<PAGE> 1
THE INSTITUTIONAL MONEY MARKET FUND
[GRAPHIC]
ANNUAL
REPORT
OCTOBER 31,
1996
[VICTORY FUNDS LOGO]
<PAGE> 2
<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> 3
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> 4
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> 5
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> 6
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%
<FN>
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> 7
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> 8
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> 9
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> 10
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
===============================================================================
<FN>
- --------------
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> 11
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> 12
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> 13
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)
===================================================================================================
<FN>
(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> 14
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> 15
THE VICTORY PORTFOLIOS Notes to Financial Statements-Continued
INSTITUTIONAL MONEY MARKET FUND October 31, 1996
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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
<FN>
(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> 16
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%
<FN>
- ----------------
* 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> 17
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> 18
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> 19
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
