THE LIFECHOICE FUNDS
ANNUAL
REPORT
OCTOBER 31,
1998
(LOGO)(R)
Victory Funds
<PAGE>
TABLE OF CONTENTS
Letter to our Shareholders 2
1998 Annual Report Commentary 3
Financial Statements
Schedules of Investments 7
Statements of Assets and Liabilities 10
Statements of Operations 11
Statements of Changes in Net Assets 12
Financial Highlights 13
Notes to Financial Statements 14
Report of Independent Accountants 18
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, Key Asset
Management Inc., or their affiliates, and are subject to investment risks,
including possible loss of the principal amount invested.
Key Asset Management Inc. (KAM), a subsidiary of KeyCorp, is the investment
adviser to the Victory Funds. The Victory Funds are sponsored and distributed
by BISYS Fund Services, which is not affiliated with KeyCorp or its
subsidiaries. KAM receives a fee for its services from the Victory Funds.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus for the Victory Funds.
Year 2000 Risk. Like other mutual funds, each of the Funds could be adversely
affected if the computer systems used by their third party service providers
do not properly process and calculate date-related information. The Funds'
service providers have been actively updating their systems to be able to
process year 2000 data. However, there can be no assurance that these steps
will be adequate to avoid a temporary service disruption or any adverse
impact on the Funds.
(LOGO)
Victory Funds (R)
1-800-539-FUND(R)
(1-800-539-3863)
<PAGE>
Letter to our Shareholders
Welcome to the October 31, 1998 Annual Report of the Victory LifeChoice
Funds. We are pleased to have this opportunity to welcome all our new
shareholders, as well as to share information on your Funds' performance. The
return of the bull market in late October was a welcome sign that the
troubles leading to the late summer correction in the stock market might well
be behind us. The continued rally in domestic stocks has again emphasized the
importance for investors of maintaining a focus on the long-term. The
LifeChoice Funds are especially suited to serve this long-term orientation by
offering diversification across asset classes.
This long-term orientation is also facilitated by the fact that all the three
LifeChoice Funds -- Conservative Investor, Moderate Investor and Growth
Investor -- are broadly diversified across different mutual funds. Each
underlying fund was specifically chosen based on how these funds are expected
to work together, and how they contribute to the overall objective of each
LifeChoice Fund. The adviser continuously monitors asset allocation and, as
market conditions change, rebalances the LifeChoice Funds to their targeted
investment allocations. Changes in fund allocations have been minimal, as we
believe this will best serve investors.
Investment history has repeatedly demonstrated that disciplined investments
made over the long-term have the greatest opportunities for success. We look
forward to 1999 and believe that the LifeChoice Funds are well positioned to
take advantage of opportunities to meet your long range investment
objectives.
As always, we welcome your comments on this annual report.
Yours Sincerely,
/s/ Leigh A. Wilson
Leigh A. Wilson
President
The Victory Funds
<PAGE>
1998 Annual Report Commentary
Market Environment
We compare the market environment over the past twelve months to a
roller coaster ride. The beginning of the year seemed to be an unexpected
continuation of the "bull market" that we have been experiencing in the
recent past. Much to the disbelief of some professionals in the investment
community, the stocks of many larger companies continued to rise. Individual
investors went along for the ride, pumping more and more money into the stock
market. Then, like any good roller coaster ride, came the dips and turns. The
first signs of trouble came from overseas and the international markets were
thrown into disarray with crisis after crisis erupting around the globe. This
was in stark contrast to the earlier part of the year, when international
stocks were outperforming those in the U.S. Even the "bull market" in the
United States turned bumpy and stocks no longer seemed safe. The Dow Jones
Index1 flirted with a decline in August and September that came close to
being labeled an official "bear market." Some equity investors painfully
discovered that there was more to the stock market than just the Dow. For
instance, the dips and turns for those investors following the (small-cap)
Russell 2000 Index2 were more traumatic than the "blue chip" Dow. In July,
August and September, many investors seeking a somewhat "safe haven" made a
flight to the bond market in search of lower volatility. Bonds continued to
perform at a steady pace, just shy of 10% for the year as measured by the
Lehman Aggregate Bond Index.3 Then, just when it seemed like the equity
markets might become completely derailed, stocks rallied in September and
October. While large-cap stocks were able to recover almost all of the lost
ground and return to high double-digit returns, the mid- and small-caps, as
seen by the Russell 2000 Index, were still down substantially for the period
ended October 31, 1998.
How did the Funds perform?
What factors led to this performance?
The LifeChoice Funds are designed to provide diversified, total portfolio
solutions with exposure to different asset classes and investment styles.
During the period, November 1, 1997 through October 31, 1998, all three
portfolios trailed both the Lehman Aggregate Bond Index and the S&P 500
Index.4 While the latter is to be expected, the former is disappointing, but
explainable. The Funds hold a slight over-weight in fixed income investments
and while the underlying fixed income mutual funds helped performance, some
of the fixed income over-weight was represented by specialty investments, in
the Convertible Securities Fund, that are used as bond substitutes. The real
story is with these specialty investments and the underlying holdings in
equity funds. During the past 12 months a handful of the largest companies
within the S&P 500 have dominated performance, pushing this index higher.
Peeling back the layers, however, reveals that most stocks have not done so
well. In addition to these large-cap (large company) investments, the
LifeChoice Funds also hold mid-cap growth & value, small-cap growth & value,
and select specialty funds, such as convertible securities, real estate
investments and international stocks. The worst of this group, small-cap
growth, as measured by the Russell 2000 Growth Index, was down 15.86% for the
year. Compared to the best and worst asset classes in which they invest, the
LifeChoice Funds did as expected. Their performance fell between the high and
the low, limiting the upside, while protecting the portfolios from the worst
that the downside had to offer.
<PAGE>
What steps have been taken to position
the Funds for the upcoming year?
We expect that fiscal year 1999 will yield more modest returns from the stock
market, unlike the inflated levels seen in the past three years. We think
that mid-cap and small sized companies are poised to deliver better returns
then their large-cap counterparts. Certain areas outside the United States
will continue to be of interest. For example, Asia could be a weak area,
while European markets might potentially be stronger than those here in the
U.S. Additionally, although we were adversely affected by them in 1998, we
continue to believe in the defensive qualities of convertible securities and
real estate investments. Finally, a continued slight over-weight in bonds
appears to be a favorable position. In general we believe that a diversified,
asset allocation approach to portfolio management will properly position this
style to take advantage of the best, while minimizing the worst areas of the
market next year.
Steps to position the Funds
Heading into 1999, the fundamental philosophy of the three LifeChoice
portfolios remains unchanged from their original strategies. The LifeChoice
Asset Allocation Committee has no plans for any major changes as to how the
Funds are managed. We think that our exposure to mid- and small-cap funds, as
well as our international and specialty holdings, have the Funds well
positioned for next year and beyond. This strategy is consistent with how we
anticipate the Funds to be positioned for the foreseeable future. We have a
slight bias to a more defensive stance, slightly under-weight in equities and
over-weight to fixed income, including the specialty assets that we use as
fixed income substitutes, such as convertibles and real estate. We strive for
and believe we have acquired some exposure to every major area of the market.
We believe that it is more prudent to rely on asset allocation then to
attempt to market-time or chase the best performing areas. Although it does
not always seem to pay off over shorter time frames, this strategy of
consistent asset allocation has been proven to work out best over longer time
periods.
If pursued more aggressively in the past year,
what investment strategies would have been
beneficial for the Funds?
Investing is a field where we constantly question our process and examine our
end results to see if there are any flaws or possible alternate steps that
could have been taken to yield different, better results. In hindsight it is
easy to see what we could have done to maximize performance. This past year
we saw performance dominated by a handful of very large growth companies. We
could have aggressively overweighed this area if only we had known that this
would be the area to outperform. Looking back we would also like to have
known that the long-anticipated rebound for small- and mid-cap equities would
still be a pending issue as 1998 draws to a close. And it would have been
nice to know that the defensive positions of convertible securities and real
estate investments would not be able to provide the resistance that we had
hoped for. The point is that we don't know in advance which asset class will
outperform and which will "tank." And that's exactly what makes these Funds
so attractive. We believe that a prudent strategy is to have and maintain
exposure to many different areas. We do not practice "market timing" nor
chase the best, hot asset class. Rather we stick to our strategy. This past
year has taught us that asset allocation can be a difficult strategy to
remain committed to, especially when a single asset class seems to dominate
time after time. History shows, however, that when you break down and change
strategy, you have most likely changed at the wrong time.5 We think that our
disciplined asset allocation approach will continue to be a better way to
invest for the future.
1 The Dow Jones Industrial Average is a price-weighted average of 30
blue-chip stocks that are generally the leaders in their industry and are
listed on the New York Stock Exchange. It has been a widely followed
indicator of the stock market since October 1, 1928.
2 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.
3 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.
4 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.
5 Past performance is no guarantee of future results.
<PAGE>
LifeChoice Conservative Investor Fund
Total Return
As of 10/31/98
One Year 2.66%
Since Inception
12/31/96 7.50%
Conservative S&P500 Lehman Aggregate
Dec-96 10000 10000 10000
Jan-97 10110 10624.8 10031
Feb-97 10110 10708.09843 10056.0775
Mar-97 9938.3 10268.10267 9944.45504
Apr-97 10089.6 10881.1084 10093.62187
May-97 10432.6 11543.55028 10189.51127
Jun-97 10674.5 12060.70133 10310.76646
Jul-97 11091.3 13020.37133 10589.15715
Aug-97 10918.5 12290.97013 10499.14932
Sep-97 11284.6 12964.14656 10654.53673
Oct-97 11120.6 12531.14407 10809.02751
Nov-97 11161.6 13111.21073 10858.74903
Dec-97 11269.6 13336.33022 10968.4224
Jan-98 11331.9 13483.83003 11108.81821
Feb-98 11622.7 14456.28385 11099.93115
Mar-98 11903.2 15196.59015 11137.67092
Apr-98 11965.9 15349.46784 11195.58681
May-98 11830.1 15085.61049 11301.94488
Jun-98 11923.9 15698.38799 11398.01141
Jul-98 11723.4 15531.20016 11421.94724
Aug-98 10900.3 13285.69924 11608.12498
Sep-98 11203.8 14136.78113 11879.7551
Oct-98 11416.8 15286.66691 11816.7924
<PAGE>
LifeChoice Moderate Investor Fund
Total Return
As of 10/31/98
One Year 1.21%
Since Inception
12/31/96 7.73%
Moderate S&P500 Lehman Aggregate
Dec-96 10000 10000 10000
Jan-97 10140 10624.8 10031
Feb-97 10250 10708.09843 10056.0775
Mar-97 9952.20844 10268.10267 9944.45504
Apr-97 10092.80472 10881.1084 10093.62187
May-97 10574.84913 11543.55028 10189.51127
Jun-97 10876.38869 12060.70133 10310.76646
Jul-97 11351.47258 13020.37133 10589.15715
Aug-97 11129.09289 12290.97013 10499.14932
Sep-97 11618.02025 12964.14656 10654.53673
Oct-97 11323.5075 12531.14407 10809.02751
Nov-97 11364.12995 13111.21073 10858.74903
Dec-97 11481.77798 13336.33022 10968.4224
Jan-98 11512.69839 13483.83003 11108.81821
Feb-98 11976.5045 14456.28385 11099.93115
Mar-98 12353.3082 15196.59015 11137.67092
Apr-98 12446.42359 15349.46784 11195.58681
May-98 12198.11588 15085.61049 11301.94488
Jun-98 12306.89611 15698.38799 11398.01141
Jul-98 11994.53834 15531.20016 11421.94724
Aug-98 10703.45956 13285.69924 11608.12498
Sep-98 11062.59531 14136.78113 11879.7551
Oct-98 11460.68112 15286.66691 11816.7924
<PAGE>
LifeChoice Growth Investor Fund
Total Return
As of 10/31/98
One Year .96%
Since Inception
12/31/96 8.47%
Growth S&P500 Lehman Aggregate
Dec-96 10000 10000 10000
Jan-97 10200 10624.8 10031
Feb-97 10170 10708.09843 10056.0775
Mar-97 9917.39433 10268.10267 9944.45504
Apr-97 10108.11345 10881.1084 10093.62187
May-97 10740.49791 11543.55028 10189.51127
Jun-97 11104.5661 12060.70133 10310.76646
Jul-97 11607.94625 13020.37133 10589.15715
Aug-97 11346.18857 12290.97013 10499.14932
Sep-97 11950.12445 12964.14656 10654.53673
Oct-97 11495.93897 12531.14407 10809.02751
Nov-97 11546.40403 13111.21073 10858.74903
Dec-97 11689.65391 13336.33022 10968.4224
Jan-98 11669.09163 13483.83003 11108.81821
Feb-98 12306.52219 14456.28385 11099.93115
Mar-98 12794.00079 15196.59015 11137.67092
Apr-98 12907.3132 15349.46784 11195.58681
May-98 12567.37598 15085.61049 11301.94488
Jun-98 12683.48809 15698.38799 11398.01141
Jul-98 12321.6934 15531.20016 11421.94724
Aug-98 10678.11181 13285.69924 11608.12498
Sep-98 11082.88515 14136.78113 11879.7551
Oct-98 11606.65099 15286.66691 11816.7924
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.
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 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.
<PAGE>
THE VICTORY PORTFOLIOS Schedule of Investments
LifeChoice Conservative Investor Fund October 31, 1998
(Amounts in Thousands, Except Shares)
Market
Security Description Shares Value
Mutual Funds (99.9%)
Equity Funds (33.3%):
Victory Value Fund 25,279 $ 476
Victory Diversified Stock Fund, Class A 25,419 479
Victory Special Value Fund, Class A 17,002 232
PBHG Growth Fund (b) 11,118 228
Neuberger&Berman Genesis Fund (b) 28,080 402
Victory Special Growth Fund 15,842 151
Victory International Growth Fund, Class A 43,175 570
2,538
Fixed Income/Specialty Funds (63.4%):
Victory Real Estate Investment Fund 43,789 447
Victory Convertible Securities Fund (c) 92,572 1,131
Loomis Sayles Bond Fund 55,324 661
Victory Investment Quality Bond Fund 126,504 1,264
Victory Intermediate Income Fund 60,767 599
Victory Fund For Income 75,789 745
4,847
Money Market Funds (3.2%):
Victory Financial Reserves Fund 244,083 244
Total MUTUAL FUNDS (Cost $7,953) 7,629
Total Investments (Cost $7,953) (a) -- 99.9% 7,629
Other assets in excess of liabilities -- 0.1% 4
TOTAL NET ASSETS -- 100.0% $7,633
(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 $97. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows
(amounts in thousands):
Unrealized appreciation $ 26
Unrealized depreciation (447)
Net unrealized depreciation $(421)
(b) Non-income producing securities.
(c) Previously known as Key SBSF Convertible Securities Fund.
See notes to financial statements.
<PAGE>
THE VICTORY PORTFOLIOS Schedule of Investments
LifeChoice Moderate Investor Fund October 31, 1998
(Amounts in Thousands, Except Shares)
Market
Security Description Shares Value
Mutual Funds (100.0%)
Equity Funds (59.2%):
Victory Value Fund 102,257 $ 1,923
Victory Diversified Stock Fund, Class A 93,591 1,764
Victory Special Value Fund, Class A 85,324 1,164
PBHG Growth Fund (b) 50,873 1,042
Neuberger&Berman Genesis Fund (b) 109,813 1,574
Victory Special Growth Fund 102,685 982
Victory International Growth Fund, Class A 216,674 2,858
11,307
Fixed Income/Specialty Funds (37.4%):
Victory Real Estate Investment Fund 106,547 1,087
Victory Convertible Securities Fund (c) 163,316 1,995
Loomis Sayles Bond Fund 73,433 877
Victory Investment Quality Bond Fund 159,844 1,598
Victory Intermediate Income Fund 72,573 715
Victory Fund For Income 90,601 891
7,163
Money Market Funds (3.4%):
Victory Financial Reserves Fund 649,650 650
Total MUTUAL FUNDS (Cost $20,026) 19,120
Total Investments (Cost $20,026) (a) -- 100.0% 19,120
Other assets in excess of liabilities -- 0.0% 8
TOTAL NET ASSETS -- 100.0% $19,128
(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 $10. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows
(amounts in thousands):
Unrealized appreciation $ 421
Unrealized depreciation (1,337)
Net unrealized depreciation $ (916)
(b) Non-income producing securities.
(c) Previously known as Key SBSF Convertible Securities Fund.
See notes to financial statements.
<PAGE>
THE VICTORY PORTFOLIOS Schedule of Investments
LifeChoice Growth Investor Fund October 31, 1998
((Amounts in Thousands, Except Shares)
Market
Security Description Shares Value
Mutual Funds (100.0%)
Equity Funds (78.1%):
Victory Value Fund 83,722 $ 1,576
Victory Diversified Stock Fund, Class A 77,686 1,464
Victory Special Value Fund, Class A 79,723 1,087
PBHG Growth Fund (b) 39,968 819
Neuberger&Berman Genesis Fund (b) 87,187 1,249
Victory Special Growth Fund 72,829 696
Victory International Growth Fund, Class A 188,569 2,488
9,379
Fixed Income/Specialty Funds (19.2%):
Victory Real Estate Investment Fund 66,909 682
Victory Convertible Securities Fund (c) 57,389 701
Victory Investment Quality Bond Fund 92,467 925
2,308
Money Market Funds (2.7%):
Victory Financial Reserves Fund 325,682 326
Total MUTUAL FUNDS (Cost $12,660) 12,013
Total Investments (Cost $12,660) (a) -- 100.0% 12,013
Other assets in excess of liabilities -- 0.0% 5
TOTAL NET ASSETS -- 100.0% $12,018
(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 $13. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows
(amounts in thousands):
Unrealized appreciation $ 297
Unrealized depreciation (957)
Net unrealized depreciation $(660)
(b) Non-income producing securities.
(c) Previously known as Key SBSF Convertible Securities Fund.
See notes to financial statements.
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Statements of Assets and Liabilities
LifeChoice Funds October 31, 1998
(Amounts in Thousands, Except Per Share Amounts)
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Investor Investor
Fund Fund Fund
<S> <C> <C> <C>
ASSETS:
Investments, at value
(Cost $7,953; $20,026 & $12,660) $7,629 $19,120 $12,013
Interest and dividends receivable 1 3 1
Receivable from affiliates 2 2 2
Receivable for capital shares issued -- 2 --
Unamortized organization costs 32 32 32
Prepaid expenses and other assets 4 5 5
Total Assets 7,668 19,164 12,053
LIABILITIES:
Payable for organization costs 32 32 32
Accrued expenses and other payables:
Investment advisory fees 1 2 1
Transfer agent fees 2 2 2
Total Liabilities 35 36 35
NET ASSETS:
Capital 7,766 19,466 12,230
Undistributed net investment income 126 145 110
Net unrealized appreciation/depreciation
from investments (324) (906) (647)
Accumulated undistributed net realized gains
from investment transactions 65 423 325
Net Assets $7,633 $19,128 $12,018
Outstanding units of beneficial interest (shares) 712 1,749 1,085
Net asset value
Offering and redemption price per share $10.72 $ 10.94 $ 11.08
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Statements of Operations
LifeChoice Funds For the Period Ended October 31, 1998
(Amounts in Thousands)
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
Eleven Eleven Eleven
Months Period Months Period Months Period
Ended Ended Ended Ended Ended Ended
October November October November October November
31, 30, 31, 30, 31, 30,
1998<F1> 1997<F4> 1998<F2> 1997<F4> 1998<F3> 1997<F4>
<S> <C> <C> <C> <C> <C> <C>
Investment Income:
Interest income $ -- $ 8 $ -- $ 11 $ -- $ 9
Dividend income 270 74 317 85 131 26
Total Income 270 82 317 96 131 35
Expenses:
Investment advisory fees 14 5 25 8 18 6
Administration fees 11 11 11 11 11 11
Shareholder service fees -- 1 -- 3 -- 3
Accounting fees 36 35 37 35 33 33
Custodian fees 1 26 1 29 1 22
Legal and audit fees 5 9 6 11 4 12
Amortization of
organization costs 10 8 10 8 10 8
Trustees' fees and expenses 2 -- 2 -- 2 --
Transfer agent fees 8 6 9 6 10 6
Registration and filing fees 14 14 14 15 14 14
Printing fees 2 -- 3 -- 4 --
Other 1 -- 1 -- 1 --
Total Expenses 104 115 119 126 108 115
Expenses voluntarily reduced (5) (3) (10) (5) (6) (4)
Expenses before
reimbursement
from distributor 99 112 109 121 102 111
Expenses reimbursed (83) (106) (81) (111) (81) (102)
Net Expenses 16 6 28 10 21 9
Net Investment Income 254 76 289 86 110 26
Realized/Unrealized Gains
(Losses) from Investments:
Net realized gains (losses) from
investment transactions 92 95 457 137 368 290
Change in unrealized
appreciation/depreciation
from investments (223) (101) (1,156) 250 (646) (1)
Net realized/unrealized gains
(losses) from investments: (131) (6) (699) 387 (278) 289
Change in net assets resulting
from operations $ 123 $ 70 $ (410) $ 473 $(168) $ 315
<FN>
<F1> Effective March 23, 1998, the KeyChoice Income & Growth Fund became the
Victory LifeChoice Conservative Investor Fund. Changes in net assets prior to
March 23, 1998 represent the KeyChoice Income & Growth Fund.
<F2> Effective March 23, 1998, the KeyChoice Moderate Growth Fund became the
Victory LifeChoice Moderate Investor Fund. Changes in net assets prior to
March 23, 1998 represent the KeyChoice Moderate Growth Fund.
<F3> Effective March 23, 1998, the KeyChoice Growth Fund became the Victory
LifeChoice Growth Investor Fund. Changes in net assets prior to March 23,
1998 represent the KeyChoice Growth Fund.
<F4> For the period December 31, 1996 (commencement of operations) through
November 30, 1997.
</FN>
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS
LifeChoice Funds Statements of Changes in Net Assets
(Amounts in Thousands)
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
Eleven Eleven Eleven
Months Period Months Period Months Period
Ended Ended Ended Ended Ended Ended
October November October November October November
31, 30, 31, 30, 31, 30,
1998<F1> 1997<F4> 1998<F2> 1997<F4> 1998<F3> 1997<F4>
<S> <C> <C> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 254 $ 76 $ 289 $ 86 $ 110 $ 25
Net realized gains/(losses)
from investment
transactions 92 95 457 137 368 291
Net change in unrealized
appreciation/depreciation
from investments (223) (101) (1,156) 250 (646) (1)
Change in net assets resulting
from operations 123 70 (410) 473 (168) 315
Distributions to Shareholders:
From net investment income (277) (31) (283) (62) (117) (19)
From net realized gains from
investment transactions (22) -- (60) -- (227) --
Change in net assets from
distributions to shareholders (299) (31) (343) (62) (344) (19)
Capital Transactions:
Proceeds from shares issued 3,682 9,405 14,522 8,443 6,322 9,564
Dividends reinvested 299 30 342 60 340 19
Cost of shares redeemed (5,309) (337) (2,711) (1,186) (1,647) (2,364)
Change in net assets from
capital transactions (1,328) 9,098 12,153 7,317 5,015 7,219
Change in net assets (1,504) 9,137 11,400 7,728 4,503 7,515
Net Assets:
Beginning of period 9,137 -- 7,728 -- 7,515 --
End of period $ 7,633 $9,137 $19,128 $ 7,728 $12,018 $ 7,515
Share Transactions:
Issued 330 867 1,266 796 536 863
Reinvested 28 3 31 5 31 2
Redeemed (485) (31) (239) (110) (139) (207)
Change in shares (127) 839 1,058 691 428 658
<FN>
<F1> Effective March 23, 1998, the KeyChoice Income & Growth Fund became the
Victory LifeChoice Conservative Investor Fund. Changes in net assets prior to
March 23, 1998 represent the KeyChoice Income & Growth Fund.
<F2> Effective March 23, 1998, the KeyChoice Moderate Growth Fund became the
Victory LifeChoice Moderate Investor Fund. Changes in net assets prior to
March 23, 1998 represent the KeyChoice Moderate Growth Fund.
<F3> Effective March 23, 1998, the KeyChoice Growth Fund became the Victory
LifeChoice Growth Investor Fund. Changes in net assets prior to March 23,
1998 represent the KeyChoice Growth Fund.
<F4> For the period December 31, 1996 (commencement of operations) through
November 30, 1997.
</FN>
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS
LifeChoice Funds Financial Highlights
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
Period Period Period Period Period Period
Ended Ended Ended Ended Ended Ended
October 31, November 30, October 31, November 30, October 31, November 30,
1998<F3> 1997<F2> 1998<F4> 1997<F2> 1998<F5> 1997<F2>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.89 $10.00 $ 11.19 $10.00 $ 11.44 $10.00
Investment Activities
Net investment income 0.37 0.31 0.24 0.20 0.13 0.11
Net realized and
unrealized gains
(losses)from
investments (0.12) 0.84<F8> (0.14) 1.16 (0.07) 1.43
Total from
Investment Activities 0.25 1.15 0.10 1.36 0.06 1.54
Distributions
Net investment income (0.39) (0.26) (0.26) (0.17) (0.14) (0.10)
Net realized gains (0.03) -- (0.09) -- (0.28) --
Total Distributions (0.42) (0.26) (0.35) (0.17) (0.42) (0.10)
Net Asset Value,
End of Period $10.72 $10.89 $ 10.94 $11.19 $ 11.08 $11.44
Total Return 2.29%<F6> 11.62%<F6> 0.90%<F6> 13.64%<F6> 0.52%<F6> 15.46%<F6>
Ratios/Supplementary Data:
Net Assets at end
of period (000) $7,633 $9,137 $19,128 $7,728 $12,018 $7,515
Ratio of expenses to
average net assets 0.23%<F7> 0.29%<F7> 0.22%<F7> 0.27%<F7> 0.23%<F7> 0.30%<F7>
Ratio of net
investment income
to average net assets 3.72%<F7> 3.41%<F7> 2.32%<F7> 2.26%<F7> 1.19%<F7> 0.81%<F7>
Ratio of expenses to
average net assets<F1> 1.50%<F7> 5.18%<F7> 0.93%<F7> 3.32%<F7> 1.16%<F7> 3.67%<F7>
Ratio of net
investment income
to average net assets<F1> 2.45%<F7> (1.48)%<F7> 1.61%<F7> (0.79)% 0.26%<F7> (2.56)%<F7>
Portfolio Turnover 78% 19% 42% 50% 30% 106%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or expense reimbursements
had not occurred, the ratios would have been as indicated.
<F2> For the period December 31, 1996 (commencement of operations) through
November 30, 1997.
<F3> Effective March 23, 1998, the KeyChoice Income & Growth Fund became the
Victory LifeChoice Conservative Investor Fund. Financial highlights prior to
March 23, 1998 represent the KeyChoice Income & Growth Fund.
<F4> Effective March 23, 1998, the KeyChoice Moderate Growth Fund became the
Victory LifeChoice Moderate Investor Fund. Financial highlights prior to
March 23, 1998 represent the KeyChoice Moderate Growth Fund.
<F5> Effective March 23, 1998, the KeyChoice Growth Fund became the Victory
LifeChoice Growth Investor Fund. Financial highlights prior to March 23, 1998
represent the KeyChoice Growth Fund.
<F6> Not annualized.
<F7> Annualized.
<F8> The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio of
securities during the period because of the timing of sales and purchases of
fund shares in relation to fluctuating market values during the period.
</FN>
See notes to financial statements.
</TABLE>
<PAGE>
THE VICTORY PORTFOLIOS Notes to Financial Statements
LifeChoice Funds October 31, 1998
1. Organization:
The Victory Portfolios (collectively, the "Trust" and individually, a "Fund")
was organized on December 6, 1995 as a successor to a company of the same
name organized as a Massachusetts business trust on February 5, 1986. The
Trust is 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 Trust is authorized to issue an unlimited number of
shares which are units of beneficial interest with a par value of $0.001. The
Trust presently offers shares of 30 active funds. Included are the financial
statements and financial highlights of the LifeChoice Conservative Investor
Fund, LifeChoice Moderate Investor Fund, and the LifeChoice Growth Investor
Fund (collectively, the LifeChoice Funds).
The LifeChoice Conservative Investor Fund seeks to provide current income
combined with moderate growth of capital by allocating its assets primarily
among registered investment companies that invest in fixed income securities
and, to a lesser extent, equity securities. The LifeChoice Moderate Investor
Fund seeks to provide growth of capital combined with a moderate level of
current income by allocating its assets primarily among registered investment
companies that invest in equity securities and, to a lesser extent, fixed
income securities. The LifeChoice Growth Investor Fund seeks to provide
growth of capital by allocating its assets primarily among registered
investment companies that invest in equity securities.
2. Reorganization:
The Trust entered an Agreement and Plan of Reorganization with The SBSF
Funds, Inc. d/b/a Key Mutual Funds pursuant to which all of the assets and
liabilities of each Key Mutual Fund transferred to a Fund of the Victory
Portfolios in exchange for shares of the corresponding Fund. The KeyChoice
Income & Growth Fund transferred its assets and liabilities to the Victory
LifeChoice Conservative Investor Fund. The KeyChoice Moderate Growth Fund
transferred its assets and liabilities to the Victory LifeChoice Moderate
Investor Fund. The KeyChoice Growth Fund transferred its assets and
liabilities to the Victory LifeChoice Growth Investor Fund. The
reorganization, which qualified as a tax-free exchange for federal income tax
purposes, was completed on March 23, 1998, following approval by shareholders
of SBSF Funds, Inc. d/b/a Key Mutual Funds at a special shareholder meeting
held on March 6, 1998. The following is a summary of shares outstanding, net
assets, net asset value per share and unrealized appreciation immediately
before and after the reorganization:
<PAGE>
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
Victory Victory
KeyChoice LifeChoice LifeChoice
Income & Growth Conservative Investor Conservative Investor
Fund Fund Fund
<S> <C> <C> <C>
Shares (000) 578 -- 578
Net Assets (000) $6,590 -- $6,590
Net Asset Value $11.40 -- $11.40
Unrealized appreciation (000) $ 84 -- $ 84
</TABLE>
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
Victory Victory
KeyChoice LifeChoice LifeChoice
Moderate Growth Moderate Investor Moderate Investor
Fund Fund Fund
<S> <C> <C> <C>
Shares (000) 983 -- 983
Net Assets (000) $11,698 -- $11,698
Net Asset Value $ 11.90 -- $ 11.90
Unrealized appreciation (000) $ 708 -- $ 708
</TABLE>
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
Victory Victory
KeyChoice LifeChoice LifeChoice
Growth Growth Investor Growth Investor
Fund Fund Fund
<S> <C> <C> <C>
Shares (000) 800 -- 800
Net Assets (000) $9,859 -- $9,859
Net Asset Value $12.33 -- $12.33
Unrealized appreciation (000) $ 495 -- $ 495
</TABLE>
<PAGE>
3. Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
LifeChoice 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 in registered investment companies are valued at the closing net
asset value per share on the day of valuation. Short-term investments of the
Funds are valued at either amortized cost which approximates market value, or
at original cost which, combined with accrued interest, approximates market
value.
Securities Transactions and Related Income:
Securities transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the accrual
basis and includes, where applicable, the pro rata amortization of premium or
accretion of discount. Dividend income is recorded on the ex-dividend date.
Gains or losses realized on sales of securities are determined by comparing
the identified cost of the security lot sold with the net sales proceeds.
Repurchase Agreements:
The Funds 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. Repurchase
agreements are considered to be loans by a Fund under the 1940 Act.
Dividends to Shareholders:
Dividends payable to shareholders are declared and distributed quarterly.
Distributable net realized capital gains, if any, are declared and
distributed at least annually.
The amounts of dividends from net investment income and of distributions from
net realized gains are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the components of net assets based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions to shareholders which exceed net investment
income and realized capital gains for financial reporting purposes but not
for tax purposes are reported as dividends in excess of net investment income
or distributions in excess of net realized gains. To the extent they exceed
net investment income and net realized gains for tax purposes, they are
reported as distributions of capital.
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 of 1986, as amended, 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.
Costs incurred in connection with the organization of the LifeChoice Funds
are being amortized on a straight-line basis over a sixty month period from
the date the Funds commenced operations.
<PAGE>
4. Purchases and Sales of Securities:
Purchases and sales of securities (excluding short-term securities) for the
eleven months ended October 31, 1998 and the year ended November 30, 1997
were as follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
Purchases Sales Purchases Sales
<S> <C> <C> <C> <C>
LifeChoice Conservative Investor Fund $ 5,627 $6,544 $ 9,343 $ 414
LifeChoice Moderate Investor Fund 17,408 5,317 9,241 1,912
LifeChoice Growth Investor Fund 7,970 2,843 10,245 3,171
</TABLE>
5. Related Party Transactions:
Investment advisory services are provided to the Funds by Key Asset
Management Inc. ("the Adviser"), a wholly owned subsidiary of KeyBank
National Association ("Key"), formerly Society National Bank, a wholly owned
subsidiary of KeyCorp. On February 28, 1997, Key Asset Management Inc. became
the surviving corporation after the reorganization of four indirect
investment adviser subsidiaries of KeyCorp, including KeyCorp Mutual Fund
Advisers Inc., Spears, Benzak, Salomon & Farrell, Inc. ("SBSF"), Society
Asset Management, Inc. and Applied Technology Investment, Inc. Pursuant to
the terms of the reorganization, the subsidiaries identified above were
merged into SBSF and SBSF then changed its name to Key Asset Management Inc.
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 LifeChoice Funds. KeyTrust Company of Ohio, N.A., a subsidiary
of KeyCorp and an affiliate of the Adviser, serving as custodian for all of
the LifeChoice 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 a
Shareholder Servicing Agent for the Funds. As such, Key and its affiliates
provide support services to their clients who are shareholders, which may
include establishing and maintaining accounts and records, processing
dividend and distribution payments, providing account information, assisting
in processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and
addresses. For providing such services, Key and its affiliates may receive a
fee of up to 0.25% of the average daily net assets of the LifeChoice Funds.
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 Funds for
serving as officers.
Under the terms of the administration agreement, the Administrator's fee is
computed at the annual rate of 0.01% of the average daily net asset of each
of the LifeChoice Funds with a minimum of $12,000 per Fund per year.
BISYS Fund Services, Ohio Inc., an affiliate of BISYS, serves the LifeChoice
Funds as Mutual Fund Accountant. Under the terms of the Fund Accounting
Agreement, the fee is based on a percentage of the average daily net assets
of the Funds with a minimum monthly fee of $1,666.66 per Fund.
Fees may be voluntarily reduced or reimbursed to assist the LifeChoice Funds
in maintaining competitive expense ratios.
<PAGE>
Additional information regarding related party transactions is as follows for
the eleven months ended October 31, 1998 and the year ended November 30,
1997:
<TABLE>
<CAPTION>
1998
Investment Advisory Fees Administration Fees
Percentage of Voluntary Voluntary
Average Daily Fee Fee
Net Assets Reductions Reductions
(000) (000)
<S> <C> <C> <C>
LifeChoice Conservative Investor Fund 0.20% $ 5 --
LifeChoice Moderate Growth Investor Fund 0.20% $10 --
LifeChoice Growth Investor Fund 0.20% $ 6 --
</TABLE>
<TABLE>
<CAPTION>
1997
Investment Advisory Fees Administration Fees
Percentage of Voluntary Voluntary
Average Daily Fee Fee
Net Assets Reductions Reductions
(000) (000)
<S> <C> <C> <C>
LifeChoice Conservative Investor Fund 0.20% -- $3
LifeChoice Moderate Growth Investor Fund 0.20% $1 $3
LifeChoice Growth Investor Fund 0.20% -- $3
</TABLE>
6. Federal Income Tax Information (Unaudited):
For the tax year ended October 31, 1998, the following percentages of income
dividends paid by the Funds qualify for the dividends received deduction
available to corporations:
Qualified Dividend Income
LifeChoice Conservative Investor Fund 65.93%
LifeChoice Moderate Growth Investor Fund 45.72%
LifeChoice Growth Investor Fund 12.86%
During the year ended October 31, 1998, the following Funds paid long-term
capital gain distributions:
Capital Gain Distributions
(000)
LifeChoice Conservative Investor Fund $38
LifeChoice Moderate Growth Investor Fund 42
LifeChoice Growth Investor Fund 62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
The Victory Portfolios:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of
operations and changes in net assets, and the financial highlights present
fairly, in all material respects, the financial position of the Victory
LifeChoice Moderate Growth Fund, the Victory LifeChoice Growth Fund, and the
Victory LifeChoice Conservative Growth Fund at October 31, 1998, the results
of operations, the changes in net assets, and the financial highlights for
each of the periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation and verification by examination of
securities at October 31, 1998 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Columbus, Ohio
December 11, 1998
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<PAGE>
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<PAGE>
(LOGO)(R)
Victory Funds
1-800-KEY-FUND(R)
(1-800-539-3863)
1AR-LCHF 10/98
