1/11** 14,600
450 Tube Products,
5.50%*, 11/1/09** 450
- -------------------------------------------------------------------------------
TOTAL CORPORATE NOTES 247,784
- -------------------------------------------------------------------------------
Municipal Bonds (0.1%)
1,030 Ottawa County Michigan Series C,
5.60%*, 3/1/16**, LOC Old Kent Bank 1,030
- -------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS 1,030
- -------------------------------------------------------------------------------
U.S. Government Agencies (16.5%)
FEDERAL FARM CREDIT BANK:
7,000 5.60%, 11/1/96 7,000
7,000 5.93%, 7/1/97 7,009
FEDERAL HOME LOAN BANK:
6,000 5.38%, 3/14/97 6,000
6,000 5.40%, 3/25/97 5,997
9,000 4.25%, 6/30/97 8,898
FEDERAL HOME LOAN MORTGAGE CORP.:
8,600 5.34%, 12/13/96 8,546
3,500 5.70%, 3/27/97 3,500
FEDERAL NATIONAL MORTGAGE ASSOC.:
10,000 5.60%, 11/1/96 10,000
25,000 5.36%*, 5/25/99** 25,000
33,000 5.33%*, 7/26/99** 33,000
STUDENT LOAN MORTGAGE ASSOC.:
1,000 5.54%*, 11/27/96 1,000
7,250 5.37%*, 9/3/97 7,246
5,000 6.00%, 9/12/97 5,000
1,190 5.53%*, 10/30/97 1,192
4,000 5.37%*, 9/28/98** 4,000
6,000 5.39%*, 1/13/99** 6,000
32,500 5.40%*, 8/2/99** 32,500
- -------------------------------------------------------------------------------
TOTAL U.S GOVERNMENT AGENCIES 171,888
- -------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Schedule of Investments - Continued
THE VICTORY PORTFOLIOS October 31, 1996
INSTITUTIONAL MONEY MARKET FUND (Amounts in Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMORTIZED
AMOUNT SECURITY DESCRIPTION COST
<S> <C> <C>
U.S. Treasury Notes (1.5%)
$ 6,000 8.50%, 4/15/97 $ 6,077
10,000 5.75%, 9/30/97 9,995
- -------------------------------------------------------------------------------
TOTAL U.S. TREASURY NOTES 16,072
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS 969,084
- -------------------------------------------------------------------------------
Repurchase Agreements (8.6%)
45,000 Donaldson-Lufkin Jenrette Securities Corp.,
5.55%, 11/1/96,
(Collateralized by $147,854 various
U.S. Treasury Securities, 0.00-14.25%,
11/15/96-11/15/24,
market value-$45,900) 45,000
44,488 Lehman Brothers, Inc.,
5.55%, 11/1/96,
(Collateralized by $45,382 U.S.
Treasury Notes, 6.13%, 8/31/98,
market value-$45,400) 44,488
- -------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS 89,488
- -------------------------------------------------------------------------------
TOTAL (COST $1,058,572)(a) $1,058,572
===============================================================================
- --------------
Percentages indicated are based on net assets of $1,044,665.
(a) Cost and value for federal income tax and financial reporting purposes are
the same.
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate,
which will change periodically, is based upon bank prime rates or an index
of market interest rates. The rate reflected on the Schedule of Portfolio
Investments is the rate in effect at October 31, 1996.
** Put and demand features exist allowing the Fund to require the repurchase
of the investment within variable time periods ranging from daily, weekly,
monthly, or semi-annually.
LOC -- Letter of credit
GIC -- Guaranteed Insurance Contract
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Statement of Assets and Liabilities
October 31, 1996
THE VICTORY PORTFOLIOS (Amounts in Thousands, except per share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSTITUTIONAL
MONEY MARKET
FUND
<S> <C>
ASSETS:
Investments, at amortized cost $ 969,084
Repurchase agreements, at cost 89,488
- -------------------------------------------------------------------------------
Total 1,058,572
Interest receivable 4,055
Prepaid expenses and other assets 4
- -------------------------------------------------------------------------------
Total Assets 1,062,631
- -------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 4,478
Payable to brokers for investments purchased 13,128
Accrued expenses and other payables:
Investment advisory fees 114
Administration fees 52
Accounting and transfer agent fees 23
Shareholder service fees -- Select Shares 76
Other 95
- -------------------------------------------------------------------------------
Total Liabilities 17,966
- -------------------------------------------------------------------------------
NET ASSETS:
Capital 1,044,593
Undistributed net investment income 76
Accumulated undistributed net realized gains (losses)
from investment transactions (4)
- -------------------------------------------------------------------------------
Net Assets $1,044,665
===============================================================================
Net Assets
Investor Shares $ 671,575
Select Shares 373,090
- -------------------------------------------------------------------------------
Total $1,044,665
===============================================================================
Outstanding units of beneficial interest (shares)
Investor Shares 671,567
Select Shares 373,094
- -------------------------------------------------------------------------------
Total 1,044,661
===============================================================================
Net asset value
Offering and redemption price per share -- Investor Shares $ 1.00
===============================================================================
Offering and redemption price per share -- Select Shares $ 1.00
===============================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Statement of Operations
For the Year Ended October 31, 1996
THE VICTORY PORTFOLIOS (Amounts in Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSTITUTIONAL
MONEY MARKET
FUND
<S> <C>
INVESTMENT INCOME:
Interest income $ 42,840
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 1,936
Administration fees 1,162
Shareholder service fees -- Select Shares 358
Accounting fees 86
Custodian fees 154
Legal and audit fees 183
Trustees' fees and expenses 30
Transfer agent fees 60
Registration and filing fees 50
Printing fees 47
Other 11
- -------------------------------------------------------------------------------
Total Expenses 4,077
Expenses voluntarily reduced (1,630)
- -------------------------------------------------------------------------------
Net Expenses 2,447
- -------------------------------------------------------------------------------
Net Investment Income 40,393
- -------------------------------------------------------------------------------
REALIZED GAINS FROM INVESTMENTS:
Net realized gains from investment transactions 2
- -------------------------------------------------------------------------------
Change in net assets resulting from operations $ 40,395
- -------------------------------------------------------------------------------
===============================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Statement of Changes in Net Assets
THE VICTORY PORTFOLIOS (Amounts in Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSTITUTIONAL MONEY MARKET FUND
-------------------------------------------------
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, APRIL 30,
1996 1995(a) 1995
FROM INVESTMENT ACTIVITIES:
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 40,393 $ 14,833 $ 22,107
Net realized gains (losses) from
investment transactions 2 -- 20
- ---------------------------------------------------------------------------------------------------
Change in net assets resulting from operations 40,395 14,833 22,127
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Investor Shares (33,269) (14,811) (21,993)
Select Shares (7,124) (22) --
In excess of net investment income -- (46) --
From net realized gains from investment
transactions (2) -- --
In excess of net realized gains from investment
transactions (24) -- --
- ---------------------------------------------------------------------------------------------------
Change in net assets from distributions to
shareholders (40,419) (14,879) (21,993)
- ---------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 2,708,661 648,875 1,197,333
Dividends reinvested 6,114 144 1,508
Cost of shares redeemed (2,186,101) (582,772) (1,290,390)
- ---------------------------------------------------------------------------------------------------
Change in net assets from capital transactions 528,674 66,247 (91,549)
- ---------------------------------------------------------------------------------------------------
Change in net assets 528,650 66,201 (91,415)
NET ASSETS:
Beginning of period 516,015 449,814 541,229
- ---------------------------------------------------------------------------------------------------
End of period $1,044,665 $ 516,015 $ 449,814
===================================================================================================
SHARE TRANSACTIONS:
Issued 2,708,661 648,875 1,197,333
Reinvested 6,114 144 1,508
Redeemed (2,186,101) (582,772) (1,290,390)
- ---------------------------------------------------------------------------------------------------
Change in shares 528,674 66,247 (91,549)
===================================================================================================
(a) Effective June 5, 1995, the Victory Institutional Money Market Portfolio
became the Institutional Money Market Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
THE VICTORY PORTFOLIOS Notes to Financial Statements
INSTITUTIONAL MONEY MARKET FUND October 31, 1996
- -------------------------------------------------------------------------------
1. ORGANIZATION:
The Victory Portfolios ( the "Funds") were organized on February 5, 1986, and
are registered under the Investment Company Act of 1940, as amended, (the "1940
Act") as an open-end investment company established as a Delaware business
trust. The Funds are authorized to issue an unlimited number of shares which are
units of beneficial interest without par value. The Funds presently offer shares
of twenty-four active funds. The accompanying financial statements and financial
highlights are those of the Institutional Money Market Fund (the "Fund") only.
The Fund is authorized to issue two classes of shares: Investor Shares and
Select Shares. Each class of shares has identical rights and privileges except
with respect to fees paid under shareholders services plans, expenses allocable
exclusively to each class of shares, voting rights on matters affecting a single
class of shares, and the exchange privilege of each class of shares.
The Fund seeks to obtain as high a level of current income as is consistent with
preserving capital and providing liquidity.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION:
Investments of the Fund are valued at either amortized cost which approximates
market value, or at original cost which, combined with accrued interest,
approximates market value. Under the amortized cost valuation method, discount
or premium is amortized on a constant basis to the maturity of the security. In
addition, the Fund may not (a) purchase any instrument with a remaining maturity
greater than 397 days unless such instrument is subject to a demand feature, or
(b) maintain a dollar-weighted- average portfolio maturity which exceeds 90
days.
SECURITIES TRANSACTIONS AND RELATED INCOME:
Securities transactions are accounted for on the date the security is purchased
or sold (trade date). Interest income is recognized on the accrual basis and
includes, where applicable, the pro rata amortization of premium or accretion of
discount. Gains or losses realized from sales of securities are determined by
comparing the identified cost of the security lot sold with the net sales
proceeds.
REPURCHASE AGREEMENTS:
The Fund may acquire repurchase agreements from financial institutions such as
banks and broker-dealers which the Funds' investment adviser deems creditworthy
under guidelines approved by the Board of Trustees, subject to the seller's
agreement to repurchase such securities at a mutually agreed-upon date and
price. The repurchase price generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates, which may be more
or less than the rate on the underlying Fund securities. The seller, under a
repurchase agreement, is required to maintain the value of collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest). Securities subject to repurchase agreements are held by the
Funds' custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS:
The Fund may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and/or yield, thereby, involving the risk that the price
and/or yield obtained may be more or less than those available in the market
when delivery takes place. At the time a Fund makes the commitment to purchase a
security on a when-issued basis, the Fund records the transaction and reflects
the value of the security in determining net asset value. Normally, the
settlement date occurs within one month of the purchase. A segregated account is
established and the Fund is required to maintain cash and marketable securities
at least equal in value to commitments for when-issued securities. Securities
purchased on a when-issued basis do not earn income until settlement date.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared daily and paid monthly for the
Fund. Distributable net realized capital gains, if any, are declared and
distributed at least annually.
Dividends from net investment income and from net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These differences are primarily
due to differing treatments for mortgage-backed securities, expiring capital
loss carryforwards and deferrals of certain losses. Permanent book and tax basis
differences are reflected in the components of net assets.
FEDERAL INCOME TAXES:
It is the policy of the Fund to continue to qualify as a regulated investment
company by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Internal Revenue Code, and
to make distributions of net investment income and net realized capital gains
sufficient to relieve it from all, or substantially all, federal income taxes.
13
<PAGE>
THE VICTORY PORTFOLIOS Notes to Financial Statements-Continued
INSTITUTIONAL MONEY MARKET FUND October 31, 1996
- -------------------------------------------------------------------------------
OTHER:
Expenses that are directly related to the Fund are charged directly to the Fund.
Other operating expenses of the Funds are prorated to each Fund on the basis of
relative net assets or other appropriate basis. Fees paid under the Fund's
shareholder services plan are borne by the specific class of shares to which
they apply.
Certain prior year balances have been reclassified to be consistent with current
year presentation.
3. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Fund by KeyCorp Mutual Fund
Advisers, Inc. ("the Adviser"), a wholly owned subsidiary of KeyCorp Asset
Management Holdings, Inc., which is a wholly owned subsidiary of KeyBank
National Association ("Key"), formerly Society National Bank, a wholly owned
subsidiary of KeyCorp. Under the terms of the investment advisory agreement, the
Adviser is entitled to receive fees based on a percentage of the average daily
net assets of the Fund. KeyTrust Company of Ohio, serving as custodian for the
Fund, received custodian fees in addition to reimbursement of out-of-pocket
expenses incurred.
BISYS Fund Services (the "Administrator"), an indirect, wholly-owned subsidiary
of The BISYS Group, Inc. ("BISYS") serves as the administrator and the
distributor to the Fund. Certain officers of the Fund are affiliated with BISYS.
Such officers receive no direct payments or fees from the Fund for serving as
officers of the Fund.
In accordance with the Shareholder Servicing Plan for the Select Shares, the
Fund may enter into Shareholder Service Agreements under which the Fund pays
fees of up to 0.25% of the average daily net assets of such class for fees
incurred in connection with the personal service and maintenance of accounts
holding the shares of such class. Such agreements are entered into between the
Victory Portfolios and various shareholder servicing agents, including the
Distributor, Key Trust Company of Ohio, N.A. and its affiliates, and other
financial institutions and securities brokers (each, a "Shareholder Servicing
Agent"). Shareholder Servicing Agents may periodically waive all or a portion of
their respective shareholder servicing fees with respect to the Fund.
Under the terms of the administration agreement, the Administrator's fee is
computed at the annual rate of 0.15% of the average daily net assets of the
Fund.
Fees may be voluntarily reduced to assist the Fund in maintaining competitive
expense ratios. Additional information regarding related party transactions is
as follows for the year ended October 31, 1996:
<TABLE>
<CAPTION>
MUTUAL FUND
INVESTMENT ADVISORY FEES ADMINISTRATION FEES ACCOUNTANT FEES CUSTODIAN FEES
PERCENTAGES OF
AVERAGE DAILY
NET ASSETS
(BEFORE VOLUNTARY VOLUNTARY VOLUNTARY
FEE REDUCTIONS) FEE REDUCTIONS FEE REDUCTIONS ANNUAL FEES ANNUAL FEES
(000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
Institutional Money Market Fund 0.25% $933 $697 $86 $154
</TABLE>
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares for the Fund were as follows (amounts in
thousands):
<TABLE>
<CAPTION>
INSTITUTIONAL MONEY MARKET FUND
--------------------------------------------------
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, APRIL 30,
1996 1995(a) 1995
<S> <C> <C> <C>
CAPITAL AND SHARE TRANSACTIONS:
Investor Shares(b):
Issued $1,367,293 $629,396 $1,197,333
Reinvested 493 133 1,508
Redeemed (1,200,727) (574,761) (1,290,390)
- ------------------------------------------------------------------------------------------
Total $ 167,059 $ 54,768 $ 91,549
Select Shares(b):
Issued 1,341,368 19,479
Reinvested 5,621 11
Redeemed (985,374) (8,011)
- ------------------------------------------------------------------------------------------
Total 361,615 11,479
(a) Effective June 5, 1995, the Fund designated the existing shares as
Institutional Shares and commenced offering Service Shares.
(b) Effective March 1, 1996, the Fund redesignated Institutional Shares as
Investor Shares and Service Shares as Select Shares.
</TABLE>
14
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
<TABLE>
<CAPTION>
INSTITUTIONAL MONEY MARKET FUND
------------------------------------------------------------------------------------------------
INVESTOR SHARES(e) SELECT SHARES(e)
YEAR SIX MONTHS YEAR JUNE 5, 1995
ENDED ENDED ENDED TO YEAR ENDED APRIL 30,
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, --------------------------------------
1996 1995(d) 1996 1995(a)(d) 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ----------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.053 0.290 0.050 0.012 0.500 0.028 0.032 0.051
Distributions
Net investment income (0.053) (0.290) (0.050) (0.012) (0.500) (0.028) (0.032) (0.051)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
============================================================================================================================
Total Return 5.41% 2.90%(b) 5.16% 1.23%(b) 4.91% 2.80% 3.26% 5.21%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Period (000) $671,575 $504,536 $373,090 $ 11,479 $449,814 $541,229 $155,097 $177,640
Ratio of expenses to
average net assets 0.27% 0.26%(c) 0.52% 0.51%(c) 0.27% 0.55% 0.43% 0.30%
Ratio of net investment
income to average
net assets 5.27% 5.69%(c) 4.97% 5.33%(c) 4.91% 2.78% 3.19% 5.06%
Ratio of expenses to
average net assets* 0.48% 0.49%(c) 0.73% 1.00%(c) 0.51% 0.55% 0.48% 0.42%
Ratio of net investment
income to average
net assets* 5.06% 5.46%(c) 4.77% 4.84%(c) 4.67% 2.78% 3.14% 4.94%
- ----------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and /or reimbursements had not occurred,
the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Institutional Money Market Portfolio
became the Institutional Money Market Fund, and the Fund designated the
existing shares as Institutional Shares and commenced offering Service
Shares.
(e) Effective March 1, 1996, the Fund redesignated Institutional Shares as
Investor Shares and Service Shares as Select Shares.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
The Victory Portfolios
We have audited the accompanying statement of assets and liabilities of the
Victory Institutional Money Market Fund, including the schedule of investments,
as of October 31, 1996, and the related statements of operations and changes in
net assets, and the financial highlights for each period presented except as
noted in the next paragraph. These financial statements and financial highlights
are the responsibility of The Victory Portfolios' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
The Victory Institutional Money Market Fund's statement of changes in net
assets for the year ended April 30, 1995 and the financial highlights for each
of the four years in the period ended April 30, 1995 were audited by other
auditors, whose report dated June 20, 1995 expressed an unqualified opinion on
those financial statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation and verification by examination
of securities owned as of October 31, 1996, by correspondence with the
custodians and brokers or other auditing procedures where confirmations from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above, except as noted in the second paragraph, present fairly, in all
material respects, the financial position of the Victory Institutional Money
Market Fund as of October 31, 1996, and the results of its operations, the
changes in its net assets and the financial highlights for the periods then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
December 13, 1996
16
<PAGE>
THE VICTORY PORTFOLIOS Special Shareholder Meeting (Unaudited)
- -------------------------------------------------------------------------------
On December 1, 1995, a special meeting of the shareholders of The Victory
Portfolios was held to consider various proposals.
The Shareholders approved each of the following proposals (with actual
vote tabulations):
With respect to all of the Funds:
1. To convert The Victory Portfolios to a Delaware business trust.
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
<S> <C> <C> <C> <C>
Institutional Money Market Fund 294,665,306 0 2,895,778 210,589,232
</TABLE>
2. To designate KeyCorp Mutual Fund Advisers, Inc. as Investment adviser
pursuant to a new Investment Advisory agreement between each of the
Funds and KeyCorp Mutual Fund Advisers, Inc.
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
<S> <C> <C> <C> <C>
Institutional Money Market Fund 294,530,806 112,122 2,918,156 210,589,232
</TABLE>
3a. To elect the following Trustees:
<TABLE>
<CAPTION>
TRUSTEE NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED
<S> <C> <C> <C>
Robert G. Brown 2,080,048,334 0 81,016,242
Edward P. Campell 2,085,377,298 0 75,687,281
Dr. Harry Gazella 2,084,165,281 0 76,899,296
Dr. Thomas F. Morrissey 2,084,083,891 0 76,980,686
Stanley I. Landgraf 2,081,571,794 0 79,492,783
Leigh A. Wilson 2,084,944,888 0 76,119,690
Dr. H. Patrick Swygert 2,083,840,673 0 77,223,904
</TABLE>
3b. To select Coopers & Lybrand L.L.P. as independent accountants:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
<S> <C> <C> <C> <C>
Institutional Money Market Fund 294,604,426 60,878 2,895,778 210,589,232
</TABLE>
4. With respect to all of the Funds other than the Fund for Income and
Special Growth Fund, to designate Society Asset Management, Inc. as
Sub-Investment Adviser pursuant to a new sub-investment advisory agreement
between Society Asset Management, Inc. and KeyCorp Mutual Fund Advisers,
Inc.:
<TABLE>
<CAPTION>
FUND NAME VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINED NOT VOTED
<S> <C> <C> <C> <C>
Institutional Money Market Fund 294,530,806 112,122 2,918,156 210,589,232
</TABLE>
<PAGE>
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
[VICTORY FUNDS LOGO]
1-800-KEY-FUND(SM)
(1-800-539-3863)
AR/IMMVF 10/96
THE VICTORY PORTFOLIOS
DISTRIBUTION
AND SERVICE PLAN
1. This Distribution and Services Plan (the "Plan") when effective in
accordance with its terms, shall be the written plan contemplated by Rule 12b-1
under the Investment Company Act of 1940 (the "1940 Act") of each of the Funds
set forth on Schedule I (individually, a "Fund" and collectively, the "Funds")
as amended from time to time, each a duly established series of shares of The
Victory Portfolios, a Massachusetts Business Trust, registered as an open-end
investment company under the 1940 Act (the "Company").
2. The Company has entered into a separate Administration Agreement and
Distribution Agreement with respect to each Fund, under which the Distributor
uses all reasonable efforts, consistent with its other business, to secure
purchasers for each Fund's shares of beneficial interest ("shares"). Under the
Distribution Agreement, the Distributor pays, among other things, the expenses
of printing and distributing any prospectuses, reports and other literature used
by the Distributor, advertising, and other promotional activities in connection
with the offering of shares of the Fund for sale to the public. The Company has
entered into separate Investment Advisory Agreements with the party listed
opposite each Fund or Schedule I hereto (the "Investment Adviser"). It is
understood that the Administrator may reimburse the Distributor for these
expenses from any source available to it, including the administration fee paid
to the Administrator by the Funds.
3. The Investment Adviser, or any subadviser, may, subject to the approval
of the Trustees, make payments to third parties who render shareholder support
services, including but not limited to, answering routine inquiries regarding
the Funds, processing shareholder transactions and providing such other
shareholder and administrative services as the Company may reasonably request.
4. The Funds will not make separate payments as a result of this Plan to
the Investment Adviser, Administrator, Distributor or any other party, it being
recognized that the Funds presently pay, and will continue to pay, an investment
advisory fee to the Investment Adviser and an administration fee to the
Administrator. To the extent that any payments made by any Fund to the
Investment Adviser or Administrator, including payment of fees under the
Investment Advisory Agreement or the Administration Agreement, respectively,
should be deemed to be indirect financing of any activity primarily intended to
result in the sale of shares of the Fund within the context of Rule 12b-1 under
the 1940 Act, then such payments shall be deemed to be authorized by this Plan.
<PAGE>
5. This Plan shall become effective upon the first business day of the
month following approval by a vote of at least a "majority of the outstanding
voting securities of each Fund" (as defined in the 1940 Act), the Plan having
been approved by a vote of a majority of the Trustees of the Company, including
a majority of Trustees who are not interested persons of the Company (as defined
in the 1940 Act) and who have no direct or indirect financial interest in the
operation of this Plan or in any agreements related to this Plan (the
"Independent Trustees"), cast in person at a meeting called for the purpose of
voting on this Plan.
6. This Plan shall, unless terminated as hereinafter provided, remain in
effect from the date specified above until June 5, 1996, and from year to year
thereafter, provided, however, that such continuance is subject to approval
annually by a vote of a majority of the Trustees of the Company, including a
majority of the Independent Trustees, cast in person at a meeting called for the
purpose of voting on this Plan. This Plan may be amended at any time by the
Board of Trustees, provided that (a) any amendment to authorize direct payments
by each Fund to finance any activity primarily intended to result in the sale of
shares of the Funds, to increase materially the amount spent by the Funds for
distribution, or any amendment of the Investment Advisory Agreement or the
Administration Agreement to increase the amount to be paid by any Fund
thereunder shall be effective only upon approval by a vote of a majority of the
outstanding voting securities of the Fund, and (b) any material amendments of
this Plan shall be effective only upon approval in the manner provided in the
first sentence in this paragraph.
7. This Plan may be terminated at any time, without the payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of a
majority of the outstanding voting securities of each Fund.
8. During the existence of this Plan, the Trust shall require the
Investment Adviser and/or Distributor to provide the Company, for review by the
Company's Board of Trustees, and the Trustees shall review, at least quarterly,
a written report of the amounts expended in connection with financing any
activity primarily intended to result in the sale of shares of the Funds (making
estimates of such costs where necessary or desirable) and the purposes for which
such expenditures were made.
9. This Plan does not require the Investment Adviser or Distributor to
perform any specific type or level of distribution activities or to incur any
specific level of expenses for activities primarily intended to result in the
sale of shares of the Funds.
10. Consistent with the limitation of shareholder and Trustee liability as
set forth in the Company's Declaration of Trust, any obligations assumed by a
Fund pursuant to this Plan
2
<PAGE>
and any agreements related to this Plan shall be limited in all cases to each
Fund individually, and the assets of each Fund individually, and shall not
constitute obligations of any shareholder or other series or classes of shares
of the Company or of any Trustee.
11. If any provision of this Plan shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Plan shall not
be affected thereby.
IN WITNESS WHEREOF, the Company has executed this Plan on behalf of
each Fund listed on Schedule I, individually and not jointly, as of June 5,
1995.
THE VICTORY PORTFOLIOS
By: /s/ LEIGH A. WILSON
-----------------------------
3
<PAGE>
SCHEDULE I
Amended as of March 1, 1997
This Distribution Plan shall be adopted with respect to Class A shares of
the following Funds of The Victory Portfolios:
Government Bond Fund
National Municipal Bond Fund
New York Tax-Free Fund
This Distribution Plan shall be adopted with respect to the following Funds
of The Victory Portfolios:
Fund For Income Fund
Financial Reserves Fund
Institutional Money Market Fund
(Select Class and Investor Class)
Lakefront Fund
Ohio Municipal Money Market Fund
Real Estate Investment Fund
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<MULTIPLIER> 1,000
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<INVESTMENTS-AT-VALUE> 499102
<RECEIVABLES> 2003
<ASSETS-OTHER> 6
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 501111
<PAYABLE-FOR-SECURITIES> 2850
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2242
<TOTAL-LIABILITIES> 5092
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 496006
<SHARES-COMMON-STOCK> 496006
<SHARES-COMMON-PRIOR> 456366
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 496019
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26000
<OTHER-INCOME> 0
<EXPENSES-NET> 4047
<NET-INVESTMENT-INCOME> 21953
<REALIZED-GAINS-CURRENT> 13
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 21966
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 21953
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1282599
<NUMBER-OF-SHARES-REDEEMED> 1261167
<SHARES-REINVESTED> 18208
<NET-CHANGE-IN-ASSETS> 39753
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 4047
<AVERAGE-NET-ASSETS> 465089
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> .047
<PER-SHARE-GAIN-APPREC> .000
<PER-SHARE-DIVIDEND> .047
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> .870
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<NAME> VICTORY U.S. GOVERNMENT OBLIGATIONS
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<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 1359266
<INVESTMENTS-AT-VALUE> 1359266
<RECEIVABLES> 5414
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1364684
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6867
<TOTAL-LIABILITIES> 6867
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1357990
<SHARES-COMMON-STOCK> 1357969
<SHARES-COMMON-PRIOR> 965105
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 80
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 93
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1357817
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 65501
<OTHER-INCOME> 0
<EXPENSES-NET> 7317
<NET-INVESTMENT-INCOME> 58184
<REALIZED-GAINS-CURRENT> 24
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 58208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 58184
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3877755
<NUMBER-OF-SHARES-REDEEMED> 3497927
<SHARES-REINVESTED> 13036
<NET-CHANGE-IN-ASSETS> 392888
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 154
<GROSS-ADVISORY-FEES> 4209
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7317
<AVERAGE-NET-ASSETS> 1202148
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> .049
<PER-SHARE-GAIN-APPREC> .000
<PER-SHARE-DIVIDEND> .049
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> .610
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 031
<NAME> VICTORY TAX-FREE MONEY MARKET FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 343513
<INVESTMENTS-AT-VALUE> 343513
<RECEIVABLES> 2418
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 345935
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1139
<TOTAL-LIABILITIES> 1139
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<PAID-IN-CAPITAL-COMMON> 344791
<SHARES-COMMON-STOCK> 344791
<SHARES-COMMON-PRIOR> 307664
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 344796
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12018
<OTHER-INCOME> 0
<EXPENSES-NET> 2491
<NET-INVESTMENT-INCOME> 9527
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<NET-CHANGE-FROM-OPS> 9530
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<DISTRIBUTIONS-OF-INCOME> 9527
<DISTRIBUTIONS-OF-GAINS> 60
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<NUMBER-OF-SHARES-SOLD> 562564
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<SHARES-REINVESTED> 3035
<NET-CHANGE-IN-ASSETS> 37070
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<PER-SHARE-NII> .030
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<PER-SHARE-NAV-END> 1.000
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
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<SERIES>
<NUMBER> 041
<NAME> VICTORY OHIO REGIONAL STOCK FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
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<TOTAL-ASSETS> 45724
<PAYABLE-FOR-SECURITIES> 39
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<OTHER-ITEMS-LIABILITIES> 65
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<PAID-IN-CAPITAL-COMMON> 26252
<SHARES-COMMON-STOCK> 2523<F1>
<SHARES-COMMON-PRIOR> 2449<F1>
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<ACCUMULATED-NET-GAINS> 870
<OVERDISTRIBUTION-GAINS> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> 602
<NET-INVESTMENT-INCOME> 337
<REALIZED-GAINS-CURRENT> 869
<APPREC-INCREASE-CURRENT> 5662
<NET-CHANGE-FROM-OPS> 6868
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<DISTRIBUTIONS-OF-INCOME> 337<F1>
<DISTRIBUTIONS-OF-GAINS> 1485<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 455<F1>
<NUMBER-OF-SHARES-REDEEMED> 492<F1>
<SHARES-REINVESTED> 111<F1>
<NET-CHANGE-IN-ASSETS> 6572
<ACCUMULATED-NII-PRIOR> 1
<ACCUMULATED-GAINS-PRIOR> 1486
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<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 607
<AVERAGE-NET-ASSETS> 42922<F1>
<PER-SHARE-NAV-BEGIN> 15.940<F1>
<PER-SHARE-NII> .140<F1>
<PER-SHARE-GAIN-APPREC> 2.620<F1>
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<EXPENSE-RATIO> 1.390<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
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<ACCUMULATED-NII-CURRENT> 1
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<ACCUMULATED-NET-GAINS> 870
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18497
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<INTEREST-INCOME> 62
<OTHER-INCOME> 0
<EXPENSES-NET> (5)
<NET-INVESTMENT-INCOME> 337
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<APPREC-INCREASE-CURRENT> 2662
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<SHARES-REINVESTED> 0<F1>
<NET-CHANGE-IN-ASSETS> 6572
<ACCUMULATED-NII-PRIOR> 1
<ACCUMULATED-GAINS-PRIOR> 1486
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 607
<AVERAGE-NET-ASSETS> 225<F1>
<PER-SHARE-NAV-BEGIN> 16.430<F1>
<PER-SHARE-NII> (.030)<F1>
<PER-SHARE-GAIN-APPREC> 1.510<F1>
<PER-SHARE-DIVIDEND> .040<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 17.870<F1>
<EXPENSE-RATIO> 2.610<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
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<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
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<INVESTMENTS-AT-VALUE> 566455
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<ASSETS-OTHER> 2
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 614
<TOTAL-LIABILITIES> 1769
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<F1>Class A Shares
</FN>
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 052
<NAME> VICTORY DIVERSIFIED STOCK FUND
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<S> <C>
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<PERIOD-START> NOV-01-1995
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<F1>Class B Shares
</FN>
</TABLE>
<TABLE> <S> <C>
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<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
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<NUMBER> 061
<NAME> VICTORY LIMITED TERM INCOME FUND
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
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<NUMBER> 071
<NAME> VICTORY OHIO MUNICIPAL BOND FUND
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<S> <C>
<PERIOD-TYPE> YEAR
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 081
<NAME> VICTORY GOVERNMENT MORTGAGE FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 091
<NAME> VICTORY INTERNATIONAL GROWTH FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
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<EXPENSES-NET> 1971
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<F1>Class A Shares
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
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<NUMBER> 092
<NAME> VICTORY INTERNATIONAL GROWTH FUND
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<S> <C>
<PERIOD-TYPE> YEAR
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<F1>Class B Shares
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
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<NAME> VICTORY GROWTH FUND
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<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
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<NAME> VICTORY BALANCED FUND
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<PER-SHARE-DIVIDEND> .360<F1>
<PER-SHARE-DISTRIBUTIONS> .070<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 12.330<F1>
<EXPENSE-RATIO> 1.270<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 112
<NAME> VICTORY BALANCED FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
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<SHARES-REINVESTED> 1<F1>
<NET-CHANGE-IN-ASSETS> 73912
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3408
<AVERAGE-NET-ASSETS> 849<F1>
<PER-SHARE-NAV-BEGIN> 11.510<F1>
<PER-SHARE-NII> .140<F1>
<PER-SHARE-GAIN-APPREC> .850<F1>
<PER-SHARE-DIVIDEND> .160<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 12.340<F1>
<EXPENSE-RATIO> 2.460<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 121
<NAME> VICTORY VALUE FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
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<PAID-IN-CAPITAL-COMMON> 274254
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<SHARES-COMMON-PRIOR> 24927
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<ACCUMULATED-NET-GAINS> 17563
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 89850
<NET-ASSETS> 382083
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<ACCUMULATED-GAINS-PRIOR> 8460
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<PER-SHARE-NII> .200
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<EXPENSE-RATIO> 1.330
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 131
<NAME> VICTORY STOCK INDEX FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 221337
<INVESTMENTS-AT-VALUE> 276335
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<PAID-IN-CAPITAL-COMMON> 215551
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<SHARES-COMMON-PRIOR> 12870
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<ACCUMULATED-NET-GAINS> 2968
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 58050
<NET-ASSETS> 277124
<DIVIDEND-INCOME> 4412
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<ACCUMULATED-GAINS-PRIOR> 2085
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<GROSS-EXPENSE> 1964
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<PER-SHARE-NAV-BEGIN> 12.500
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<PER-SHARE-NAV-END> 14.850
<EXPENSE-RATIO> .570
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 141
<NAME> VICTORY SPECIAL VALUE FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 242913
<INVESTMENTS-AT-VALUE> 285620
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<TOTAL-ASSETS> 291297
<PAYABLE-FOR-SECURITIES> 1090
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<TOTAL-LIABILITIES> 1451
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 226652
<SHARES-COMMON-STOCK> 20450<F1>
<SHARES-COMMON-PRIOR> 16026<F1>
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<ACCUMULATED-NET-GAINS> 19829
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 42707
<NET-ASSETS> 289846
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<EXPENSES-NET> 3255
<NET-INVESTMENT-INCOME> 2081
<REALIZED-GAINS-CURRENT> 20290
<APPREC-INCREASE-CURRENT> 21511
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<NUMBER-OF-SHARES-REDEEMED> 2842<F1>
<SHARES-REINVESTED> 591<F1>
<NET-CHANGE-IN-ASSETS> 95146
<ACCUMULATED-NII-PRIOR> 57
<ACCUMULATED-GAINS-PRIOR> 5442
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2376
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3326
<AVERAGE-NET-ASSETS> 237459<F1>
<PER-SHARE-NAV-BEGIN> 12.150<F1>
<PER-SHARE-NII> .120<F1>
<PER-SHARE-GAIN-APPREC> 2.330<F1>
<PER-SHARE-DIVIDEND> .110<F1>
<PER-SHARE-DISTRIBUTIONS> .340<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 14.150<F1>
<EXPENSE-RATIO> 1.370<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 142
<NAME> VICTORY SPECIAL VALUE FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
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<ACCUM-APPREC-OR-DEPREC> 42707
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<SHARES-REINVESTED> 0<F1>
<NET-CHANGE-IN-ASSETS> 95146
<ACCUMULATED-NII-PRIOR> 57
<ACCUMULATED-GAINS-PRIOR> 5442
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2376
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3326
<AVERAGE-NET-ASSETS> 182<F1>
<PER-SHARE-NAV-BEGIN> 12.890<F1>
<PER-SHARE-NII> .010<F1>
<PER-SHARE-GAIN-APPREC> 1.230<F1>
<PER-SHARE-DIVIDEND> .040<F1>
<PER-SHARE-DISTRIBUTIONS> .000<F1>
<RETURNS-OF-CAPITAL> .000<F1>
<PER-SHARE-NAV-END> 14.090<F1>
<EXPENSE-RATIO> 2.510<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 151
<NAME> VICTORY SPECIAL GROWTH FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
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<NET-INVESTMENT-INCOME> (463)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFLIOS
<SERIES>
<NUMBER> 161
<NAME> VICTORY INVESTMENT QUALITY BOND FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 171
<NAME> VICTORY INTERMEDIATE INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 181
<NAME> VICTORY FUND FOR INCOME
<MULTIPLIER> 1,000
<S> <C>
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