As filed with the Securities and Exchange Commission on December 15, 1998
File No. 333-_______
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. [ ]
Amendment No. ___
The Victory Portfolios
(Exact name of Registrant as Specified in Trust Instrument)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of Principal Executive Office)
(800) 362-5365
(Area Code and Telephone Number)
Robert Hingston Copy to:
BISYS Fund Services Limited Partnership Jay G. Baris, Esq.
3435 Stelzer Road Kramer Levin Naftalis & Frankel LLP
Columbus, Ohio 43219 919 Third Avenue
(Name and Address of Agent for Service) New York, New York 10022
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
Title of Securities Being Registered: Shares of Beneficial Interest. No Filing
Fee is due because of reliance on Section 24(f).
<PAGE>
Cross-Reference Sheet
The Victory Portfolios
Part A Form N-14
Item No. Prospectus/Proxy Caption
-------- ------------------------
1(a) Cross Reference Sheet of The Victory Portfolios.
(b) Cover Page - Special Meeting of Shareholders March 5, 1999
- The Victory Portfolios - Combined Proxy Statement and
Prospectus.
2(a) Not applicable.
(b) Table of Contents.
3(a) Part 2 - Your Fund's Proposals - Proposal 1 - To Approve a
Reorganization of the Gradison Funds. How the Fees of the
Gradison Funds Compare to the Fees of the Victory
Portfolios.
(b) Part 1 - An overview; Part 2 - Your Fund's Proposals -
Proposal 1 - To Approve a Reorganization of the Gradison
Funds - How the Reorganization Works.
(c) Part 1 - Your Fund's Proposals - Proposal 1 - To Approve a
Reorganization of the Gradison Funds - Comparison of
principal investment risks.
4(a) Part 1 - An Overview; Part 2 - Your Fund's Proposals -
Proposal 1 - To Approve a Reorganization of the Gradison
Funds - How the Reorganization Works, Information about
the Reorganization - Why We Want to Reorganize the
Gradison Funds; Considerations by the Board of Trustees;
Comparison of shareholder rights.
(b) Part 2 - Your Fund's Proposal - Proposal 1 - To Approve a
Reorganization of the Gradison Funds - Capitalization of
the Funds.
5(a) Part 2 - Your Fund's Proposal - Proposal 1 - To Approve a
Reorganization of the Gradison Funds.
(b) - (e) Not applicable.
(f) Combined Proxy Statement and Prospectus - Introduction.
6(a) Part 2 - Your Fund's Proposals - Proposal 1 - To Approve a
Reorganization of the Gradison Funds; Part 5 -
Prospectuses.
(b) Combined Proxy Statement and Prospectus - Introduction.
(c)-(d) Not applicable.
7(a) Part 3 - More on Proxy Voting and Shareholder Meetings.
(b) Not applicable.
(c) Part 3 - More on Proxy Voting and Shareholder Meetings.
<PAGE>
8 Not applicable.
9 Not applicable.
Part B Statement of Additional Information Caption
------ -------------------------------------------
10 Front Cover Page.
11 Table of Contents.
12(a) Additional Information about the Registrant.
(b)-(c) Not applicable.
13 Not applicable.
14 Financial Statements.
2
<PAGE>
Important Information to Help You Understand the Proposals on Which You Are
Being Asked to Vote.
Please read the full text of this proxy statement. Below is a brief
overview of the matters to be voted upon. Your vote is important. If you
have questions regarding the proposals please call your Investment
Consultant or Gradison Mutual Funds at (513) 579-5700 in the Cincinnati
area or (800)-869-5999 outside of Cincinnati. We appreciate the
confidence you have placed in the Gradison Funds and look forward to
helping you achieve your financial goals through investment in The
Victory Portfolios.
What proposals am I being asked to vote on?
You are being asked to vote on the following proposals:
1. To reorganize each Gradison Fund into a corresponding fund
of The Victory Portfolios
2. To approve a New Investment Advisory Agreement between each
Gradison Fund and McDonald Investments Inc. (McDonald)
3. To approve a new Investment Sub-Advisory Agreement between
McDonald and Blairlogie Capital Management (Blairlogie), on
behalf of the International Fund.
GRADISON FUNDS REORGANIZING INTO NEW VICTORY FUNDS
- As of Close of Business on April 2, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
Old Gradison Fund New Victory Portfolio
----------------- ---------------------
Gradison U.S. Government Reserves Gradison Government Reserves Fund-Class G Shares
Gradison Established Value Fund Established Value Fund-Class G Shares
</TABLE>
GRADISON FUNDS MERGING INTO NEW CLASS OF EXISTING VICTORY FUNDS
- As of Close of Business on March 26, 1999
<TABLE>
<CAPTION>
<S> <C>
Old Gradison Fund Victory Fund Portfolio
----------------- ----------------------
Gradison Government Income Fund Fund for Income-Class G Shares *
Gradison Ohio Tax-Free Income Fund Ohio Municipal Bond Fund-Class G Shares
Gradison Growth & Income Fund Diversified Fund-Class G Shares
Gradison Opportunity Value Fund Special Growth Fund-Class G Shares**
Gradison International Fund International Growth Fund-Class G Shares
</TABLE>
**Effective no later than the time of the reorganization, the Victory Fund for
Income will be managed in substantially the same manner as the Gradison
Government Income Fund had been managed.
**Effective no later than the time of the reorganization, the Victory Special
Growth Fund will change its name to the Victory Small Company Opportunity Fund
and be managed in substantially the same manner as the Gradison Opportunity
Value Fund has been managed.
Has my Fund's Board of Trustees approved the Reorganization?
Yes. The Board of the Gradison Funds unanimously approved the
reorganization on November 6, 1998, and recommends that you vote
to approve the reorganization. The Board of The Victory
Portfolios approved the Plan of Reorganization on December 11,
1998.
<PAGE>
Why is the Reorganization being recommended?
The merger of McDonald Investments Inc. with KeyCorp brought
together two mutual fund families, the Gradison Funds and The
Victory Portfolios, under a single management structure. The
Boards of both the Gradison Funds and The Victory Portfolios
recognized that several of the Gradison and Victory Funds have
substantially similar investment objectives and policies.
The reorganization will produce a number of benefits including:
o Reducing investor confusion and eliminating duplicate marketing
and operational costs required to operate two separate entities.
o Enabling you to exchange your Victory Fund shares for shares
of any other Victory Fund without the payment of a sales charge.
o Facilitating administrative, portfolio management, distribution
service and other efficiencies.
o Producing economics of sale in certain cases.
Will the Portfolio manager of my Fund change as a result of the reorganization?
The current portfolio managers of certain Gradison Funds will
continue to manage those Funds after the reorganization, as noted
below. The current portfolio managers of Key Asset Management
Inc. will advise the Victory Ohio Municipal Bond Fund, Victory
Diversified Stock Fund and International Growth Fund with which
Gradison Ohio Tax Free Income Fund, Gradison Growth & Income Fund
and Gradison International Fund, respectively, will be
reorganized.
GRADISON FUNDS REORGANIZING INTO NEW VICTORY FUNDS
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Manager (Currently, a Gradison
Gradison Fund New Victory Fund Portfolio Portfolio Manager)
- ------------- -------------------------- ----------------------------------------
Gradison U.S. Government Reserves Gradison Government Reserves Steven Wesselkamper
Gradison Established Value Fund Established Value Fund William Leugers; Daniel Shick
GRADISON FUNDS MERGING INTO NEW CLASS OF EXISTING VICTORY FUNDS
Portfolio Manager (Currently, a Gradison
Gradison Fund Victory Fund Portfolio Portfolio Manager)
- ------------- ---------------------- ----------------------------------------
Gradison Government Income Fund Fund for Income Thomas Seay
Gradison Opportunity Value Fund Special Growth Fund William Leugers; Daniel Shick
</TABLE>
- 2 -
<PAGE>
Will the fees and expenses of my Fund increase?
No. Gradison Fund shareholders will exchange their shares for the
Class G Shares of a similar Victory Fund with expenses that are
no higher than your current Gradison Fund expenses, including
proxy expenses. These expenses will be maintained at a rate no
higher than the current expense ratio of the Gradison Funds for a
period of at least two years after the reorganization.
Will I or my Fund have to pay taxes as a result of the reorganization?
No.Neither you nor the Victory or Gradison Funds, will have any
tax consequences as a result of the reorganization. Your current
cost basis will remain the same.
Will any sales load, sales commission or other fee be imposed on my shares in
connection with the reorganization?
No.
What happens if I do not wish to participate in the reorganization?
If you do not wish to participate in the reorganization, you must
redeem your shares of the Gradison Funds, as shown below, before
the reorganization date. Please note that redeeming your shares
may result in you incurring a tax liability.
GRADISON FUND REDEEM BY:
Gradison U.S. Government Reserves Before 12:00 p.m., April 2, 1999
Gradison Established Value Fund Before 4:00 p.m., April 2, 1999
Gradison Government Income Fund Before 4:00 p.m., March 26, 1999
Gradison Ohio Tax-Free Income Fund Before 4:00 p.m., March 26, 1999
Gradison Growth & Income Fund Before 4:00 p.m., March 26, 1999
Gradison Opportunity Value Fund Before 4:00 p.m., March 26, 1999
Gradison International Fund Before 4:00 p.m., March 26, 1999
When will the Shareholder Meeting be held?
A Shareholder Meeting will be held on March 5, 1999.
Why am I being asked to approve a new Investment Advisory Agreement with
McDonald Investments Inc. and/or a new Investment Sub-Advisory Agreement for the
Gradison International Fund with Blairlogie Capital Management?
You are being asked to approve these agreements because the
merger of McDonald's corporate parent with KeyCorp caused these
agreements to terminate. The Board of Trustees of your Fund has
acted to permit the agreements to continue but your approval of
the Investment Advisory Agreement with McDonald Investments Inc.
and of the Investment Sub-Advisory Agreement with Blairlogie if
you are a shareholder of the Gradison International Fund, is
necessary to permit McDonald and
- 3 -
<PAGE>
Blairlogie to continue to act as investment adviser and
investment sub-adviser, respectively, until the time of the
reorganization. Your approval also permits McDonald and
Blairlogie to act in those capacities in the event that the
reorganization is not approved. Your approval of the Investment
Advisory Agreement and Investment Sub-Advisory Agreement is also
necessary in order to allow the Gradison Funds to pay McDonald
investment advisory fees for the period since the merger of
McDonald's corporate parent with KeyCorp.
I have received other proxies from Gradison. Is this a duplicate? Do I have to
vote again?
This is NOT a duplicate proxy. You must vote separately for each
account you have with the Gradison Funds.
How do I vote my shares?
You can vote your shares by completing and signing the enclosed
proxy card(s), and mailing them in the enclosed postage paid
envelope. You may also vote your shares by phone at 800- 786-8764
or by fax at 800-733-1885. If you need assistance, or have any
questions regarding the proposal or how to vote your shares,
please call your Investment Consultant or Gradison Mutual Funds
at (513) 579-5700 in the Cincinnati area or (800)-869-5999
outside of Cincinnati.
- 4 -
<PAGE>
PRELIMINARY PROXY MATERIALS FOR THE INFORMATION
OF THE SECURITIES AND EXCHANGE COMMISSION
GRADISON GROWTH TRUST
Gradison Established Value Fund
Gradison Growth & Income Fund
Gradison Opportunity Value Fund
Gradison International Fund
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
Gradison Ohio Tax-Free Income Fund
GRADISON-McDONALD CASH RESERVES TRUST
Gradison U.S. Government Reserves
GRADISON CUSTODIAN TRUST
Gradison Government Income Fund
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
The Gradison Funds will host a Special Meeting of Shareholders on March
5, 1999, at 9:30 a.m., Eastern Time. This will be a joint meeting for the
shareholders of each of the Gradison Funds. The Special Meeting will be held at
the Gradison Funds' offices, 580 Walnut Street, Cincinnati, Ohio. At the
meeting, we will ask shareholders of each Fund to vote on:
1. A proposal to reorganize each Gradison Fund into a corresponding
fund of The Victory Portfolios.
2. A proposal to approve a new Investment Advisory Agreement between
each Gradison Fund and McDonald Investments Inc.
3. A proposal to approve a new Investment Sub-Advisory Agreement
between McDonald Investments Inc. and Blairlogie Capital
Management (Gradison International Fund only).
4. Any other business properly brought before the meeting.
By Order of the Boards of Trustees
Richard M. Wachterman, Secretary
580 Walnut Street
Cincinnati, Ohio 45202
January ____, 1999
<PAGE>
YOUR VOTE IS IMPORTANT!
YOU CAN VOTE EASILY AND QUICKLY BY MAIL, BY PHONE (Toll-Free), OR BY
THE INTERNET. JUST FOLLOW THE SIMPLE INSTRUCTIONS THAT APPEAR
ON YOUR ENCLOSED PROXY CARD.
2
<PAGE>
GRADISON GROWTH TRUST
Gradison Established Value Fund
Gradison Growth & Income Fund
Gradison Opportunity Value Fund
Gradison International Fund
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
Gradison Ohio Tax-Free Income Fund
GRADISON-McDONALD CASH RESERVES TRUST
Gradison U.S. Government Reserves
GRADISON CUSTODIAN TRUST
Gradison Government Income Fund
SPECIAL MEETING OF SHAREHOLDERS
MARCH 5, 1999
THE VICTORY PORTFOLIOS
3435 Stelzer Road
Columbus, Ohio 43219
COMBINED PROXY STATEMENT AND PROSPECTUS
INTRODUCTION
------------
This Combined Proxy Statement and Prospectus is being provided for a special
meeting of shareholders of the Gradison Funds to be held on March 5, 1999. For
each proposal, shareholders of each Gradison Fund will vote separately. We've
divided the Combined Proxy Statement and Prospectus into five parts:
Part 1 -- An Overview
Part 2 -- Your Fund's Proposals
Part 3 -- More on Proxy Voting and Shareholder Meetings
Part 4 -- Fund Information
Part 5 -- Prospectus for
Victory Fund For Income - Class G Shares
Victory Ohio Municipal Bond Fund - Class G Shares
Victory Diversified Stock Fund - Class G Shares
Victory Small Company Opportunity Fund - Class G Shares
Victory International Growth Fund - Class G Shares
Part 6 -- Forms of Agreement and Plan of Reorganization
Part 7 -- Financial Information about The Victory Portfolios
Please read the entire proxy statement before voting. If you have any
questions, please call us at 1-800-869-5999 or (513) 579-5700 in the Cincinnati
area.
<PAGE>
This Combined Proxy Statement and Prospectus was first mailed to
shareholders the week of January __, 1999.
This Combined Proxy Statement and Prospectus contains information
about The Victory Portfolios that you should know. Please
keep it for future reference. A Statement of Additional Information
dated __, 1999 is incorporated by reference.
Neither the Securities and Exchange Commission (the SEC) nor
any state securities commission has approved or disapproved
these securities, or determined that this Combined Proxy Statement
and Prospectus is truthful or complete. Anyone who tells you otherwise
is committing a crime.
o Shares of the Victory Funds are not insured by the FDIC.
o Shares of the Victory Funds are not deposits of or guaranteed by
KeyBank or any of its affiliates, or any other bank.
o You can lose money by investing in the Victory Funds, because they
are subject to investment risks.
The Gradison Funds and The Victory Portfolios are both required by
federal law to file reports, proxy statements and other information with the
SEC. The SEC maintains a Web site that contains information about the Gradison
Funds and The Victory Portfolios. Any such proxy material, reports and other
information can be inspected and copied at the public reference facilities of
the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's New
York Regional Office, Seven World Trade Center, New York, NY 10048 and Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies
of such materials can be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
ii
<PAGE>
Table of Contents
Notice of Special Meeting of Shareholders
Introduction
Part 1- An Overview
Part 2- Your Fund's Proposals
Proposal 1- To Approve the Reorganization of each Gradison Fund
Introduction
How the Reorganization Works
How the Fees of the Gradison Funds Compare to the Fees of The
Victory Portfolios
Information about each Reorganization
Why We Want to Reorganize the Gradison Funds
Considerations by the Boards of Trustees
How the Gradison Funds Compare to The Victory Portfolios
Comparison of Investment Objectives
Comparison of Investment Policies and Strategies
Comparison of Principal Investment Risks
Comparison of Potential Risks and Rewards
Comparison of Operations
Investment Advisory Agreements
Distribution and Service Plans
Administrator and Distributor
Sub-Administrator
Dividends and Other Distributions
Purchase Procedures
Exchange Rights
Redemption Procedures
Trustees
Comparison of Shareholder Rights
Capitalization of the Funds
Required Vote
Board Recommendation
Proposal 2- To Approve A New Investment Advisory Agreement for each
Gradison Fund
Introduction
Reasons for the Proposal
ii
<PAGE>
Board Considerations
Terms of Investment Advisory Agreements
Required Vote
Board Recommendation
Proposal 3- To Approve New Investment Sub-advisory Agreements for the
Gradison International Fund
Introduction
Reasons for the Proposal
Board Considerations
Terms of the Sub-Advisory Agreements
Required Vote
Board Recommendation
Other Information
Principal Executive Officer and Directors of McDonald
Principal Executive Officer and Directors of Blairlogie
Officers and Trustees of the Gradison Funds
Old Investment Advisory Agreements
Other Fees Paid to McDonald or its Affiliates
Other Fees Paid to Blairlogie or its Affiliates
Affiliated Brokerage Commissions
Distribution Agreement for the Gradison Ohio Tax-Free Income Fund
Part 3- More on Proxy Voting and Shareholder Meetings
Part 4- Fund Information
Part 5- Prospectus
Victory Fund for Income - Class G Shares
Victory Ohio Municipal Bond Fund - Class G Shares
Victory Diversified Stock Fund - Class G Shares
Victory Small Company
Opportunity Fund - Class G Shares
Victory International Growth Fund - Class G Shares
Part 6- Forms of Agreement and Plan of Reorganization
Part 7- Financial Information about The Victory Portfolios
iii
<PAGE>
PART 1 - AN OVERVIEW
The Board of Trustees of each Gradison Trust has sent you this Combined
Proxy Statement and Prospectus to ask for your vote on proposals affecting your
Fund. This table summarizes the proposals and how they apply to the Gradison
Funds, which have scheduled a shareholder meeting for March 5, 1999.
Proposal Funds Affected
- ------------------------------------------------------- ------------------------
1. Agreement and Plan of Reorganization and All Funds
Termination
- ------------------------------------------------------- ------------------------
2. Investment Advisory Agreements All Funds
- ------------------------------------------------------- ------------------------
3. Investment Sub-Advisory Agreement International Fund
- ------------------------------------------------------- ------------------------
PART 2 - YOUR FUND'S PROPOSALS
PROPOSAL 1.
TO APPROVE THE REORGANIZATION OF EACH GRADISON FUND
Introduction
The Boards of Trustees of the Gradison Trusts have approved a proposal
to reorganize each Gradison Fund into a corresponding fund of The Victory
Portfolios.
>> THE PRIMARY PURPOSE OF THIS PROPOSAL IS TO IMPROVE OPERATING
EFFICIENCIES. IN ADDITION, THIS WILL ALLOW YOU TO EXCHANGE YOUR
SHARES WITH ANY OF THE FUNDS IN THE VICTORY PORTFOLIOS, WITHOUT
PAYING A SALES CHARGE.
You will NOT have to pay federal income taxes solely as a result of the
reorganization of your Fund.
To adopt the Agreement and Plan of Reorganization that applies to your
Fund, we need shareholder approval.
The next few pages of this Combined Proxy Statement and Prospectus
discuss some of the details of each proposed reorganization and how it will
affect your Fund.
How the Reorganization Works
Each Gradison Fund has entered into an "Agreement and Plan of
Reorganization." If shareholders approve this proposal, each Fund would
reorganize into a corresponding Fund of The Victory Portfolios. Key Asset
Management Inc. (KAM) is the investment adviser of each Victory Fund. The
reorganization would work as follows:
<PAGE>
-> Each Gradison Fund would transfer all its assets and
liabilities to a corresponding Victory Fund, in exchange for
shares of the Victory Fund.
-> Each Gradison Fund would distribute the Victory Fund shares it
receives to you. You would receive the same dollar value of
Victory Fund shares as you owned of Gradison Fund shares.
-> You will not have to pay any Federal income tax solely as a
result of the reorganization.
-> You would become a shareholder of Class G shares of the
corresponding Victory Fund. Each Gradison Fund would then
cease operations.
Here is how the reorganization would apply to your Gradison Fund:
New Victory Funds: The Victory Funds described below were established
to continue the operations of the corresponding Gradison Funds and will begin
doing business at the time the reorganization occurs. Each New Victory Fund has
an investment objective and investment policies that are substantially identical
to those of the corresponding Gradison Fund. After the reorganization, we
anticipate that each New Victory Fund will be managed by the same portfolio
manager who now manages your Gradison Fund.
<TABLE>
<CAPTION>
<S> <C> <C>
Your Gradison Fund would reorganize into -> Your Victory Fund
(Class G)
U.S. Government Reserves -> Gradison Government Reserves Fund
Established Value Fund -> Established Value Fund
</TABLE>
Currently Operating Victory Funds: The Victory Funds described below
are currently operating and have established Class G shares as a new class of
shares that you will recive in the reorganization. Each Victory Fund has an
investment objective and investment policies that are substantially similar to
those of the corresponding Gradison Fund.
<TABLE>
<CAPTION>
<S> <C> <C>
Your Gradison Fund would reorganize into -> Your Victory Fund
(Class G)
Government Income Fund -> Fund For Income
Ohio Tax-Free Income Fund -> Ohio Municipal Bond Fund
Growth & Income Fund -> Diversified Stock Fund
Opportunity Value Fund -> Small Company Opportunity Fund
International Fund -> International Growth Fund
</TABLE>
A FEW WORDS ABOUT THIS COMBINED PROXY STATEMENT AND PROSPECTUS
NEW VICTORY FUNDS: This Combined Proxy Statement and Prospectus is a proxy
statement for a special meeting of shareholders of your Gradison Fund. It is not
a prospectus for shares of the Victory Gradison Government Reserves Fund or the
Victory Established Value Fund.
2
<PAGE>
You will receive a prospectus for those shares at a later time.
CURRENTLY OPERATING VICTORY FUNDS: This Combined Proxy Statement and
Prospectus is a proxy statement for the special meeting of shareholders for your
Gradison Fund, AND a prospectus relating to the Class G shares of the currently
operating Victory Fund that you will receive in the reorganization (the Victory
Fund for Income, the Victory Ohio Municipal Bond Fund, the Victory Diversified
Stock Fund, the Victory Small Company Opportunity Fund and the Victory
International Growth Fund).
How the Fees of the Gradison Funds Compare to the Fees of The Victory Portfolios
The Gradison Funds, like all mutual funds, incur certain expenses in
their operations. The Funds pay these expenses from their assets and as a
shareholder of the Gradison Funds, you pay these expenses indirectly. The
Victory Portfolios also incur expenses in their operations. The expenses include
management fees, as well as the costs of maintaining accounts, administration,
providing shareholder liaison services and distribution services, and other
activities. The following table compares the expenses paid by the Gradison Funds
with the expenses that you will incur indirectly as a shareholder of Class G
shares of The Victory Portfolios, after the reorganization. The amounts
described below do not take into account the amounts that the investment
advisers waive or reimburse the Funds. In some cases, KAM has agreed to waive or
reimburse expenses. A Fund's annual expenses may be more or less than the
amounts shown below.
3
<PAGE>
<TABLE>
<CAPTION>
Victory
Gradison U.S. Gradison Government
Government Reserves Fund
Reserves Fund Class G (New Fund)
------------- ------------------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None None
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses (Before Expense
Waivers and Reimbursements)
(as a percentage of average daily net assets)
Management Fees(1) 0.44% 0.44%
Distribution (Rule 12b-1) Fees 0.10% 0.10%
Other Expenses 0.19% 0.34%
----- -----
Total Fund Operating Expenses 0.73% 0.88%(2)
1 The Management Fee is based upon the average daily net assets of the Fund at
an annual rate of 0.50% on the first $400 million, 0.45% on the next $600
million, 0.40% on the next $1 billion and 0.35% on amounts in excess of $2
billion.
2 KAM has agreed to waive or reimburse expenses so that at current asset
levels, total expenses would not exceed 0.73% for a period of two years
after the completion of the reorganization.
Victory
Gradison Established Value
Established Fund
Value Fund Class G (New Fund)
---------- ------------------
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge(1) 0.50% 0.50%
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses (Before Expense
Waivers and Reimbursements)
(as a percentage of average daily net assets)
Management Fees(2) 0.51% 0.50%
Distribution (Rule 12b-1) Fees 0.48% 0.50%
Other Expenses 0.11% 0.26%
----- -----
Total Fund Operating Expenses 1.10% 1.26%(3)
</TABLE>
1 Imposed on shares sold within 9 months of purchase. Sales of shares
purchased through McDonald or its affiliates are not subject to this
charge.
2 The Management Fee is based upon the average daily net assets of the Fund at
an annual rate of 0.65% on the first $100 million, 0.55% on the next $600
million and 0.45% in excess of $200 million.
3 KAM has agreed to waive or reimburse expenses so that at current asset
levels, total expenses would not exceed 1.10% for a period of two years
after the completion of the reorganization.
4
<PAGE>
<TABLE>
<CAPTION>
Gradison Victory
Government Fund For Income
Income Fund Class G
----------- -------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge(1) 0.50%(2) 0.50%
Redemption Fees None None
Exchange Fees None None
**
Annual Fund Operating Expenses (Before Expense
Waivers and Reimbursements)
(as a percentage of average daily net assets)
Management Fees 0.50% 0.50%
Distribution (Rule 12b-1) Fees 0.25% 0.25%
Other Expenses 0.15% 0.30%
----- -----
Total Fund Operating Expenses 0.90% 1.05%(3)
</TABLE>
1 Imposed on shares sold within 9 months of purchase. Sales of shares
purchased through McDonald or its affiliates are not subject to this
charge.
2 This charge was approved by the Trustees but not yet implemented.
3 KAM has agreed to waive or reimburse expenses so that at current asset
levels, total expenses would not exceed 0.90% for a period of two years
after the completion of the reorganization.
<TABLE>
<CAPTION>
Victory Ohio
Gradison Ohio Municipal Bond Fund
Tax-Free Income Fund Class G
-------------------- -------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge(1) 0.50%(2) 0.50%
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses (Before Expense
Waivers and Reimbursements)
(as a percentage of average daily net assets)
Management Fees 0.50% 0.60%
Distribution (Rule 12b-1) Fees 0.25% 0.25%
Other Expenses 0.20% 0.27%
----- -----
Total Fund Operating Expenses 0.95% 1.12%(3)
</TABLE>
1 Imposed on shares sold within 9 months of purchase. Sales of shares
purchased through McDonald or its affiliates are not subject to this
charge.
2 This charge was approved by the Trustees but not yet implemented.
5
<PAGE>
3 KAM has agreed to waive or reimburse expenses so that at current asset
levels, total expenses would not exceed 0.96% for a period of two years
after the completion of the reorganization.
<TABLE>
<CAPTION>
Gradison Victory
Growth & Diversified Stock
Income Fund Fund Class G
----------- ------------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge(1) 0.50% 0.50%
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses (Before Expense
Waivers and Reimbursements)
(as a percentage of average daily net assets)
Management Fees(2) 0.65% 0.65%
Distribution (Rule 12b-1) Fees 0.50% 0.50%
Other Expenses 0.37% 0.37%
----- -----
Total Fund Operating Expenses 1.52% 1.52%(2)
</TABLE>
1 Imposed on shares sold within 9 months of purchase. Sales of shares
purchased through McDonald or its affiliates are not subject to this
charge.
2 KAM has agreed to waive or reimburse expenses so that at current asset
levels, total expenses would not exceed 1.49% for a period of two years
after the completion of the reorganization.
<TABLE>
<CAPTION>
Victory
Gradison Small Company
Opportunity Opportunity
Value Fund Fund Class G
---------- ------------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge(1) 0.50% 0.50%
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses (Before Expense
Waivers and Reimbursements)
(as a percentage of average daily net assets)
Management Fees(2) 0.62% 0.62%
Distribution (Rule 12b-1) Fees 0.50% 0.50%
Other Expenses 0.19% 0.31%
----- -----
Total Fund Operating Expenses 1.31% 1.43%(3)
</TABLE>
6
<PAGE>
1 Imposed on shares sold within 9 months of purchase. Sales of shares
purchased through McDonald or its affiliates are not subject to this
charge.
2 The Management Fee is based upon the average daily net assets of the Fund at
an annual rate of 0.65% on the first $100 million, 0.55% on the next $100
million and 0.45% in excess of $200 million.
3 KAM has agreed to waive or reimburse expenses so that at current asset
levels, total expenses would not exceed 1.31% for a period of two years
after the completion of the reorganization.
7
<PAGE>
<TABLE>
<CAPTION>
Victory
Gradison International Growth
International Fund
Fund Class G
---- -------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases None None
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge(1) 0.50% 0.50%
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses (Before Expense
Waivers and Reimbursements)
(as a percentage of net assets)
Advisory Fees 1.00% 1.10%
Distribution (Rule 12b-1) Fees 0.50% 0.50%
Other Expenses 0.90% 0.47%
----- -----
Total Fund Operating Expenses 2.40%(2) 2.07%(3)
</TABLE>
1 Imposed on shares sold within 9 months of purchase. Sales of shares
purchased through McDonald or its affiliates are not subject to this
charge.
2 Gradison waives fees so that total expenses do not exceed 2.00%.
3 KAM has agreed to waive or reimburse expenses so that at current asset
levels, total expenses would not exceed 2.00% for a period of two years
after the completion of the reorganization.
8
<PAGE>
Example
This Example is intended to help you compare the cost of investing in
the Victory Funds with the cost of investing in the Gradison Funds and other
mutual funds.
The Example assumes that you invest $10,000 in each Gradison and
Victory Fund for the time periods indicated and then redeem all of your shares
at the end of those periods. The Example also assumes that your investment has a
5% return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gradison U.S. Government Reserves $75 $233 $406 $906
Victory Gradison Government Reserves Fund - Class G $ $ $ $
- -------------------------------------------------------------------------------------------------------------
Gradison Established Value Fund $112 $350 $606 $1,340
Victory Established Value Fund - Class G $ $ $ $
- -------------------------------------------------------------------------------------------------------------
Gradison Government Income Fund $92 $287 $498 $1,108
Victory Fund for Income - Class G $ $ $ $
- -------------------------------------------------------------------------------------------------------------
Gradison Ohio Tax-Free Income Fund $97 $303 $525 $1,166
Victory Ohio Municipal Bond Fund - Class G $ $ $ $
- -------------------------------------------------------------------------------------------------------------
Gradison Growth & Income Fund $155 $480 $829 $1,813
Victory Diversified Stock Fund - Class G $ $ $ $
- -------------------------------------------------------------------------------------------------------------
Gradison Opportunity Value Fund $133 $415 $718 $1,579
Victory Small Company Opportunity Fund - Class G $ $ $ $
- -------------------------------------------------------------------------------------------------------------
Gradison International Fund $243 $748 $1,280 $2,736
Victory International Growth Fund - Class G $ $ $ $
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Information about each Reorganization
This section describes some information you should know about the
reorganization of your Fund.
The Agreement and Plan of Reorganization.
Each Gradison Trust, on behalf of each of the Gradison Funds, has
entered into an Agreement and Plan of Reorganization and Termination with The
Victory Portfolios, on behalf of the Victory Funds that are described above. In
this Combined Proxy Statement and Prospectus, we refer to the Agreement and Plan
of Reorganization and Termination as the "Plan of Reorganization" and, to the
transactions described in the Agreement and Plan of Reorganization, as the
"reorganization."
Description of Transcription. The Plan of Reorganization provides that
your Gradison Fund will transfer its assets to a corresponding Victory Fund, as
described in the chart above, in exchange for Class G shares of the Victory
Funds. The Victory Fund also will assume all of your Gradison Fund's
liabilities. After this transaction, your Gradison Fund will give you Class G
shares of the corresponding Victory Fund. The total value of the shares you
receive will be equal to the net asset value of the Gradison Fund shares you
owned at the end of business on the day the transaction occurs. You will not pay
a sales charge or any other fee as part of this transaction, although in some
cases, the ongoing fees and expenses paid by the Victory Funds differ from the
fees you pay as a Gradison Fund shareholder.
9
<PAGE>
For at least two years, however, the total annual operating expenses of each
Victory Fund will not exceed the operating expenses of the corresponding
Gradison Fund. We described these fees and expenses above.
Please see a copy of the Plan of Reorganization for a more detailed
description of the reorganization. You can find a copy of the Plan of
Reorganization in Part 6 of this Combined Proxy Statement and Prospectus.
The reorganization will be "tax-free." We expect each reorganization to
be "tax-free." That is, each Gradison Fund will obtain an opinion of counsel
saying, in effect, that you will not have to pay any federal income taxes solely
as a result of the reorganization. Some Gradison Funds, however, may pay a
dividend or distribute a taxable gain prior to the reorganization. You may be
liable for taxes on those distributions.
Certain corporate actions. At the time of the reorganization, Gradison
U.S. Government Reserves and the Gradison Established Value will take certain
corporate actions that will enable the corresponding Victory Funds to operate.
For example, they must approve the new investment advisory agreement between KAM
and The Victory Portfolios on behalf of the new Victory Funds. This action is
necessary because the new Victory Funds were formed in order to continue the
operations of Gradison U.S. Government Reserves and Gradison Established Value
Fund.
Conditions of the reorganization. Before the reorganization can occur,
the Gradison Funds and The Victory Portfolios must satisfy certain conditions.
For example:
> The Gradison Funds must receive an opinion of counsel stating,
in effect, that you will not pay any federal income taxes
solely as a result of the reorganization
> The Gradison Funds and The Victory Portfolios must receive an
opinion of counsel certifying to certain matters concerning
the legal existence of each Fund
> Shareholders of the Gradison Funds must approve each
reorganization
> The Victory Portfolios must receive an exemptive order
from the SEC.
Exemptive order. As of December ___, 1998, affiliates of KAM held
shares of certain Victory Funds as record holders for the benefit of their
customers, including employees of KeyCorp and its affiliates. To the extent that
KAM's affiliates owned more than 5% of the "outstanding voting securities" of
any one of the Victory Funds, KAM may be deemed to be an "affiliated person" of
that Victory Fund. This affiliation may require the SEC to issue an exemptive
order that would permit the Victory Funds to carry out the reorganization, which
the law might otherwise prohibit. The Victory Portfolios has applied for an
exemptive order for the Victroy Special Growth Fund that would allow the
reorganization involving that Fund to occur.
10
<PAGE>
Why We Want to Reorganize the Gradison Funds
KAM is the investment adviser of The Victory Portfolios. McDonald
Investments Inc. (McDonald) is the investment adviser of the Gradison Funds. On
October 23, 1998, McDonald's corporate parent merged with KeyCorp, the ultimate
parent of KAM. McDonald expects to combine its investment advisory operations
with those of KAM. Thus, the merger brought two mutual fund families -- the
Gradison Funds and The Victory Portfolios -- under a single management
structure.
KAM and McDonald believe that the reorganization will benefit both the
Gradison Funds and The Victory Portfolios. Among other things, KAM and McDonald
believe the reorganization will:
o Eliminate duplicate operational and administrative costs. For
example, after the reorganization, all of the Funds will have
the same investment adviser, administrator, custodian,
transfer agent, accountants, counsel, and Board of Trustees.
o Improve operating efficiencies.
o Result in economies of scale. That is, the increased assets of
two combined Funds could possibly reduce expenses by spreading
fixed costs over a larger asset base.
o Eliminate duplicative efforts that separate legal entities may
require, resulting in more efficient Fund operations.
o Eliminate the confusion of maintaining similar investment
companies.
o Simplify and improve the marketing of the Funds by eliminating
similar funds.
o Increase the asset base of the Funds to allow for greater
asset diversification.
Considerations by the Boards of Trustees
The Board of Trustees of each Gradison Trust unanimously approved the
proposed Plan of Reorganization on November 6, 1998. The Gradison Trustees
concluded that the reorganization of each Gradison Fund
o was in the best interests of the Gradison Fund's
shareholders, and
o would not result in any dilution of the value of your
investment.
In approving the Plan of Reorganization, the Gradison Trustees
(including a majority of the Trustees who are not "interested persons")
considered, among other things:
o The investment objectives and policies of the Victory Funds
are similar to those of the Gradison Funds.
o KAM and McDonald are combining to manage the Victory Funds
after the reorganization.
o You will not pay a sales charge to become a shareholder of the
Victory Funds.
o For at least two years after the reorganization, Gradison Fund
shareholders would not pay increased fees as shareholders of
the Victory Funds.
11
<PAGE>
o Current Gradison Fund shareholders will be able to exchange
their Class G shares for shares of other Victory Funds
(including Victory Funds that do not offer Class G shares)
without paying any sales charge.
o KAM, combined with McDonald, offers high quality portfolio
management capability.
o The Victory Funds have a wider distribution network, which may
help the Funds increase their assets.
o The Victory Funds have a larger asset base, which may result
in economies of scale, and offer improved services to
shareholders.
o The reorganization by itself will not cause you any federal
income tax liability .
Similarly, the Board of Trustees of The Victory Portfolios unanimously
approved the Plan of Reorganization on December 11, 1998. The Victory
Portfolios' Trustees concluded that the reorganization of each Victory Fund
o was in the best interests of the Victory Funds' shareholders
and
o would not dilute the value of their investments.
How the Gradison Funds Compare to The Victory Portfolios
For complete information about each of the Gradison Funds, please refer
to your Gradison Fund prospectus. You also can call us at (513) 579-5700 from
Cincinnati or 1-800-869-5999 for a free copy of your Gradison Fund's prospectus.
The information contained in your Fund's prospectus is incorporated by reference
into this Combined Proxy Statement and Prospectus.
For complete information about the Victory Funds (other than Victory
Gradison Government Reserves Fund and Victory Established Value Fund), please
refer to the prospectus included with this combined proxy statement and
prospectus.
COMPARISON OF INVESTMENT OBJECTIVES.
The following tables compare the investment objectives of the Gradison
Funds and their corresponding Victory Funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------- ---------------------------------------------------
Gradison U.S. Government Reserves Fund Gradison Government Reserves Fund
- --------------------------------------------------------- ---------------------------------------------------
<S> <C>
To maximize current income to the extent consistent Same
with preservation of capital and the maintenance of
liquidity
- --------------------------------------------------------- ---------------------------------------------------
Gradison Established Value Fund Victory Established Value Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide long-term capital growth by investing Same
primarily in common stocks
- --------------------------------------------------------- ---------------------------------------------------
Gradison Government Income Fund Victory Fund for Income
- --------------------------------------------------------- ---------------------------------------------------
To provide high current income through investment in To provide a high level of current income consistent
U.S. Government obligations and obligations of agencies with preservation of shareholders' and capital
instrumentalities of the U.S. Government
- --------------------------------------------------------- ---------------------------------------------------
12
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Ohio Tax-Free Income Fund Victory Ohio Municipal Bond Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide as high a level of after-tax current income To provide a high level of current interest
as is consistent with preservation of income which is exempt from both federal income
capital through investment primarily in obligations the tax and Ohio personal income tax
interest of which is exempt from Federal income tax
and from Ohio state personal income tax
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Growth & Income Fund Victory Diversified Stock Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide long-term growth of capital, current income, To provide long-term growth of capital
and growth of income consistent with
reasonable investment risk
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Opportunity Value Fund Victory Small Company Opportunity Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide long-term capital growth by investing To provide capital appreciation
primarily in common stocks
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison International Fund Victory International Growth Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide growth of capital To provide capital growth consistent with
reasonable investment risk
- --------------------------------------------------------- ---------------------------------------------------
</TABLE>
COMPARISON OF INVESTMENT POLICIES AND STRATEGIES.
The following tables compare the principal investment policies and
strategies of the Gradison Funds and their corresponding Victory Funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------- ---------------------------------------------------
Gradison U.S. Government Reserves Gradison Government Reserves Fund
- --------------------------------------------------------- ---------------------------------------------------
<S> <C>
U.S. Government Reserves invests primarily in Same
securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities.
The Fund currently invests only in obligations issued
by the Federal Home Loan Banks, the Federal Farm
Credit Bank System and the Student Loan Marketing
Association
Gradison U.S. Government Reserves invests in securities
which bear fixed, floating or variable rates of
interest.
The Fund may also invest in repurchase agreements
secured by U.S. Government securities.
- --------------------------------------------------------- ---------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Established Value Fund Victory Established Value Fund
- --------------------------------------------------------- ---------------------------------------------------
<S> <C>
The Established Value Fund invests primarily in common Same
stocks of companies that are considered to be
undervalued, selected from those in the S&P's 500
Composite Stock Price Index and from among other
companies generally with capitalizations of $1 billion
or more.
In the Established Value Fund, investments are made
in companies that meet certain objective requirements
with respect to:
o Earnings
o Price-earnings ratios
o Price-book ratios
o Rate of return on shareholders' equity and other factors.
Under normal market conditions, at least 70% of the
Established Value Fund's assets will be invested in
common stocks. It may invest remaining assets in:
o U.S. Government obligations
o Certificates of deposit
o Commercial paper
o Other money market obligations
o Repurchase agreements
- --------------------------------------------------------- ---------------------------------------------------
Gradison Government Income Fund Victory Fund for Income
- --------------------------------------------------------- ---------------------------------------------------
The Government Income Fund pursues its investment Same
objective by investing in securities issued or
guaranteed by the U.S. Government, its agencies
or instrumentalities. The Government Income Fund
may also hold a portion of its assets in cash and
repurchase agreements collateralized by securities
eligible for purchase by the Fund.
Under normal market conditions, the Government Income
Fund primarily invests in:
o Obligations issued or guaranteed by the U.S.
government or by its agencies or instrumentalities with
maturities generally in the range of 2 to 30 years
o Mortgage-backed obligations and collateralized
mortgage obligations (CMOs) issued by the Government
National Mortgage Association
The Government Income Fund also may engage to a
limited extent in the following investment practices:
14
<PAGE>
o Writing covered call options
o Engaging in closing options transactions
o Obligating itself to purchase or sell securities
with delivery and payment to occur at a later date
- --------------------------------------------------------- ---------------------------------------------------
Gradison Ohio Tax-Free Income Fund Victory Ohio Municipal Bond Fund
- --------------------------------------------------------- ---------------------------------------------------
The Ohio Tax-Free Income Fund normally pursues its The Ohio Municipal Bond Fund pursues its
investment objective by investing at least 80% of its investment objective by investing at least 80% of
total assets in securities, the interest from which is its total assets in investment grade
exempt from federal income tax and Ohio state personal obligations. The interest on these obligations
income tax and is not a tax preference item for is exempt from federal income taxes, including
purposes of the federal alternative minimum tax. 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 that are also exempt from Ohio
state income tax.
Under normal market conditions, the Ohio Tax-Free Under normal market conditions, the Ohio
Income Fund invests in: Municipal Bond Fund primarily invests in:
o Municipal bonds o Municipal securities with fixed,
o Short term tax-exempt securities, usually for variable, or floating interest rates
temporary purposes o Zero coupon, tax, revenue, and bond
o Participations in lease obligations or installment anticipation notes
purchase contract obligations of municipal authorities o Tax-exempt commercial paper
or entities
o Zero coupon municipal bonds
o Ohio tax-free money market funds
Important characteristics of the Ohio Tax-Free Income Important characteristics of the Ohio Municipal
Fund include the ability to: Bond Fund's investments:
o Purchase and sell securities on a "when issued" and o QUALITY: Municipal securities rated A
"delayed delivery" basis; or above at the time of purchase by S&P,
o Hold cash that is not earning interest and invest in Fitch, Moody's, or another nationally recognized
short-term obligations issued or guaranteed by the U.S. statistical ratings organization, or if
Government, and its agencies or instrumentalities; and unrated, of comparable quality.
o Engage in short-term trading o MATURITY: The dollar-weighted effective
o QUALITY: Municipal securities rated investment average maturity of the Ohio Municipal Bond
grade, that is, rated within the top four quality Fund generally will range from 5 to 15 years.
categories by S&P, Fitch or Moody's, or if Under certain market conditions, the Portfolio
unrated, determined to be equal in quality by Manager may go outside these boundaries.
McDonald.
o MATURITY: The dollar-weighted effective average
maturity of the Ohio Tax-free Income Fund
generally will range from 20 to 30 years.
Short-term trading may increase the Fund's turnover rate,
generally resulting in higher transactions costs and
possibly capital gains, subject to tax.
As of September 30, 1998, the weighted average As of September 30, 1998, the weighted average
maturity of the Fund's portfolio was 19 years. maturity of the Fund's portfolio was ___ years.
- --------------------------------------------------------- ---------------------------------------------------
19
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Growth & Income Fund Victory Diversified Stock Fund
- --------------------------------------------------------- ---------------------------------------------------
The Growth & Income Fund pursues its investment The Diversified Stock Fund pursues its investment
objective by investing primarily in common stocks of objective by investing primarily in equity
companies considered by McDonald to be undervalued and securities and securities convertible into common
which offer earnings growth potential while stocks issued by large, established companies.
paying urrent dividends.
KAM seeks to invest in both growth and value
McDonald seeks to identify dividend paying securities securities. In making investment decisions, KAM
issued by companies, which have, on average, records of may consider cash flow, book value, dividend
historic growth in earnings that are higher than the yield, growth potential, quality of management,
growth in earnings of the S&P 500. In addition, adequacy of revenues, earnings, capitalization,
McDonald seeks companies which have had higher returns relation to historical earnings, the value of the
on shareholder equity than the S&P 500. McDonald issuer's underlying assets, and expected future
will generally pursue investments in securities of relative earnings growth. KAM will pursue
companies with capitalizations in excess of $500 investments that provide above average dividend
million, the securities of which are traded on yield or potential for appreciation.
recognized securities exchanges or in the
over-the-counter market. Under normal market conditions, the Diversified
Stock Fund:
Under normal market conditions, the Growth & Income o Will invest at least 80% of its total
Fund: assets in equity securities of large,
established companies and securities
o Will invest principally in common stocks and convertible or exchangeable into
will avoid market-timing or speculating on common including
broad market stock, conditions o Growth stocks, which are stocks of
companies that KAM believes will
May also invest in: regularly experience earnings growth,
o Securities convertible into common stocks and
o Warrants o Value stocks, which are stocks that KAM
o Cash equivalents believes are intrinsically worth more
o U.S. Government securities than their market value.
o Non-convertible preferred stocks o May invest up to 20% of its total assets
o Straight debt securities (rated in the top in:
three quality categories by S&P or Moody's, or o Preferred stocks
determined to be equal in quality by McDonald.) o Investment grade corporate debt
securities
Generally, the Growth & Income Fund will not engage in o Short-term debt obligations
trading for short-term profits. o U.S. Government obligations
Nevertheless, changes to the portfolio will be made
promptly under unforeseen circumstances. The Diversified Stock Fund may, but is not
required to, use derivative instruments.
- --------------------------------------------------------- ---------------------------------------------------
16
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Opportunity Value Fund Victory Small Company Opportunity Fund
- --------------------------------------------------------- ---------------------------------------------------
The Opportunity Value Fund invests primarily in common The Small Company Opportunity Fund invests primarily in
stocks of companies that are considered to be common stocks of smaller companies that are
undervalued, selected from those in the S&P's 500 exhibiting high earnings growth in relation to
Composite Stock Price Index and from among other their price-earnings ratio. These companies
companies generally with capitalizations of less than generally will have market capitalizations of $1
$1 billion. billion or less.
In the Opportunity Value Fund, investments are made in Under normal market conditions, the Small Company Opportunity
companies that meet certain objective requirements with Fund:
respect to: o Will invest at least 65% of its total
o Earnings assets in equity securities of companies
o Price-earnings ratios with market capitalization of $1 billion or
o Price-book ratios less. These equity investments include:
o Rate of return on shareholders' equity and other o Common stock
similar factors. o Convertible preferred stock
o Debt convertible or exchangeable into
Under normal market conditions, at least 70% of the equity securities
Opportunity Value Fund's assets will be invested in o Securities convertible into common stock
common stocks. It may invest its remaining assets in: o May invest up to 35% of its total assets
o U.S. Government obligations in:
o Certificates of deposit o Equity securities of companies with
o Commercial paper market capitalizations of approximately
o Other money market obligations $1 billion or more
o Repurchase agreements o Investment-grade debt securities
o Preferred stocks
o Short-term debt obligations
o Repurchase agreements
- --------------------------------------------------------- ---------------------------------------------------
17
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison International Fund Victory International Growth Fund
- --------------------------------------------------------- ---------------------------------------------------
The International Fund will primarily invest most of The International Growth Fund pursues its
its assets in securities of companies traded on investment objective by investing primarily in
exchanges outside of the U.S. including equity securities of foreign corporations, most
"emerging market" countries and more developed of which are denominated in foreign currencies.
countries. It generally will invest a maximum of 30% The International Growth Fund will
of its assets securities of issuers in emerging invest most of the its assets in
markets securities of companies traded on any exchange
outside of the U.S. including
Under normal market conditions, the International developing countries and developed countries. In
Growth Fund will invest at least 65% of its total making investment decisions, KAM (or the
assets in common stock of non-U.S. companies. It may subadviser) may analyze the economies of foreign
maintain a portion of its assets, which usually will countries and the growth potential for individual
not exceed 10% in: sectors and securities.
o U.S. Government securities;
o High-quality debt securities (with maturities o Under normal market conditions, the
not exceeding 5 years); International Growth Fund will invest at
o Money market obligations; and least 65% of its total assets in:
o Cash o Securities (including "sponsored" and
"unsponsored American Depositary
The International Fund has a policy to be as fully Receipts) of companies that derive more
invested in common stock as possible at all times than 50% of their gross revenues from,
and not to attempt to "time" the market. As a result, or have more than 50% of their assets,
there is the risk of general declines in stock outside the United States.
prices. However, when defensive measures are o Securities for which the principal
called for, McDonald may invest an trading markets are located in at least
unlimited portion of its assets in U.S. three different countries (excluding
Government debt securities. the United States).
o May invest up to 20% of its total assets
The International Fund may invest in illiquid in securities of companies located in
securities but may not invest in securities that are developing countries.
illiquid because they are subject to certain legal or o May invest up to 35% of its total assets
contractual restrictions. in cash equivalents and fixed income
securities, including U.S. Government
obligations.
The International Growth Fund's high
portfolio turnover rate may result in
higher expenses and taxable gain distributions.
The Fund may, but is not required to, use
derivative contracts.
- --------------------------------------------------------- ---------------------------------------------------
</TABLE>
18
<PAGE>
Comparison of Principal Investment Risks. The following tables compare
the principal investment risks of investing in the Gradison Funds and the
corresponding Victory Funds.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------- ---------------------------------------------------
Gradison U.S. Government Reserves Gradison Government Reserves Fund
- --------------------------------------------------------- ---------------------------------------------------
<S> <C>
You may lose money if any of the following occurs: Same
o An agency or instrumentality defaults on its
obligations and the U.S. Government does not provide
financial support to such agencies or
instrumentalities in the future, to the extent it is
not obligated to do so by law.
o The market value of floating and variable rate
securities does not continue to be valued at
least approximately at par.
o Rising interest rates cause the value of investments
to decline.
- --------------------------------------------------------- ---------------------------------------------------
Gradison Established Value Fund Victory Established Value Fund
- --------------------------------------------------------- ---------------------------------------------------
You may lose money if any of the following occurs: Same
o The market value of securities acquired by the
Established Value Fund declines
o A particular strategy does not produce the intended
result or the portfolio manager does not execute the
strategy effectively
o A company's earnings do not increase as expected
- --------------------------------------------------------- ---------------------------------------------------
Gradison Government Income Fund Victory Fund for Income
- --------------------------------------------------------- ---------------------------------------------------
You may lose money if any of the following occurs: Same
o The market value of securities acquired by the
Government Income Fund declines
o Interest rates rise, an issuer's credit quality
is downgraded, the Government Income Fund must
reinvest interest or sale proceeds at lower
rates, or the rate of inflation increases
o Mortgagors prepay the underlying mortgages,
making them a less effective means of "locking in"
attractive long-term interest rates
o Prepayment occurs at a slower than expected rate,
lengthening the life of a security.
- --------------------------------------------------------- ---------------------------------------------------
19
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Ohio Tax-Free Income Fund Victory Ohio Municipal Bond Fund
- --------------------------------------------------------- ---------------------------------------------------
You may lose money if any of the following occurs: Same
o Interest rates rise, an issuer's credit quality
is downgraded, the Ohio Tax-Free Income Fund
must reinvest interest or sale porceeds at lower
rates or the rate of inflation increases.
o Economic or political events take place in Ohio
which make the market value of Ohio obligations go
down
o A decrease in the rating of portfolio securities
o The inability of issuers to make payment of
principal and interest
o Regarding Municipal Leases with
"nonappropriation" clauses, the municipality
fails to appropriate money to pay the lease
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Growth & Income Fund Victory Diversified Stock Fund
- --------------------------------------------------------- ---------------------------------------------------
You may lose money if any of the following occurs: Same
o The market value of securities acquired by the
Growth & Income Fund declines
o A particular strategy does not produce the
intended result or the portfolio manager does not
execute the strategy effectively
o A company's earnings do not increase as
expected
o "Value" stocks fall out of favor with investors
- --------------------------------------------------------- ---------------------------------------------------
Gradison Opportunity Value Fund Victory Small Company Opportunity Fund
- --------------------------------------------------------- ---------------------------------------------------
You may lose money if any of the following occurs: Same
o The market value of securities acquired by the
Opportunity Value Fund declines
o A particular strategy does not produce the intended
result or the portfolio
manager does not execute the strategy effectively
o The price of small company stocks decline
- --------------------------------------------------------- ---------------------------------------------------
Gradison International Fund Victory International Growth Fund
- --------------------------------------------------------- ---------------------------------------------------
You may lose money if any of the following occurs: Same
o Foreign stock markets go down
o Changes in foreign exchange rates affecting
the value of securities denominated or quoted in
currencies other than the U.S. dollar
o Hedges created by using futures contracts do
not respond to economic or market conditions as
expected
- --------------------------------------------------------- ---------------------------------------------------
</TABLE>
20
<PAGE>
Comparison of Potential Risks and Rewards.
Each of the Gradison Funds and the corresponding Victory Funds has its
own risks and potential rewards. The tables below compare the potential risks
and rewards of investing in the Gradison Funds and the currently existing
Victory Funds.
The bar chart and table shown below give an indication of the risks of
investing in each Fund by showing changes in the Fund's performance from year to
year since the inception of the Fund. The table below shows how each Fund's
average annual returns for one year, five years and since inception compare to
the returns of a broad-based securities market index. The figures shown assume
reinvestment of dividends and distributions. The performance information below
is for the Class A shares of each Victory Fund. Returns for the Class G shares
would be similar because the shares will be invested in the same portfolio of
securities. The annual returns would differ only to the extent that each class
has a different expense ratio. Keep in mind that past performance does not
indicate future results.
[Insert Bar Chart]
<TABLE>
<CAPTION>
<S> <C> <C>
Fund Highest Quarterly Return Lowest Quarterly Return
Gradison Government Income Fund 5.57% in 2d Quarter 1989 (3.05)% in 1st Quarter 1994
Victory Fund for Income* 5.57% in 2d Quarter 1989 (3.05)% in 1st Quarter 1994
Gradison Ohio Tax-Free Income Fund 7.12% in 1st Quarter 1995 (6.08)% in 1st Quarter 1994
Victory Ohio Municipal Bond Fund - ___% in ___ Quarter 19__ ___% in ___ Quarter 19__
Class A shares
Gradison Growth & Income Fund 14.02% in 2nd Quarter 1997 (7.57)% in 3d Quarter 19__
Victory Diversified Stock Fund - ___% in ___ Quarter 19__ ___% in ___ Quarter 19__
Class A shares
Gradison Opportunity Value Fund ____% in 1st Quarter 19__ _______% in 4th Quarter 19__
Victory Small Company Opportunity Fund* ____% in 1st Quarter 19__ _______% in 4th Quarter 19__
Gradison International Fund 14.69% in 1st Quarter 1998 (7.63)% in 3d Quarter 1998
Victory International Growth Fund - ___% in ___ Quarter 19__ ___% in ___ Quarter 19__
Class A shares
</TABLE>
*After the reorganization, Victory Fund for Income will adopt the financial
history of Gradison Government Income Fund, and Victory Small Company
Opportunity Fund will adopt the financial history of Gradison Opportunity Value
Fund.
21
<PAGE>
The Average Annual Total Returns for the periods ended December 31,
1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ----------------------------------------------- ----------------------- ---------------------- -----------------------
Average Annual Total Returns
(for the periods ended Past One Year Past 5 Years Past 10 Years
December 31, 1998)
- ----------------------------------------------- ----------------------- ---------------------- -----------------------
Gradison Government Income Fund % % %
- ----------------------------------------------- ----------------------- ---------------------- -----------------------
Victory Fund for Income* % % %
- ----------------------------------------------- ----------------------- ---------------------- -----------------------
Lehman Brothers Aggregate Bond Index** % % %
- ----------------------------------------------- ----------------------- ---------------------- -----------------------
</TABLE>
*After the reorganization, Victory Fund For Income will adopt the financial
history of Gradison Government Income Fund. The performance here reflects the
performance of Gradison Government Income Fund.
**The Lehman Brothers Aggregate Bond Index is a broad-based unmanaged index that
represents the general performance of investment grade bonds.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------- ------------------- ----------------------- ------------------------
Average Annual Total Returns
(for the periods ended Past One Year Past 5 Years Since Inception**
December 31, 1998)
- ------------------------------------------------- ------------------- ----------------------- ------------------------
Gradison Ohio Tax-Free Income Fund % % %
- ------------------------------------------------- ------------------- ----------------------- ------------------------
Victory Ohio Municipal Bond Fund - Class A % % %
- ------------------------------------------------- ------------------- ----------------------- ------------------------
Lehman 10 Year Muni Index* % % %
- ------------------------------------------------- ------------------- ----------------------- ------------------------
</TABLE>
* The Lehman Brothers 10-Year Municipal Bond Index is a broad-based unmanaged
index that represents the general performance of investment-grade municipal
bonds with maturities of 8 to 12 years.
**Reflects performance since the Gradison Ohio Tax-Free Income Fund's inception
on August 18, 1992 and the Victory Ohio Municipal Bond Fund - Class A's
inception on May 18, 1990.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------ ------------------- ------------------------ ------------------------
Average Annual Total Returns
(for the periods ended Past One Year Past 5 Years Since Inception**
December 31, 1998)
- ------------------------------------------------- ------------------- ----------------------- ------------------------
Gradison Growth & Income Fund % % %
- ------------------------------------------------ ------------------- ------------------------ ------------------------
Victory Diversified Stock Fund - Class A % % %
- ------------------------------------------------ ------------------- ------------------------ ------------------------
S&P 500 Stock Index* % % %
- ------------------------------------------------ ------------------- ------------------------ ------------------------
</TABLE>
*The Standard & Poor's 500 Stock Composite Price Index is a broad-based
unmanaged index that represents the general performance of domestically traded
common stocks of mid- to large-sized companies.
**Reflects performance since the Gradison Growth & Income Fund's inception on
February 28, 1995 and the Victory Diversified Stock Fund - Class A's inception
on October 20, 1989.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------ ------------------- ------------------------ ------------------------
Average Annual Total Returns
(for the periods ended Past One Year Past 5 Years Past 10 Years
December 31, 1998)
- ------------------------------------------------- ------------------- ----------------------- ------------------------
Gradison Opportunity Value Fund % % %
- ------------------------------------------------ ------------------- ------------------------ ------------------------
Victory Small Company Opportunity Fund* % % %
- ------------------------------------------------ ------------------- ------------------------ ------------------------
Russell 2000 Index** % % %
- ------------------------------------------------ ------------------- ------------------------ ------------------------
</TABLE>
22
<PAGE>
*After the reorganization, Victory Small Company Opportunity Fund will adopt the
financial history of Gradison Opportunity Value Fund. The performance here
reflects the performance of Gradison Opportunity Value Fund. ** The Russell
2000(R) Index is a broad-based unmanaged index that represents the general
performance of domestically traded common stocks of small- to mid-sized
companies.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------ ------------------- ------------------------ ------------------------
Average Annual Total Returns
(for the periods ended Past One Year Past 5 Years Since Inception**
December 31, 1998)
- ------------------------------------------------- ------------------- ----------------------- ------------------------
Gradison International Fund % % %
- ------------------------------------------------ ------------------- ------------------------ ------------------------
Victory International Growth Fund - Class A % % %
- ------------------------------------------------ ------------------- ------------------------ ------------------------
All Country World Index* % % %
- ------------------------------------------------ ------------------- ------------------------ ------------------------
</TABLE>
* The All Country World Index is a widely recognized, unmanaged index of common
stock prices with country weightings of international companies.
**Reflects performance since the Gradison International Fund's inception on May
31, 1995 and the Victory International Growth Fund - Class A's inception on May
18, 1990.
COMPARISON OF OPERATIONS.
Investment Advisory Agreements
McDonald, through its Gradison Division, serves as investment adviser
to the Gradison Funds. McDonald is a wholly owned subsidiary of KeyCorp, 127
Public Square, Cleveland, Ohio 44114. Subject to the authority of the Board of
Trustees, Gradison manages the investment and reinvestment of the assets of the
Gradison Funds, and provides its employees to act as the officers of the Funds,
who are responsible for the overall management of the Gradison Funds. Blairlogie
serves as the investment sub-adviser to Gradison International Fund. Blairlogie
is a Scottish investment management firm, organized as a limited partnership.
Blairlogie's address is 4th Floor, 125 Princes Street, Edinburgh EH2 4AD,
Scotland.
KAM serves as investment adviser to the Victory Funds. KAM is a New
York corporation registered as an investment adviser with the SEC. KAM, a
subsidiary of Key Bank National Association, a wholly owned subsidiary of
KeyCorp, oversees the operations of the Victory Funds according to investment
policies and procedures adopted by the Board of Trustees. Affiliates of the
Adviser manage approximately $62 billion for a limited number of individual and
institutional clients. KAM's address is 127 Public Square, Cleveland, Ohio
44114.
KAM, the investment adviser, serves as a Manager of Managers of the
International Growth Fund. In this capacity, KAM may select one or more
sub-advisers to manage the International Growth Fund's assets. Under its
Advisory Agreement with Victory, KAM oversees the investment advisory services
that a sub-adviser provides to the International Growth Fund.
KAM currently has a Portfolio Management Agreement with Indocam
International Investment Services, S.A. (IIIS), a French corporation located
in Paris, France. IIIS has served
23
<PAGE>
as sub-adviser for all of the International Growth Fund's assets (other than
short-term debt instruments) since June 1998.
Distribution and Service Plans
The Gradison Funds have adopted a distribution and servicing plan. The Gradison
Funds pay fees as follows:
o An annual service fee of up to 0.25% of average daily
net assets of the Gradison Government Income Fund and
the Gradison Ohio Tax-Free Income Fund.
o An annual service fee of up to 0.25% of average daily
net assets and an annual distribution fee of up to 0.25%
of average daily net assets of the Gradison Established
Value Fund, the Gradison Growth & Income Fund, the
Gradison Opportunity Value Fund, and the Gradison
International Fund.
o An annual service fee of up to 0.10% of average daily
net assets of the Gradison U.S. Government Reserves.
These fees are paid monthly. The service fee is paid to securities
broker-dealers for providing personal services to shareholders of the Fund,
including responding to shareholder inquiries and providing information to
shareholders about their Fund accounts. The distribution fee may be used to pay
for advertising and printing prospectuses, annual reports, and other promotional
material for prospective investors, and for other distribution activities. Over
time these fees will increase the cost of your investment.
The G class of each Victory Fund has adopted a similar plan that
provides for the same fees. In addition, the Victory Funds have adopted a
Shareholder Servicing Plan, which provides that each Victory Fund may pay up to
0.25% for shareholder servicing activities. The Victory Funds currently do not
anticipate paying any fees under this plan.
Administrator and Distributor
McDonald, through its Gradison Division, acts as administrator,
transfer agent, and accounting service provider for all of the Gradison Funds,
except the Gradison Government Income Fund.
McDonald receives the following fees for acting as Administrator,
Transfer Agent and Accounting Service Provider:
24
<PAGE>
Gradison U.S. Government Reserves
- ---------------------------------
Transfer Agent and Accounting Services - $23.50 per shareholder non-zero balance
account and $5.00 per closed or zero balance account per year, plus
out-of-pocket costs.
Accounting Services - .0150% of the first $400 million of average daily
assets
.0125% of the next $300 million of average daily
assets
.0100% of the next $300 million of average daily
assets
.0075% of average daily net assets in excess of
$1 billion
Gradison Ohio Tax-Free Income Fund
- ----------------------------------
Transfer Agent and Accounting Services - $23.00 per shareholder non-zero balance
account and $5.00 per closed or zero balance account per year, plus
out-of-pocket costs.
Accounting Services - .035% of the first $100 million of average daily assets
.025% of the next $100 million of average daily
assets
.015% of average daily net assets in excess of
$200 million Minimum yearly fee is $48,000
Gradison Established Value Fund
- -------------------------------
Gradison Opportunity Value Fund
- -------------------------------
Gradison Growth & Income Fund
- -----------------------------
Transfer Agent and Accounting Services - $18.50 per shareholder non-zero balance
account and $5.00 per closed or zero balance account per year, plus
out-of-pocket costs.
Accounting Services - .03% of the first $100 million of average
daily assets
.02% of the next $100 million of average
daily assets
.01% of average daily net assets in
excess of $200 million
Minimum fee per fund is
$40,000 per year.
Gradison International Fund
- ---------------------------
Transfer Agent and Accounting Services - $18.50 per shareholder non-zero balance
account and $5.00 per closed or zero balance account per year, plus
out-of-pocket costs.
Accounting Services - .045% of the first $100 million of average daily assets
.030% of the next $100 million of average daily
assets
.015% of average daily net assets in excess of
$200 million Minimum yearly fee is $60,000.
With respect to the Gradison Government Income Fund, Gradison provides
administrative and accounting services to the Fund at cost and provides data
processing services at a cost of $8.25 per account per year
25
<PAGE>
McDonald provides its employees to act as the officers of the Trust who
are responsible for the overall management of the Funds except for one officer
who is an employee of BISYS Fund Services Limited Partnership ("BISYS"). BISYS
is the distributor for the Gradison Funds.
BISYS serves as the administrator, distributor, and fund accountant for
the Victory Funds pursuant to administration, distribution and accounting
agreements with Victory. For expenses incurred and services provided as
administrator of the Victory Funds, BISYS receives a fee at the following annual
rate based on each Victory Fund's average daily net assets: 0.15% for portfolio
assets up to $300 million; 0.12% for the next $300 million of portfolio assets;
and 0.10% for portfolio assets in excess of $600 million.
BISYS also serves as the distributor of the Victory Funds. BISYS does
not charge the Victory Funds a fee for its services as distributor, but receives
sales charges paid by shareholders. Under its distribution agreement with
Victory, BISYS may provide sales support, including cash or other compensation
to dealers for selling shares of the Victory Funds. BISYS does this at its own
expense and not at the expense of any Fund or its shareholders.
Sub-Administrator
There is no sub-administrator of the Gradison Funds.
KAM serves as sub-administrator of the Victory Funds. For its services
as sub-administrator of the Victory Funds, BISYS pays KAM an annual fee of up to
0.05% of the average daily net assets of the Victory Funds.
Dividends and Other Distributions
The Gradison Established Value Fund and the Gradison Growth & Income
Fund pay dividends quarterly; the Gradison Opportunity Value Fund pays dividends
semi-annually; and the Gradison International Fund pays dividends yearly. The
Gradison Government Income Fund and the Gradison Ohio Tax-Free Income Fund
declare dividends from accrued income daily and pay the dividends monthly.
Gradison U.S. Government Reserves declares dividends daily and pays dividends
monthly. Generally, each Gradison Fund pays realized capital gains, if any, at
least once a year.
Ordinarily, the Victory Fund for Income and Ohio Municipal Bond Fund
declare dividends from accrued income daily and pay the dividends monthly. The
Established Value Fund, Diversified Stock Fund, Small Company Opportunity Fund
and International Growth Fund declare and pay dividends quarterly. Gradison
Government Reserves Fund declares dividends daily and pays dividends monthly.
Generally, each Fund pays realized capital gains, if any, at least once a year.
Each class of shares declares and pays dividends separately.
26
<PAGE>
Gradison 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. The Fund will send you a check no later than seven days after
the pay date.
o Income Earned Option. You can automatically reinvest your dividends in your
Fund and have your capital gains paid in cash, or reinvest capital gains
and have your dividends paid in cash.
A Victory Fund's distributions can be received in one of the following
ways in addition to the three methods described above:
o Directed Dividends Option. In most cases, you can automatically reinvest
distributions in shares of another Fund of The Victory Portfolios. If you
reinvest your distributions 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 automatically transfer
distributions to your bank checking or savings account. Under normal
circumstances, the Fund will transfer your distributions within seven days
of the dividend payment date. The bank account must have a registration
identical to your account.
Purchase Procedures
You may purchase shares of any Gradison Fund without an initial sales
charge. The minimum investment required to open an account in a Fund is $1,000
and additional investments must be at least $50. These minimums may be waived
for certain group purchases. Purchase orders become effective when the Fund
receives the necessary information about the purchaser's account and provision
for payment has been made.
You may purchase Class G shares of any Victory Fund without an initial
sales charge. The Victory Funds offer different classes of shares, which have
varying purchase procedures, sales charges, and ongoing fees.
Exchange rights
Shares of the Gradison Funds may be exchanged, without administrative
fees, for shares of any other Gradison fund and for shares of certain
federal/Ohio tax-free money market funds. You may request exchanges by
telephoning or writing the Funds. An exchange may not be made from a Fund to the
fund in which you are investing unless the shares of such fund are registered
for sale in the state in which you reside. The terms of the exchange feature are
subject to change and the exchange feature is subject to termination both upon
60 days written notice, except that no notice shall be required under certain
circumstances, according to SEC rules.
27
<PAGE>
You may exchange shares of a Victory Fund, without a sales charge, for
shares of any other series of The Victory Portfolios that are of the same class
as the shares being exchanged. However, when you exchange shares of a Victory
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 both offer the exchange privilege.
o If you own Class G shares, you can exchange into Class G Shares, Select
Shares, or any single class money market fund shares of a Victory Fund
without paying a sales charge. If a Victory Fund offers both Class G and
Class A Shares, you can exchange into only Class G Shares. However, you can
exchange your Class G shares into Class A Shares of any Victory Fund that
does not offer Class G Shares without paying a 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 seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
Redemption Procedures
You may redeem your shares of each Gradison Fund by sending a signed
redemption request to the Fund identifying the account name and number and the
number of shares or dollar amount to be redeemed. You may redeem shares by
telephone and have the proceeds of your redemption mailed to the address on the
Fund's records. The Funds generally make payment for redeemed shares within one
business day and, except in extraordinary circumstances, within seven days after
receipt of a properly executed redemption request. The Funds may delay payment
for the redemption of shares where the shares were purchased with a personal
check (or any other method of payment subject to collection) but only until the
purchase payment has cleared, which may be up to 15 days from the day the
purchase payment is received by a Fund.
Shares of the Victory Funds may be redeemed by mail, telephone, or
wire. If your request is received and accepted by 4:00 p.m. Eastern Time, your
redemption will be processed the same day. When using either Regular U.S. Mail
or Overnight Mail to redeem shares, you need to send Victory a letter of
instruction indicating your Fund account number, amount of redemption, and where
to send the proceeds. When using telephone redemption procedures, you need to
call 800-539-FUND and make sure to check the box marked "Telephone
Authorization" when you fill out your original application. When selling your
shares by wire, you must establish a Fund account that will accommodate wire
transactions. If you call by 4:00 p.m. Eastern time, your funds will be wired on
the next business day.
Trustees
Each Gradison Board of Trustees is responsible for the direction and
supervision of the Gradison Funds' operations. Victory's Board of Trustees is
responsible for the management of the Victory Funds.
28
<PAGE>
Comparison of Shareholder Rights.
The chart below describes some of the differences between your rights
as a shareholder of the Victory Portfolios and your rights as a shareholder of
the Gradison Funds.
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
=============================== ========================= ============================= ============================
CATEGORY THE VICTORY PORTFOLIOS GRADISON GROWTH TRUST GRADISON-MCDONALD CASH
RESERVES TRUST
- ------------------------------- ------------------------- ----------------------------- ----------------------------
1. Par Value Each share has a par Without par value Each share has a par value
value of $0.001 of $.01
- ------------------------------- ------------------------- ----------------------------- ----------------------------
2. Preemptive rights None None None
- ------------------------------- ------------------------- ----------------------------- ----------------------------
3. Preference None None None
- ------------------------------- ------------------------- ----------------------------- ----------------------------
4. Appraisal Rights None None None
- ------------------------------- ------------------------- ----------------------------- ----------------------------
5. Conversion Rights None None except contemplated a None except contemplated a
right to convert shares right to convert shares
into another Series into another Series
- ------------------------------- ------------------------- ----------------------------- ----------------------------
6. Exchange Rights (not None None None
including the right to
exchange among Funds)
- ------------------------------- ------------------------- ----------------------------- ----------------------------
7. Shareholder Rights No right to call for No right to call for any No right to call for any
any partition or partition or division of partition or division of
division of property, property, profits, rights property, profits, rights
profits, rights or or interests of the Trust or interests of the Trust
interests of the Trust
- ------------------------------- ------------------------- ----------------------------- ----------------------------
8. Personal Liability of None None None, although
Shareholders shareholders have
theoretical potential
liability
- ------------------------------- ------------------------- ----------------------------- ----------------------------
9. Annual meetings No annual meetings Not held except as required No annual meetings required
required by the 1940 Act
- ------------------------------- ------------------------- ----------------------------- ----------------------------
10. Right to call special Shall be called upon Shall be called upon Shall be called upon
meeting request of shareholders request of shareholders request of shareholders
of shareholders owning at least 10% of holding at least 25% of the holding at least 10% of
the outstanding shares outstanding shares the outstanding shares
- ------------------------------- ------------------------- ----------------------------- ----------------------------
11. Notice of meetings Sent by first class Mailed to each shareholder Mailed to each shareholder
mail or such other entitled to vote at least 7 entitled to vote at least
means determined by the and not more than 60 days 7 and not more than 60
trustees at least 10 before meeting days before meeting
days prior to any such
meeting
- ------------------------------- ------------------------- ----------------------------- ----------------------------
12. Record date for meetings 1. Trustees may close 1. Trustees may close 1. Trustees may close
transfer books transfer books not transfer books not
not exceeding 60 days exceeding 30 days or exceeding 30 days or
prior to shareholder 2. Trustees may fix a 2. Trustees may fix a
meeting or date not more than 60 date not more than
2. Trustees may fix a days prior to 60 days prior to
date not exceeding 60 shareholder meeting shareholder meeting
days prior to
shareholder meeting
- ------------------------------- ------------------------- ----------------------------- ----------------------------
13. Election of Trustees A plurality A majority of shares A majority of shares
entitled to vote present in entitled to vote present
person or by proxy in person or by proxy
- ------------------------------- ------------------------- ----------------------------- ----------------------------
14. Adjournment of Meetings Majority of votes cast Majority of shares Majority of shares
upon question of represented at meeting represented at meeting
adjournment
- ------------------------------- ------------------------- ----------------------------- ----------------------------
15. Removal of Trustees by May be removed at May be removed by holders Removal by shareholders
Shareholders shareholder meeting by of record of at least 2/3 not provided for
a vote of shareholders of the outstanding shares
owning at least 2/3 of of the Trust either
the outstanding shares 1. by a declaration in
of the Trust writing or
2. by votes cast at a
meeting called by
trustees when
requested in writing
by record holders of
not less than 10% of
outstanding shares
=============================== ========================= ============================= ============================
30
<PAGE>
=============================== =========================== =============================
CATEGORY GRADISON CUSTODIAN TRUST GRADISON-MCDONALD MUNICIPAL
CUSTODIAN TRUST
- ------------------------------- --------------------------- -----------------------------
1. Par Value Without par value Without par value
- ------------------------------- --------------------------- -----------------------------
2. Preemptive rights None None
- ------------------------------- --------------------------- -----------------------------
3. Preference None None
- ------------------------------- --------------------------- -----------------------------
4. Appraisal Rights None None
- ------------------------------- --------------------------- -----------------------------
5. Conversion Rights None except contemplated None except contemplated a
a right to convert shares right to convert shares
into another Series into another Series
- ------------------------------- --------------------------- -----------------------------
6. Exchange Rights (not None None
including the right to
exchange among Funds)
- ------------------------------- --------------------------- -----------------------------
7. Shareholder Rights No right to call for any No right to call for any
partition or division of partition or division of
property, profits, rights property, profits, rights
or interests of the Trust or interests of the Trust
- ------------------------------- --------------------------- -----------------------------
8. Personal Liability of None None
Shareholders
- ------------------------------- --------------------------- -----------------------------
9. Annual meetings Not held except as Not held except as
required by the 1940 Act required by the 1940 Act
- ------------------------------- --------------------------- -----------------------------
10. Right to call special Shall be called upon Shall be called upon
meeting request of shareholders request of shareholders
shareholders holding at least 10% of holding at least 10% of
the outstanding shares the outstanding shares
- ------------------------------- --------------------------- -----------------------------
11. Notice of meetings Mailed to each Mailed to each shareholder
shareholder entitled to entitled to vote at least 7
vote at least 7 and not and not more than 60 days
more than 60 days before before meeting
meeting
- ------------------------------- --------------------------- -----------------------------
12. Record date for meetings 1. Trustees may close 1. Trustees may close
transfer books not transfer books not
exceeding 30 days or exceeding 30 days or
2. Trustees may fix a 2. Trustees may fix a
date not more than date not more than 60
60 days prior to days prior to
shareholder meeting shareholder meeting
- ------------------------------- --------------------------- -----------------------------
13. Election of Trustees A majority of shares A majority of shares
entitled to vote present entitled to vote present in
in person or by proxy person or by proxy
- ------------------------------- --------------------------- -----------------------------
14. Adjournment of Meetings Majority of shares Majority of shares
represented at meeting represented at
meeting
- ------------------------------- --------------------------- -----------------------------
15. Removal of Trustees by May be removed by holders May be removed by holders
Shareholders of record of at least a of record of at least a
majority of outstanding majority of outstanding
shares of the Trust either shares of the Trust either
1. by a declaration in 1. by a declaration in
writing or writing or
2. by votes cast at a 2. by votes cast at a
meeting called by meeting called by
trustees when trustees when
requested in requested in writing
writing by record by record holders of
holders of not less not less than 10% of
than 10% of outstanding shares
outstanding shares
=============================== =========================== =============================
</TABLE>
31
<PAGE>
Capitalization of the Funds.
The tables below shows existing and pro forma capitalization as of
October 31, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
Total Net Assets (000) Shares Outstanding
---------------------- ------------------
Gradison Government Income Fund $
Victory Fund for Income
Pro Forma Combined
Total Net Assets (000) Shares Outstanding
---------------------- ------------------
Gradison Ohio Tax-Free Income Fund $
Victory Ohio Municipal Bond Fund
Pro Forma Combined
Total Net Assets (000) Shares Outstanding
---------------------- ------------------
Gradison Growth & Income Fund $
Victory Diversified Stock Fund
Pro Forma Combined
Total Net Assets (000) Shares Outstanding
---------------------- ------------------
Gradison Opportunity Value Fund $
Victory Small Company Opportunity Fund
Pro Forma Combined
Total Net Assets (000) Shares Outstanding
---------------------- ------------------
Gradison International Fund $
Victory International Growth Fund
Pro Forma Combined
</TABLE>
Required Vote
Approval of Proposal 1 by a Gradison Fund requires a vote of a simple
majority of the Fund's outstanding shares. A simple majority of outstanding
shares of a Fund means one more than half of the number of shares of that Fund
that were issued and outstanding as of the record date, voting at the meeting in
person or by proxy. Approval of Proposal 1 by the shareholders of one Gradison
Fund is not contingent upon the approval of Proposal 1 by the shareholders of
any other Gradison Fund.
Board Recommendation
EACH BOARD RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" PROPOSAL 1.
<PAGE>
---------------------------
PROPOSAL 2.
TO APPROVE A NEW INVESTMENT ADVISORY
AGREEMENT FOR EACH GRADISON FUND
Introduction
On October 23, 1998, KeyCorp acquired McDonald & Company Investments,
Inc., the corporate parent of McDonald & Company Securities, Inc. (McDonald
Securities). McDonald Securities subsequently changed its name to McDonald
Investments Inc. Effective on that date, each Gradison Fund entered into a new
investment advisory agreement with McDonald because the prior investment
advisory agreement may have terminated due to the acquisition. The SEC has
issued an exemptive order that permits each Gradison Fund to obtain your
approval of the new investment advisory agreement within 150 days after the
acquisition (by March 22, 1999), instead of prior to the acquisition. Until your
approval is obtained, the exemptive order requires that advisory fees paid
pursuant to the new investment advisory agreement be escrowed.
Reasons for the Proposal
This proposal is intended to accomplish two goals. First, approval of
the new investment advisory agreement for your Fund permits McDonald to continue
to serve as the investment adviser to your Fund either (1) on an ongoing basis,
if you do not approve the reorganization of your Gradison Fund described in
Proposal 1, or (2) until the time of the reorganization, if you approve the
reorganization of your Gradison Fund. If you do not approve either the
reorganization of your Fund or the new investment advisory agreement, the
investment advisory agreement for your Fund will terminate. In that event, the
Board will consider what additional steps to take for your Fund. Second,
approval of the investment advisory agreement for your Gradison Fund allows
McDonald to receive the advisory fees that have been escrowed since October 23,
1998.
Board Considerations
The new investment advisory agreements were presented to the Boards of
the Gradison Funds on September 14, 1998. KAM, which is anticipated to acquire
the investment advisory operations of McDonald, provided information to the
Boards regarding the impact of the purchase on the Gradison Funds, including on
the advisory services provided to them. In particular, KAM provided information
regarding its experience and record as an investment adviser, its internal
procedures, its staffing, other details of its operations, and its plans and
expectations regarding the advisory services that will be provided to the Fund
by McDonald as part of KAM.
In considering the new investment advisory agreements, the Boards
considered the information presented by KAM. The Boards also considered other
factors they deemed relevant, including the following:
34
<PAGE>
1. that the advisory fees and expense ratios of the Funds would not
exceed their current levels for a two-year period after the
completion of the Funds' reorganization;
2. that the financial and other resources of McDonald and the
continuance of appropriate incentives would assure that McDonald
would continue to furnish high quality services to each Fund;
3. that the terms of the new investment advisory agreements are
substantially similar to those currently in effect;
4. that the quality of the services furnished by McDonald to each
Gradison Fund would be of at least equal quality to the services
now rendered to the Funds and may ultimately be strengthened;
5. that after the proposed reorganization, the investment record of
McDonald would be preserved for the Gradison Government Income
Fund and the Gradison Opportunity Value Fund; and
6. that benefits accrue to McDonald from serving as adviser to each
Gradison Fund.
The Boards also considered KAM's intention that, for a period of three
years after the purchase, at least 75% of each Board would not be "interested
persons" (as defined under the 1940 Act) (the "Independent Trustees") and that,
for a period of two years after the closing, there would be no unfair burden
imposed on any Fund.
After full consideration of these and other factors, the Boards,
including all of the Independent Trustees, unanimously approved the new
investment advisory agreements and recommended that they be submitted to
shareholders for approval.
Terms of the Investment Advisory Agreements
The services that McDonald will provide (and currently provides) under
each of the new investment advisory agreements are generally identical to the
services that McDonald provided under each of the old investment advisory
agreements. In addition, the fees that McDonald will charge (and currently
charges) pursuant to each of the new investment advisory agreements are
identical to the fees that McDonald charged under each of the old investment
advisory agreements.
All other provisions of the new investment advisory agreements and the
old investment advisory agreements are substantially identical, except for the
dates of execution and termination and except for a provision permitting, with
the approval of the Board and to the extent permitted by the 1940 Act, the new
investment advisory agreement to be assigned to KAM.
Required Vote
Approval of Proposal 2 by a Gradison Fund requires the affirmative vote
of the lesser of (1) 67% or more of the shares of that Fund present at the
meeting or represented by proxy if more
35
<PAGE>
than 50% of the outstanding shares of the Fund are so present or represented or
(2) more than 50% of the outstanding shares of the Fund. Approval of Proposal 2
by the shareholders of one Gradison Fund is not contingent upon the approval of
Proposal 2 by the shareholders of any other Gradison Fund.
Board Recommendation
EACH BOARD RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" PROPOSAL 2.
----------------------------------
PROPOSAL 3.
TO APPROVE NEW
INVESTMENT SUB-ADVISORY AGREEMENTS
FOR THE GRADISON INTERNATIONAL FUND
Introduction
Effective October 23, 1998, the date that KeyCorp acquired McDonald's
parent company, McDonald and Blairlogie Capital Management ("Blairlogie")
entered into a new investment sub-advisory agreement with respect to Gradison
International Fund because the prior investment sub-advisory agreement may have
terminated due to the acquisition. The SEC has issued an exemptive order that
permits your Fund to obtain your approval of the new investment sub-advisory
agreement within 150 days after the acquisition (by March 22, 1999), instead of
prior to the acquisition. Until your approval is obtained, the exemptive order
requires that sub-advisory fees paid pursuant to the new investment sub-advisory
agreement be escrowed.
Separately, PIMCO Advisors L.P., 840 Newport Center Drive, Suite 360,
Newport Beach, California 92660, the owner of a 75% interest in Blairlogie, has
entered into an agreement to sell its interest in Blairlogie to Alleghany Asset
Management, the investment management subsidiary of Alleghany Corporation. This
acquisition is scheduled to occur in February 1999. As in the transaction
described above, the change in control of Blairlogie would result in the
termination of its sub-advisory contract with McDonald, requiring shareholder
approval of a new sub-advisory contract. The SEC is currently considering an
application for an exemptive order to permit Blairlogie to continue to serve as
the investment sub-adviser to your Fund after Blairlogie's change in control. If
the SEC grants an exemptive order, any investment sub-advisory fees accruing
after the change in control will be escrowed.
Reasons for the Proposal
This proposal is intended to accomplish the following goals. First, if
you do not approve the reorganization of Gradison International Fund described
in Proposal 1, approval of the investment sub-advisory agreement permits
Blairlogie to continue to serve as the investment sub-adviser to your Fund. If
you do not approve either the reorganization of Gradison International Fund or
the new investment sub-advisory agreement, the investment sub-advisory agreement
with respect to Gradison International Fund will terminate. In that event, the
Board will consider what additional steps to take with respect to Gradison
International Fund. Second, assuming that McDonald receives payments of its
escrowed fees, approval of the investment sub-advisory agreement allows
Blairlogie to receive from McDonald (and not from the Fund) its sub-advisory
fees that have been escrowed since October 23, 1998 until there has been a
change in control of Blairlogie (or after that time, if the SEC grants the
exemptive relief requested in connection with the change in control). If you
approve the new investment
36
<PAGE>
advisory agreement described in Proposal 2, but do not approve this Proposal,
McDonald will retain all of the escrowed fees.
Board Considerations
The new investment sub-advisory agreement was presented to the Board of
your Fund on September 14, 1998. KAM and Blairlogie provided information to the
Board regarding the impact on Gradison International Fund of the
McDonald/KeyCorp merger and the anticipated acquisition of Blairlogie, including
the effects on the sub-advisory services provided by Blairlogie. In considering
the new investment sub-advisory agreement, the Board examined factors it deemed
relevant, including the following:
1. that the quality of the services furnished by Blairlogie to Gradison
International Fund would be of at least equal quality to the services
now rendered to the Fund;
2. that the sub-advisory fee would not exceed its current level; and
3. that the terms of the new sub-advisory agreement are substantially
similar to those currently in effect.
The Board also considered KAM's intention that, for a period of three
years after the purchase, at least 75% of the members of the Board would be
independent and that, for a period of two years after the closing, there would
be no unfair burden imposed on Gradison International Fund.
After full consideration of these and other factors, the Board,
including a majority of the Independent Trustees, approved the new sub-advisory
agreement arising out of KeyCorp's acquisition of McDonald and recommended that
it be submitted to shareholders for approval. The Board also approved a
sub-advisory agreement in the same form to be entered into upon Alleghany's
acquisition of Blairlogie.
Terms of the Sub-Advisory Agreements
The services that Blairlogie will provide (and currently provides)
under the new sub-advisory agreement are generally identical to the services
that Blairlogie provided under the old sub-advisory agreement. In addition, the
fee that Blairlogie will charge (and currently charges) pursuant to the new
sub-advisory agreement is identical to the fees that Blairlogie charged under
the old sub-advisory agreements.
Finally, all other provisions of the new sub-advisory agreements and
the old sub-advisory agreement are substantially identical, except for the dates
of execution and termination [and except for a provision permitting, with the
approval of the Board and to the extent permitted by the 1940 Act, the new
investment sub-advisory agreement to be assigned to KAM.]
Required Vote
Approval of Proposal 3 by Gradison International Fund requires the
affirmative vote of the lesser of (1) 67% or more of the shares of the Fund
present at the Meeting or represented by
37
<PAGE>
Proxy if more than 50% of the outstanding shares of the Fund are so present or
represented or (2) more than 50% of the outstanding shares of the Fund.
Board Recommendation
THE BOARD RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" PROPOSAL 3.
----------------------------
OTHER INFORMATION
Principal Executive Officer and Directors of McDonald
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------- -------------------------------------------------------------------
Name, Address, and Position with McDonald Principal Occupations
- -------------------------------------------------- -------------------------------------------------------------------
William B. Summers, Jr., Chairman of the Board of Directors and Chief Executive Officer of
Director and Chief Executive Officer McDonald Investments Inc.
800 Superior Avenue
Cleveland, Ohio 44114
- -------------------------------------------------- -------------------------------------------------------------------
Robert T. Clutterbuck, President of McDonald Investments Inc.
Director
800 Superior Avenue
Cleveland, Ohio 44114
- -------------------------------------------------- -------------------------------------------------------------------
Robert B. Heisler, Jr., Executive Vice President of KeyCorp
Director
127 Public Square
Cleveland, Ohio 44114
- -------------------------------------------------- -------------------------------------------------------------------
Principal Executive Officer and Directors of Blairlogie
- --------------------------------------------------------------- ------------------------------------------------------
Name, Address, and Position with Blairlogie Principal Occupations
- --------------------------------------------------------------- ------------------------------------------------------
Gavin Dobson, Managing Director and Chief Executive Officer
Managing Director and Chief Executive Officer
125 Princes Street
Edinburgh EH2 4AD
Scotland
- --------------------------------------------------------------- ------------------------------------------------------
James G.S. Smith, Managing Director and Chief Investment Officer
Managing Director
125 Princes Street
Edinburgh EH2 4AD
Scotland
- --------------------------------------------------------------- ------------------------------------------------------
</TABLE>
38
<PAGE>
Officers and Trustees of the Gradison Funds
The following chart shows the name of each officer or trustee of the
Gradison Funds who is also an officer, employee, director, general partner, or
shareholder of McDonald. No trustees and officers of the Gradison Funds who are
affiliated with McDonald receives remuneration from the Gradison Funds.
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------- ----------------------------------------------------------
Name and Position with the Gradison Funds Position with McDonald
- ----------------------------------------------------------- ----------------------------------------------------------
Donald E. Weston, Chairman of the Gradison Division of McDonald (Gradison)
Trustee and Chairman of the Board of all Gradison Trusts
- ----------------------------------------------------------- ----------------------------------------------------------
Bradley E. Turner, Senior Managing Director and Director of McDonald
President of all Gradison Trusts
- ----------------------------------------------------------- ----------------------------------------------------------
Stephen C. Dilbone, Senior Vice President of Gradison
Vice President of Gradison-McDonald Municipal Custodian
Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Richard S. Demko,
Vice President of Gradison-McDonald Municipal Custodian Senior Managing Director of McDonald
Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Thomas M. Seay, Senior Vice President of Gradison
Vice President of Gradison
Custodian Trust
- ----------------------------------------------------------- ----------------------------------------------------------
William J. Leugers, Jr., Managing Director of Gradison
Vice President of Gradison Growth Trust
- ----------------------------------------------------------- ----------------------------------------------------------
C. Stephen Wesselkamper, First Vice President of Gradison
Vice President of Gradison-McDonald Cash Reserves
Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Richard M. Wachterman, Senior Vice President and General Counsel of Gradison
Secretary of all Gradison Trusts
- ----------------------------------------------------------- ----------------------------------------------------------
Daniel R. Shick, Managing Director of Gradison
Vice President of Gradison Growth Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Gary H. Miller, Vice President of Gradison Growth Trust Vice President of Gradison
- ----------------------------------------------------------- ----------------------------------------------------------
39
<PAGE>
- ----------------------------------------------------------- ----------------------------------------------------------
Julian Ball, First Vice President of Gradison
Vice President of Gradison Growth Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Patricia J. Jamieson, Treasurer of all Gradison Trusts Senior Managing Director, Treasurer, and Chief Financial
Officer of McDonald
- ----------------------------------------------------------- ----------------------------------------------------------
Mark A. Frietch, Senior Vice President of Gradison
Assistant Treasurer of all
Gradison Trusts
</TABLE>
Old Investment Advisory Agreements
The chart below contains some information about the old investment
advisory agreements (and the old investment sub-advisory agreement with respect
to Gradison International Fund). In particular, the chart shows the advisory fee
schedule applicable to each Gradison Fund, the dollar amount of advisory fees
paid in each Fund's last fiscal year, the date of the old advisory agreement (or
sub-advisory agreement), and the date on which the old advisory agreement (or
sub-advisory agreement) was most recently submitted to shareholders.
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------- ---------------------------------------- ---------------------------
Trust Advisory Fee Advisory Fee
Portfolio (of average daily net assets) (amount paid in last
(Date of advisory agreement and date of most fiscal year)
recent submission to shareholders)
- -------------------------------------------------- ---------------------------------------- ---------------------------
Gradison Growth Trust
Gradison Established Value Fund 0.65% of first $100 million $ 2,580,124
0.55% of next $100 million
0.45% thereafter
Gradison Opportunity Value Fund 0.65% of first $100 million $ 881,658
0.55% of next $100 million
0.45% thereafter
(Agreement dated October 4, 1991, most recently
amended on June 1, 1995, and most recently
submitted to shareholders on May 5, 1995)
- -------------------------------------------------- ---------------------------------------- ---------------------------
40
<PAGE>
- -------------------------------------------------- ---------------------------------------- ---------------------------
Gradison Growth Trust
Gradison Growth & Income Fund 0.65% of first $100 million $ 267,848
0.55% of next $100 million
0.45% thereafter
Gradison International Fund 1.00% of first $100 million $ 0*
0.90% of next $150 million
0.80% of next $250 million
(Growth & Income Fund: Agreement dated, and 0.75% thereafter
approved by Adviser as sole shareholder on,
February 28, 1995) Sub-adviser receives: $ 223,022
0.80% of first $25 million
(International Fund: Advisory agreement dated 0.70% of next $25 million
June 1, 1995 and sub-advisory agreement dated 0.60% of next $50 million
May 25, 1995; both approved by Adviser as sole 0.50% of next $150 million
shareholder on May 31, 1995). 0.40% thereafter
- -----------------
*All fees paid to McDonald with respect to the Gradison International Fund were paid by McDonald to Blairlogie.
- -------------------------------------------------- ---------------------------------------- ---------------------------
Gradison-McDonald Municipal Custodian Trust
Gradison Ohio Tax-Free Income Fund
0.50% $ 432,146
(Agreement dated August 25, 1992 and approved by
Adviser as sole shareholder on August 20, 1992)
- -------------------------------------------------- ---------------------------------------- ---------------------------
Gradison-McDonald Cash Reserves Trust
Gradison U.S. Government Reserves
0.50% of first $400 million $ 7,875,357
(Agreement dated September 24, 1993 and approved 0.45% of next $600 million
by the sole shareholder (an unaffiliated party) 0.40% of next $1 billion
on September 16, 1993) 0.35% thereafter
- -------------------------------------------------- ---------------------------------------- ---------------------------
Gradison Custodian Trust
Gradison Government Income Fund 0.50% $ 773,094
(Agreement dated October 4, 1991 and approved by
shareholders on September 23, 1991)
- -------------------------------------------------- ---------------------------------------- ---------------------------
</TABLE>
41
<PAGE>
Other Fees Paid to McDonald or its Affiliates
In addition to the advisory fees shown in the chart above, McDonald and
its affiliates were paid the following fees during the most recent fiscal year
of each Gradison Fund:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Fund Transfer Accounting Distribution Services
Agent Services
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Established Value Fund $ 303,442 $ 80,669 $ 2,454,412
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Opportunity Value Fund $ 130,769 $ 40,000 $ 710,599
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Growth & Income Fund $ 47,227 $ 40,000 $ 206,037
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison International Fund $ 41,353 $ 60,000 $ 88,483
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Ohio Tax-Free Income Fund $ 37,821 $ 48,000 $ 216,073
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison U.S. Government Reserves $ 2,612,210 $ 187,038 $ 1,778,775
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Government Income Fund $ 40,302 $ 53,667 $ 380,694
- ------------------------------------------------------ ------------------- ------------------- -----------------------
</TABLE>
Other Fees Paid to Blairlogie or its Affiliates
Other than the sub-advisory fee shown in the chart above, Blairlogie
and its affiliates did not receive any fees from the Gradison Funds during the
most recent fiscal year.
Affiliated Brokerage Commissions
In the last fiscal year, none of the Gradison Funds paid commissions to
an affiliated broker.
Distribution Plan for the Gradison Ohio Tax-Free Income Fund
The Board of Gradison-McDonald Municipal Custodian Trust previously
made an undertaking to submit the distribution plan (12b-1 plan) for the
Gradison Ohio Tax-Free Income Fund to shareholders at their initial meeting.
This initial meeting will be the Special Meeting. However, because the proposal
to reorganize the Fund into a Victory Fund encompasses approval of the
distribution arrangements with respect to the Victory Fund, that proposal would,
if approved by shareholders, eliminate the need to seek a separate shareholder
vote on the distribution plan. If the reorganization of the Gradison Ohio
Tax-Free Income Fund is not approved by shareholders, the Board will promptly
call a shareholder meeting for the purpose of submitting the distribution plan
to a shareholder vote.
42
<PAGE>
PART 3 - MORE ON PROXY VOTING AND SHAREHOLDER MEETINGS
General information about proxy voting. The Board of Trustees of each
Gradison Trust is soliciting your proxy to vote on the matters described in this
combined proxy statement and prospectus. We expect to solicit proxies primarily
by mail, but representatives of McDonald or its affiliates, or others may
communicate with you by mail or by telephone or other electronic means to
discuss your vote. We have also retained Shareholders Communication Corporation
to assist us in this solicitation. Representatives of Shareholders Communication
Corporation may contact you if we do not receive your ballot. We estimate that
the cost of soliciting votes to be approximately $____. __________ will pay the
costs of solicitation. We will ask broker-dealers and other institutions that
hold shares for the benefit of their customers to send the proxy materials to
the beneficial owners and to obtain authorization to vote on their behalf.
You may vote directly over the telephone by calling 800-786-8764. You
may also fax your ballot to 800-733-1885 or return it by mail. Internet voting
is available at _______________.
Only shareholders of record of the Gradison Funds at the close of
business on the record date, January 6, 1999, may vote at the special meeting.
As of the record date, each of the Gradison Funds had the number of shares
issued and outstanding listed below, each share being entitled to one vote:
<TABLE>
<CAPTION>
Fund Name Total Shares Outstanding
--------- ------------------------
<S> <C>
*Gradison U.S. Government Reserves
*Gradison Established Value Fund
**Gradison Government Income Fund
**Gradison Ohio Tax-Free Income Fund
**Gradison Growth & Income Fund
**Gradison Opportunity Value Fund
**Gradison International Fund
</TABLE>
* Gradison Fund that will be reorganized into Class G of a new Victory
Fund
** Gradison Fund that will reorganize into Class G of an operating
Victory Fund
As of December __, 1998, the trustees and officers of the Gradison
Funds, as a group, owned less than 1% of the outstanding shares of each Gradison
Fund. To the best of the knowledge of the Gradison Funds, the following
shareholders beneficially owned 5% or more of the outstanding shares of the
Gradison Funds and the Victory Funds as of December __, 1998:
<TABLE>
<CAPTION>
======================================================================================================================
<S> <C> <C> <C>
Percent of Class Owned Percent of Class Owned
Fund Name and Address of Record of Record and
Beneficially
- ----------------------------------------------------------------------------------------------------------------------
======================================================================================================================
43
<PAGE>
======================================================================================================================
Percent of Class Owned Percent of Class Owned
Fund Name and Address of Record of Record and
Beneficially
- ----------------------------------------------------------------------------------------------------------------------
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
======================================================================================================================
</TABLE>
You may cast one vote for each proposal for each whole share that you
own of a Gradison Fund. We count your fractional shares as fractional votes. If
we receive your proxy before the special meeting date, we will vote your shares
as you instruct the proxies. If you sign and return your proxy, but do not
specify instructions, we will vote your shares in favor of each proposal. You
may revoke your proxy at any time before the special meeting if you notify us in
writing, or if you attend the special meeting in person and vote in person.
If a broker or nominee returns a proxy indicating that it did not
receive voting instructions from the beneficial owner, or if the beneficial
owner marked an abstention, we will count those shares when we determine if a
quorum as present, but those proxies, in effect, will count as a vote "against".
The Gradison Growth Trust consists of four separate Gradison Funds:
Established Value Fund, Growth & Income Fund, Opportunity Value Fund, and
International Fund. If shareholders of any one of the Growth Trust Funds do not
approve the reorganization relating to that Fund, then the reorganization of
that Fund will not proceed. The reorganization relating to the other Growth
Trust Funds will proceed if shareholders of those other Funds approve the
reorganization. If this occurs, Gradison Growth Trust will continue operating as
an investment company and will not dissolve.
If shareholders of any Gradison Fund do not approve any proposal, the
Boards of Trustees will consider possible alternatives.
44
<PAGE>
Quorum and adjournments. Each Gradison Fund will vote separately on
each proposal. Each Gradison Fund requires that a quorum at the special meeting
be present, in person or by proxy, to conduct the special meeting. A simple
majority of all of the shares outstanding on the record date will be a quorum.
If a quorum is not present at the special meeting, the persons named as proxies
may propose one or more adjournments of the special meeting to permit further
solicitation of proxies. An affirmative vote of a majority of the shares of each
Gradison Fund present at the special meeting may adjourn the special meeting
without further notice, until the Gradison Fund obtains a quorum. In the event a
quorum is present but sufficient votes to approve a proposal are not received,
the persons named as proxies may propose one or more adjournments to permit
further solicitation of proxies. If this should occur, we will vote proxies for
or against a motion to adjourn in the same proportion to the votes received in
favor or against the proposal. We may adjourn a special meeting for no more than
____ days after the date of the original special meeting.
Other business. The Board of Trustees of each Gradison Trust knows of
no other business to be brought before the special meeting. If any other matters
come before the special meeting, proxies that do not contain specific
restrictions to the contrary, the named proxies will vote all proxies using
their best judgment.
Future shareholder proposals. The Gradison Funds are not required to
hold annual meetings, unless required to do so by law. If you have a proposal
you wish to be considered by shareholders, send your proposal to The Gradison
Funds, 580 Walnut Street, Cincinnati, Ohio 45202. We must receive your proposal
in sufficient time before the next meeting of shareholders for it to be
included. We do not guarantee that we will be able to include any proposal in a
proxy statement.
Recommendation of each Board of Trustees. After carefully considering
all of the issues involved, the Board of Trustees of each Gradison Trust has
unanimously concluded that each proposal is in the best interests of
shareholders. Each Board of Trustees recommends that you vote to approve each
proposal.
PART 4 - FUND INFORMATION
The Victory Portfolios is a business trust established under Delaware
law. The operations of The Victory Portfolios is governed by a Trust Instrument
dated December 5, 1995, as amended.
Each Victory Fund is a separate series of The Victory Portfolios and,
as such, has similar rights under the Trust Instrument of The Victory Portfolios
and applicable Delaware law. You should be aware of the following features of
the Victory Funds:
o Shares of each class of the Victory Funds participate equally
in dividends and other distributions attributable to that
class, including any distributions in the event of a
liquidation.
o Each share of each Victory Fund is entitled to one vote for
all purposes.
45
<PAGE>
o Shares of all series of The Victory Portfolios vote for the
election of Trustees and on any other matter that affects each
Victory Fund in substantially the same manner, except as
otherwise required by law.
o As to matters that affect each Fund differently, such as
approval of an investment advisory agreement, shares of each
series vote as a separate series.
o On matters that affect the classes of a series differently,
shares of each class vote separately.
o Delaware law does not require registered investment companies,
such as The Victory Portfolios or its series, to hold annual
meetings of shareholders and it is anticipated that
shareholder meetings will be held only when specifically
required by federal or state law.
o Shareholders have available certain procedures for the removal
of Trustees.
o The Victory Portfolios indemnifies trustees and officers to
the fullest extent permitted under federal and Delaware law.
Financial Statements. PricewaterhouseCoopers LLP, independent auditors
of The Victory Portfolios, has audited the financial statements included in the
Statement of Additional Information for the year ended October 31, 1998.
The Gradison Ohio Tax-Free Income Fund undertook to submit its
distribution expense plan and investment advisory agreements (which were
approved by the Adviser as its sole shareholder) to shareholders at its first
annual meeting, which this meeting is. Since it is anticipated that this meeting
will result in the reorganization of the Fund, this matter is not being
submitted to shareholders at this meeting. If the reorganization is not
approved, a special shareholder meeting will be called for the purpose of
seeking shareholder approval of the distribution expense plan.
PART 5 - PROSPECTUS
PART 6 - FORMS OF AGREEMENT AND PLAN OF REORGANIZATION
PART 7 - FINANCIAL INFORMATION ABOUT THE VICTORY PORTFOLIOS
46
<PAGE>
PART 5 -- THE PROSPECTUS is incorporated by reference to the prospectus included
in Post-Effective Amendment No. 44 to Registrant's Registration Statement on
Form N-1A filed with the SEC on November 19, 1998, File Nos. 33-8982, 811-4852.
PART 6 -- FORMS OF AGREEMENT AND PLAN OF REORGANIZATION are incorporated by
reference to Part C, Item 16(4)(a) and (b) of this Registration Statement on
Form N-14.
PART 7 -- FINANCIAL INFORMATION ABOUT THE VICTORY PORTFOLIOS will be filed by
amendment.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
________, 1999
Acquisition of the Assets of
GRADISON GROWTH TRUST
Gradison Established Value Fund
Gradison Growth & Income Fund
Gradison Opportunity Value Fund
Gradison International Fund
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
Gradison Ohio Tax-Free Income Fund
GRADISON-McDONALD CASH RESERVES TRUST
Gradison U.S. Government Reserves
GRADISON CUSTODIAN TRUST
Gradison Government Income Fund
by and in exchange for Class G shares of
THE VICTORY PORTFOLIOS
Established Value Fund
Diversified Stock Fund
Small Company Opportunity Fund
International Growth Fund
Ohio Municipal Bond Fund
Gradison Government Reserves Fund
Fund for Income
This Statement of Additional Information dated _____, 1999, is not a prospectus,
but should be read in conjunction with the Combined Proxy Statement and
Prospectus dated ________, 1999. This Statement of Additional Information is
incorporated by reference in its entirety into the Combined Proxy Statement and
Prospectus. Copies of the Combined Proxy Statement and Prospectus may be
obtained by writing The Victory Portfolios at P.O. Box 8527, Boston, MA
02266-8527 or by calling toll free 800-539-FUND or 800-539-3863.
<PAGE>
TABLE OF CONTENTS
1. Statements of Additional Information of Established Value Fund,
Diversified Stock Fund, Small Company Opportunity Fund, International
Growth Fund, Ohio Municipal Bond Fund, Gradison Government Reserves
Fund, and Fund for Income, portfolios of The Victory Portfolios dated
_______, 1999.
2. Statement of Additional Information of Gradison Established Value Fund,
Gradison Growth & Income Fund, Gradison Opportunity Value Fund and
Gradison International Fund, portfolios of Gradison Growth Trust dated
August 1, 1998.
3. Statement of Additional Information of Gradison Ohio Tax-Free Income
Fund, a portfolio of Gradison-McDonald Municipal Custodian Trust dated
November 1, 1998.
4. Statement of Additional Information of Gradison U.S. Government
Reserves, a portfolio of Gradison McDonald Cash Reserves Trust dated
February 1, 1998.
5. Statement of Additional Information of Gradison Government Income Fund,
a portfolio of Gradison Custodian Trust dated May 1, 1998.
6. Financial Statements of Diversified Stock Fund, Small Company
Opportunity Fund (formerly Special Growth Fund), International Growth
Fund, Ohio Municipal Bond Fund, and Fund for Income, portfolios of The
Victory Portfolios dated October 31, 1998.
7. Financial Statements of Gradison Established Value Fund, Gradison
Growth & Income Fund, Gradison Opportunity Value Fund and Gradison
International Fund, portfolios of Gradison Growth Trust dated March 31,
1998.
8. Unaudited Financial Statements of Gradison Established Value Fund,
Gradison Growth & Income Fund, Gradison Opportunity Value Fund and
Gradison International Fund, portfolios of Gradison Growth Trust dated
September 30, 1998.
9. Financial Statements of Gradison Ohio Tax-Free Income Fund, a portfolio
of Gradison-McDonald Municipal Custodian Trust dated June 30, 1998.
10. Financial Statements of Gradison U.S. Government Reserves, a portfolio
of Gradison McDonald Cash Reserves Trust dated September 30, 1998.
11. Financial Statements of Gradison Government Income Fund, a portfolio of
Gradison Custodian Trust dated December 31, 1997.
12. Unaudited Financial Statements of Gradison Government Income Fund, a
portfolio of Gradison Custodian Trust dated June 30, 1998
<PAGE>
ADDITIONAL INFORMATION ABOUT THE REGISTRANT
The Statement of Additional Information of Diversified Stock Fund,
Small Company Opportunity Fund, International Growth Fund, Ohio Municipal Bond
Fund, and Fund for Income, portfolios of The Victory Portfolios, is incorporated
by reference to Post-Effective Amendment No. 44 to The Victory Portfolio's
Registration Statement on Form N-1A (File No. 33-8982) which was filed with the
Securities and Exchange Commission on (SEC) November 19, 1998.
The Statement of Additional Information of Established Value Fund and
Gradison Government Reserves Fund, portfolios of The Victory Portfolios, is
incorporated by reference to Post-Effective Amendment No. 45 to The Victory
Portfolio's Registration Statement on Form N-1A (File No. 33-8982) which was
filed with the SEC on December ___, 1998.
The Statements of Additional Information dated August 1, 1998, of
Gradison Established Value Fund, Gradison Growth & Income Fund, Gradison
Opportunity Value Fund and Gradison International Fund, portfolios of Gradison
Growth Trust, are incorporated by reference to Post-Effective Amendment No. 20
to Gradison Growth Trust's Registration Statement on Form N-1A (File No.
2-84169). A copy may be obtained by writing Gradison Growth Trust at 580 Walnut
Street, Cincinnati, OH 45202 or by calling (513) 579-5700 from Cincinnati or
toll free 800-869-5999.
The Statement of Additional Information dated November 1, 1998, of
Gradison Ohio Tax-Free Income Fund, a portfolio of Gradison-McDonald Municipal
Custodian Trust is incorporated by reference to Post-Effective Amendment No.
11 to Gradison-McDonald Municipal Custodian Trust's Registration Statement on
Form N-1A (File No. 33-48613). A copy may be obtained by writing
Gradison-McDonald Municipal Custodian Trust at 580 Walnut Street, Cincinnati, OH
45202 or by calling (513) 579-5700 from Cincinnati or toll free 800-869-5999.
The Statement of Additional Information dated February 1, 1998, of
Gradison U.S. Government Reserves, a portfolio of Gradison McDonald Cash
Reserves Trust is incorporated by reference to Post-Effective Amendment No. 40
to Gradison McDonald Cash Reserves Trust's Registration Statement on Form N-1A
(File No. 2-55297). A copy may be obtained by writing Gradison McDonald Cash
Reserves Trust at 580 Walnut Street, Cincinnati, OH 45202 or by calling (513)
579-5700 from Cincinnati or toll free 800-869-5999.
The Statement of Additional Information dated May 1, 1998, of Gradison
Government Income Fund, a portfolio of Gradison Custodian Trust is incorporated
by reference to Post-Effective Amendment No. 16 to Gradison Custodian Trust's
Registration Statement on Form N-1A (File No. 33-14949). A copy may be obtained
by writing Gradison Custodian Trust at 580 Walnut Street, Cincinnati, OH 45202
or by calling (513) 579-5700 from Cincinnati or toll free 800-869-5999.
<PAGE>
FINANCIAL STATEMENTS
The audited Financial Statements of Diversified Stock Fund, Small
Company Opportunity Fund, International Growth Fund, Ohio Municipal Bond Fund,
(formerly Special Growth Fund), and Fund for Income, portfolios of The Victory
Portfolios are incorporated by reference to the Annual Report of The Victory
Portfolios (File No. 811-4852) dated October 31, 1998.
The audited Financial Statements of Gradison Established Value Fund,
Gradison Growth & Income Fund, Gradison Opportunity Value Fund and Gradison
International Fund, portfolios of Gradison Growth Trust, are incorporated by
reference to the Annual Report of Gradison Growth Trust (File No. 811-3760)
dated March 31, 1998.
The unaudited Financial Statements of Gradison Established Value Fund,
Gradison Growth & Income Fund, Gradison Opportunity Value Fund and Gradison
International Fund, portfolios of Gradison Growth Trust, are incorporated by
reference to the Semi-Annual Report of Gradison Growth Trust (File No. 811-3760)
dated September 30, 1998.
The Financial Statements of Gradison Ohio Tax-Free Income Fund, a
portfolio of Gradison-McDonald Municipal Custodian Trust, are incorporated by
reference to the Annual Report of Gradison-McDonald Municipal Custodian Trust
(File No. 811-6705) dated June 30, 1998.
The Financial Statements of Gradison U.S. Government Reserves, a
portfolio of Gradison McDonald Cash Reserves Trust, are incorporated by
reference to the Annual Report of Gradison McDonald Cash Reserves Trust (File
No. 811-2618) dated September 30, 1998.
The Financial Statements of Gradison Government Income Fund, a
portfolio of Gradison Custodian Trust are incorporated by reference to the
Annual Report of Gradison Custodian Trust (File No. 811-5198) dated December 31,
1997.
The unaudited Financial Statements of Gradison Government Income Fund,
a portfolio of Gradison Custodian Trust are incorporated by reference to the
Semi-Annual Report of Gradison Custodian Trust (File No. 811-5198) dated June
30, 1998.
Pro forma financial statements as of October 31, 1998, which give
effect to the Reorganization of the Gradison Funds into the Victory Funds,
follow.
[to be filed by amendment]
<PAGE>
THE VICTORY PORTFOLIOS
PART C
------
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
The response to this item is incorporated by reference to Item 25 of
Part C of Post-Effective Amendment No. 44 to the Registrant's Registration
Statement on Form N-1A as filed on November 19, 1998, accession number
0000922423-98-001315.
ITEM 16. Exhibits.
(1) Certificate of Trust. (1)
(2) Delaware Trust Instrument dated December 6, 1995, as amended. (2)
(3) Not Applicable.
(4)(a) Form of Agreement and Plan of Reorganization and Termination
between Registrant, on behalf of the Victory Established Value
Fund and Victory Gradison Government Reserves Fund, and
corresponding Gradison Funds.
(b) Form of Agreement and Plan of Reorganization and Termination
between Registrant, on behalf of the Victory Fund for Income,
Victory Ohio Municipal Bond Fund, Victory Diversified Stock Fund,
Victory Small Company Opportunity Fund and Victory International
Fund; and corresponding Gradison Funds.
(5) Bylaws, Amended and Restated as of August 28, 1998. (3)
(6)(a) Investment Advisory Agreement dated as of March 1, 1997
between Registrant and Key Asset Management Inc. ("KAM"), with
Schedule A amended as of March 1, 1997, March 2, 1998, and May 29,
1998. (4)
(b) Investment Advisory Agreement dated March 1, 1997, between
Registrant and KAM regarding Lakefront Fund and Real Estate
Investment Fund. (5)
(c) Investment Advisory Agreement dated June 1, 1998, between
Registrant and KAM regarding the International Growth Fund.(4)
(d) Investment Sub-Advisory Agreement dated March 1, 1997, between KAM
and Lakefront Capital Investors, Inc. regarding the Lakefront
Fund.(5)
- -------------------------------
1 Filed as an Exhibit to Post-Effective Amendment No. 26 to Registrant's
Registration Statement on Form N-1A filed electronically on December 28,
1995, accession number 0000950152-95-003085.
2 Filed as an Exhibit to Post-Effective Amendment No. 36 to Registrant's
Registration Statement on Form N-1A filed electronically on February 26,
1998, accession number 0000922423-98-000264.
3 Filed as an Exhibit to Post-Effective Amendment No. 44 to Registrant's
Registration Statement on Form N-1A filed electronically on July 29,
1998, accession number 0000922423-98-001315.
4 Filed as an Exhibit to Post-Effective Amendment No. 42 to Registrant's
Registration Statement on Form N-1A filed electronically on July 29, 1998
accession number 0000922423-98-000725.
5 Filed as an Exhibit to Post-Effective Amendment No. 34 to Registrant's
Registration Statement on Form N-1A filed electronically on December 12,
1997, accession number 0000922423-97-001015.
C-1
<PAGE>
(e) Form of Investment Advisory Agreement between Registrant and KAM
regarding Gradison Government Reserves fund and the Established
Value Fund, to be filed by amendment.
(f) Form of Investment Advisory Agreement between McDonald Investments
Inc. ("McDonald") and each of the Gradison Funds, to be filed by
amendment.
(g) Form of Investment Sub-Advisory Agreement between McDonald and
Blairlogie Capital Management regarding the Gradison International
fund, to be filed by amendment.
(7) (a) Distribution Agreement dated June 1, 1996, between Registrant
and BISYS Fund Services Limited Partnership, with Schedule I
amended as of March 2, 1998, and May 29, 1998. (4)
(b) Distribution Agreement between Registrant and BISYS Fund Services
regarding Class G Shares to be filed by amendment.
(8) Not applicable.
(9) (a) Amended and Restated Mutual Fund Custody Agreement dated
August 1, 1996, between Registrant and Key Trust of Ohio, Inc.,
with Schedule A revised as of March 1998, and May 29, 1998, and
Attachment B revised as of March 2, 1998. ( 4)
(b) Custody Agreement dated May 31, 1996, between Morgan Stanley Trust
Company and Key Trust Company of Ohio. 6
(10)(a) Amended and Restated Rule 18f-3 Multi-Class Plan as of December
11, 1998, to be filed by amendment.
(b) Shareholder Servicing Plan dated June 5, 1995, with Schedule I
amended as of March 1, 1997, March 2, 1998, and May 29, 1998. (4)
(c) Form of Shareholder Servicing Agreement. (1)
(d) Distribution Plan dated June 5, 1995, for Class B Shares of
Registrant with Schedule I amended as of February 1, 1996. (9)
(e) Distribution and Service Plan dated June 5, 1995, for the Class A
Shares of Registrant with Schedule I amended as of February 19,
1997, March 2, 1998, and May 29, 1998.(4)
(11)(a) Consent of Kramer Levin Naftalis & Frankel LLP ("Kramer Levin").
- ------------------------------
6 Filed as an Exhibit to Post-Effective Amendment No. 30 to Registrant's
Registration Statement on Form N-1A filed electronically on July 30,
1996, accession number 0000922423-96-000344.
C-2
<PAGE>
(b) Opinion of Kramer Levin as to the legality of the securities being
registered, to be filed by amendment.
(c) Opinion of Morris, Nichols, Arsht & Tunnell, Delaware counsel to
Registrant, to be filed by amendment.
(12) Tax Opinion of Kramer Levin, to be filed by amendment.
(13)(a) Sub-Administration Agreement dated October 1, 1997 between BISYS
Fund Services Limited Partnership ("BISYS") and KAM, with Schedule
A amended as of March 2, 1998, and May 29, 1998. (4)
(b) Administration Agreement dated October 1, 1997, between Registrant
and BISYS, with Schedule I amended as of March 2, 1998, and May
29, 1998, and Schedule II-B amended as of March 2, 1998. (4)
(c) Transfer Agency and Service Agreement dated July 12, 1996 between
Registrant and State Street Bank and Trust Company, with Schedule
A revised as of August 1, 1996, March 2, 1998, and May 29, 1998.
(4)
(d) Fund Accounting Agreement dated May 31, 1995, between Registrant
and BISYS Fund Services Ohio, Inc., with Amended Schedule A as of
February 19, 1997, March 2, 1998, and May 29, 1998, and Schedule B
as of March 2, 1998. (4)
(e) Form of Broker-Dealer Agreement. (7)
(14) Consent of Arthur Andersen LLP.
(15) Not applicable.
(16)(a) Powers of Attorney of Roger Noall and Frank A. Weil.(8)
(b) Powers of Attorney of Leigh A. Wilson, Edward P. Campbell, Harry
Gazelle, Thomas F. Morrissey, H. Patrick Swygert and Eugene J.
McDonald. (2)
(17)(a) Portfolio Management Agreement dated June 1, 1998 between
Registrant, KAM and Indocam International Investment Services,
S.A. regarding the International Growth Fund.(9)
- -----------------------------
7 Filed as an Exhibit to Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed electronically on January 31,
1996, accession number 0000922423-96-000047.
8 Filed as an Exhibit to Pre-Effective No. 2 to Registrant's Registration
Statement on Form N-14 filed electronically on February 3, 1998,
accession number 0000922423-98-000095.
9 Filed as an Exhibit to Post-Effective Amendment No. 40 to Registrant's
Registration Statement on Form N-1A filed electronically on June 12,
1998, accession number 0000922423-98-000602.
C-3
<PAGE>
(b) Form of Proxy Card.
Item 17. Undertakings
(1) The undersigned registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part
of this registration statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) under the Securities Act
of 1933, as amended (the "Securities Act"), the reoffering prospectus will
contain the information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the Securities
Act, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial
bona fide offering of them.
C-4
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933, the Registrant has duly caused
this Registration Statement on Form N-14 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 15th day of December, 1998.
The Victory Portfolios
(Registrant)
By:/s/ Leigh A. Wilson
-------------------
Leigh A. Wilson, President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-14 has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C>
/s/ Roger Noall Chairman of the Board and Trustee December 15, 1998
- ------------------------------------
Roger Noall
/s/ Leigh A. Wilson President and Trustee December 15, 1998
- ------------------------------------
Leigh A. Wilson
/s/Joel Engle Treasurer December 15, 1998
- ------------------------------------
Joel Engle
* Trustee December 15, 1998
- ------------------------------------
Edward P. Campbell
* Trustee December 15, 1998
- ------------------------------------
Harry Gazelle
* Trustee December 15, 1998
- ------------------------------------
Thomas F. Morrissey
* Trustee December 15, 1998
- ------------------------------------
H. Patrick Swygert
* Trustee December 15, 1998
- ------------------------------------
Frank A. Weil
* Trustee December 15, 1998
- ------------------------------------
Eugene J. McDonald
*By: /s/ Carl Frischling
-------------------
Carl Frischling
Attorney-in-Fact
</TABLE>
<PAGE>
THE VICTORY PORTFOLIOS
INDEX TO EXHIBITS
Exhibit Number
- --------------
Ex - 99.B4(a) Form of Agreement and Plan of Reorganization and Termination
between Registrant, on behalf of the Victory Established
Value Fund and Victory Gradison Government Reserves Fund, and
corresponding Gradison Funds.
Ex - 99.B4(b) Form of Agreement and Plan of Reorganization and Termination
between Registrant, on behalf of the Victory Fund for Income,
Victory Ohio Municipal Bond Fund, Victory Diversified Stock
Fund, Victory Small Company Opportunity Fund and Victory
International Fund; and corresponding Gradison Funds.
Ex - 99.B11 Consent of Kramer Levin Naftalis & Frankel LLP.
Ex - 99.B14(a) Consent of Arthur Andersen LLP.
Ex - 99.B17 Form of Proxy Card.
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
This AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement")
is made as of this 11th day of December, 1998, between Gradison Growth Trust, an
Ohio business trust ("Old Trust"), on behalf of Gradison Established Value Fund,
a segregated portfolio of assets ("series") thereof ("Old Fund"), and The
Victory Portfolios, a Delaware business trust ("New Trust"), on behalf of its
Victory Established Value Fund series ("New Fund"). (Old Fund and New Fund are
sometimes referred to herein individually as a "Fund" and collectively as the
"Funds"; Old Trust and New Trust are sometimes referred to herein individually
as a "Trust" and collectively as the "Trusts.") All agreements, representations,
actions, and obligations described herein made or to be taken or undertaken by a
Fund are made or shall be taken or undertaken by Old Trust on behalf of Old Fund
and by New Trust on behalf of New Fund.
Old Fund intends to change its identity and place of organization -- by
converting from a series of an Ohio business trust to a series of a Delaware
business trust -- through a reorganization within the meaning of section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("Code"). Old Fund
desires to accomplish such conversion by transferring all its assets to New Fund
(which is being established solely for the purpose of acquiring such assets and
continuing Old Fund's business) in exchange solely for Class G voting shares of
beneficial interest in New Fund ("New Fund Shares") and New Fund's assumption of
Old Fund's liabilities, followed by the distribution of New Fund Shares pro rata
to the holders of shares of beneficial interest in Old Fund ("Old Fund Shares")
in liquidation of Old Fund, all upon the terms and conditions set forth in this
Agreement (which is intended to be, and is adopted as, a "plan of
reorganization" for federal income tax purposes). All such transactions are
referred to herein as the "Reorganization."
In consideration of the mutual promises herein contained, the parties
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
1.1. At the Effective Time (defined in paragraph 2.1), Old Fund agrees
to assign, sell, convey, transfer, and deliver all of its assets described in
paragraph 1.2 ("Assets") to New Fund. New Fund agrees in exchange therefor --
(a) to issue and deliver to Old Fund the number of full and fractional
(rounded to the third decimal place) New Fund Shares equal to the number of
full and fractional Old Fund Shares outstanding; and
(b) to assume all of Old Fund's liabilities described in paragraph 1.3
("Liabilities").
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Old Fund's books, and other property owned by Old Fund at the
Effective Time.
<PAGE>
1.3. The Liabilities shall include (except as otherwise provided
herein) all of Old Fund's liabilities, debts, obligations, and duties of
whatever kind or nature, whether absolute, accrued, contingent, or otherwise,
whether or not determinable at the Effective Time, and whether or not
specifically referred to in this Agreement, including without limitation, Old
Fund's share of the expenses described in Paragraph 5, if any, and the
liabilities to which the Assets are subject.
1.4. At the Effective Time (or as soon thereafter as is reasonably
practicable), Old Fund shall constructively distribute the New Fund Shares
received by it pursuant to paragraph 1.1 to Old Fund's shareholders of record,
determined as of the Effective Time (collectively, "Shareholders" and each
individually, a "Shareholder"), in exchange for their Old Fund Shares and in
liquidation of Old Fund. To accomplish this distribution, New Trust's transfer
agent ("Transfer Agent") shall open accounts on New Fund's share transfer books
in the Shareholders' names and transfer such New Fund Shares thereto. Each
Shareholder's account shall be credited with the pro rata number of full and
fractional (rounded to the third decimal place) New Fund Shares due that
Shareholder. All outstanding Old Fund Shares, including those represented by
certificates, shall simultaneously be canceled on Old Fund's share transfer
books. New Fund shall not issue certificates representing New Fund Shares in
connection with the Reorganization. However, certificates representing Old Fund
Shares shall represent New Fund Shares after the Reorganization.
1.5. As soon as reasonably practicable after distribution of the New
Fund Shares pursuant to paragraph 1.4, Old Fund shall be terminated and any
further actions shall be taken in connection therewith as required by applicable
law. Old Trust shall file such instruments and take all other steps necessary to
effect a complete liquidation and dissolution of Old Fund.
1.6. Any transfer taxes payable on issuance of New Fund Shares in a
name other than that of the registered holder on Old Fund's books of Old Fund
Shares constructively exchanged therefor shall be paid by the person to whom
such New Fund Shares are to be issued, as a condition of such transfer.
1.7. Any reporting responsibility of Old Fund to a public authority is
and shall remain its responsibility up to and including the date on which it is
terminated.
2. CLOSING AND EFFECTIVE TIME
2.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Trusts' principal office on
March ___, 1999, or on such other date and/or at such other place upon which the
parties may agree. All acts taking place at the Closing shall be deemed to take
place simultaneously as of the Trusts' close of business on the date thereof or
at such other time upon which the parties may agree ("Effective Time").
2.2. Old Trust shall deliver to New Trust at the Closing a schedule of
the Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax bases and holding periods by lot.
Old Fund's custodian shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets held by the custodian will be transferred to
New Fund at the Effective Time and (b) all necessary taxes in conjunction with
the delivery of the
2
<PAGE>
Assets, including all applicable federal and state stock transfer stamps, if
any, have been paid or provision for payment has been made.
2.3. The Transfer Agent shall deliver at the Closing a certificate as
to the opening on New Fund's share transfer books of accounts in the
Shareholders' names. New Trust shall issue and deliver a confirmation to Old
Trust evidencing New Fund Shares to be credited to Old Fund at the Effective
Time or provide evidence satisfactory to Old Trust that such shares have been
credited to Old Fund's account on such books. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, stock
certificates, receipts, or other documents as the other party or its counsel may
reasonably request.
2.4. Each Trust shall deliver to the other at the Closing a certificate
executed in its name by its President or a Vice President in form and substance
satisfactory to the recipient and dated the Effective Time, to the effect that
the representations and warranties it made in this Agreement are true and
correct in all material respects at the Effective Time, with the same force and
effect as if made on and as of the Effective Time, except as they may be
affected by the transactions contemplated by this Agreement.
3. REPRESENTATIONS AND WARRANTIES.
3.1. Old Fund represents and warrants as follows:
3.1.1. Old Trust is a trust operating under a written declaration
of trust, the beneficial interest in which is divided into
transferable shares, that is duly organized, validly existing, and in
good standing under the laws of the State of Ohio, and a copy of its
Declaration of Trust is on file with the Secretary of State of Ohio;
3.1.2. Old Trust is duly registered as an open-end management
investment company under the Investment Company Act of 1940, as
amended ("1940 Act"), and such registration is in full force and
effect;
3.1.3. Old Fund is a duly established and designated series of
Old Trust;
3.1.4. At the Closing, Old Fund will have good and marketable
title to the Assets and full right, power, and authority to sell,
assign, transfer, and deliver the Assets free of any liens or other
encumbrances; and upon delivery and payment for the Assets, New Fund
will acquire good and marketable title thereto;
3.1.5. New Fund Shares are not being acquired for the purpose of
making any distribution thereof, other than in accordance with the
terms hereof;
3.1.6. Old Fund's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended ("1933 Act"),
and the 1940 Act and the rules and regulations thereunder and do not
include any untrue statement of a material fact or omit to state any
material fact required
3
<PAGE>
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
3.1.7. Old Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Ohio law or any
provision of Old Trust's Declaration of Trust or By-Laws or of any
agreement, instrument, lease, or other undertaking to which Old Fund
is a party or by which it is bound or result in the acceleration of
any obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Old Fund is a party or by which it is
bound, except as previously disclosed in writing to and accepted by
Old Trust;
3.1.8. Except as otherwise disclosed in writing to and accepted
by New Trust, all material contracts and other commitments of or
applicable to Old Fund (other than this Agreement and investment
contracts, including options, futures, and forward contracts) will be
terminated, or provision for discharge of any liabilities of Old Fund
thereunder will be made, at or prior to the Effective Time, without
either Fund's incurring any liability or penalty with respect thereto
and without diminishing or releasing any rights Old Fund may have had
with respect to actions taken or omitted to be taken by any other
party thereto prior to the Closing;
3.1.9. Except as otherwise disclosed in writing to and accepted
by New Trust, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently
pending or (to Old Fund's knowledge) threatened against Old Trust with
respect to Old Fund or any of its properties or assets that, if
adversely determined, would materially and adversely affect Old Fund's
financial condition or the conduct of its business; Old Fund knows of
no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or
subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially or adversely affects its
business or its ability to consummate the transactions contemplated
hereby;
3.1.10. The execution, delivery, and performance of this
Agreement has been duly authorized as of the date hereof by all
necessary action on the part of Old Trust's board of trustees, which
has made the determinations required by Rule 17a-8(a) under the 1940
Act; and, subject to approval by Old Fund's shareholders and receipt
of any necessary exemptive relief or no-action assurances requested
from the Securities and Exchange Commission ("SEC") or its staff with
respect to sections 17(a) and 17(d) of the 1940 Act, this Agreement
will constitute a valid and legally binding obligation of Old Fund,
enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
3.1.11. At the Effective Time, the performance of this Agreement
shall have been duly authorized by all necessary action by Old Fund's
shareholders;
4
<PAGE>
3.1.12. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act
of 1934 ("1934 Act"), or the 1940 Act for the execution or performance
of this Agreement by Old Trust, except for (a) the filing with the SEC
of a registration statement by New Trust on Form N-14 relating to the
New Fund Shares issuable hereunder, and any supplement or amendment
thereto ("Registration Statement"), including therein a
prospectus/proxy statement ("Proxy Statement"), (b) receipt of the
exemptive relief referenced in subparagraph 3.1.9, and (c) such
consents, approvals, authorizations, and filings as have been made or
received or as may be required subsequent to the Effective Time;
3.1.13. On the effective date of the Registration Statement, at
the time of the shareholders' meeting referred to in paragraph 4.2,
and at the Effective Time, the Proxy Statement will (a) comply in all
material respects with the applicable provisions of the 1933 Act, the
1934 Act, and the 1940 Act and the regulations thereunder and (b) not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the shall not apply to statements in
or omissions from the Proxy Statement made in reliance on and in
conformity with information furnished by New Trust for use therein;
3.1.14. The Liabilities were incurred by Old Fund in the ordinary
course of its business and are associated with the Assets;
3.1.15. Old Fund is a "fund" as defined in section 851(g)(2) of
the Code; it qualified for treatment as a regulated investment company
under Subchapter M of the Code ("RIC") for each past taxable year
since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year (and
the Assets will be invested at all times through the Effective Time in
a manner that ensures compliance with the foregoing); it has no
earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it; and it has made all
distributions for each such past taxable year that are necessary to
avoid the imposition of federal excise tax or has paid or provided for
the payment of any excise tax imposed for any such year;
3.1.16. There is no plan or intention by Shareholders who own 5%
or more of Old Fund Shares, and to the best of the knowledge of
management of Old Fund, there is no plan or intention on the part of
the remaining Shareholders to redeem or otherwise sell to New Fund or
to New Trust any New Fund Shares to be received by them in the
Reorganization. Old Trust's management does not anticipate
dispositions of New Fund Shares at the time of or soon after the
Reorganization to exceed the usual rate and frequency of redemptions
of shares of Old Fund in the ordinary course of its operation as a
series of an open-end investment company. Consequently, Old Trust's
management expects that the percentage of Shareholder interests, if
any, that will be disposed of as a result of or at the time of the
Reorganization will be de minimis;
5
<PAGE>
3.1.17. Old Fund is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case
within the meaning of section 368(a)(3)(A) of the Code;
3.1.18. Not more than 25% of the value of Old Fund's total assets
(excluding cash, cash items, and U.S. government securities) is
invested in the stock and securities of any one issuer, and not more
than 50% of the value of such assets is invested in the stock and
securities of five or fewer issuers;
3.1.19. Old Fund will, pursuant to the Agreement, distribute, in
liquidation of Old Fund, the New Fund Shares it receives in the
Reorganization as soon as reasonably practicable after the
Reorganization. Each Shareholder will receive solely New Fund Shares
in exchange for its Old Fund Shares. Old Fund will receive solely New
Fund Shares and the assumption by the New Fund of the Liabilities in
exchange for the Assets it transfers to New Fund. None of the
compensation received by any Shareholder that is an employee or a
direct or indirect provider of investment advisory or administrative
services to Old Fund ("Shareholder/Service Provider") (if any) will be
separate consideration for, or allocable to, any of its Old Fund
Shares; none of the New Fund Shares received by any
Shareholder/Service Provider (if any) will be separate consideration
for, or allocable to, any employment agreement or any investment
advisory services provided to Old Fund; and the compensation paid to
any Shareholder/Service Provider (if any) will be for services
actually rendered and will be commensurate with the amounts paid to
third parties bargaining at arm's length for similar services;
3.1.20. As of the Effective Time, Old Fund will not have
outstanding any warrants, options, convertible securities, or any
other type of right pursuant to which any person could acquire Old
Fund Shares;
3.1.21. At the Effective Time, the performance of this Agreement
shall have been duly authorized by all necessary action by Old Fund's
shareholders; and
3.1.22. Old Fund will be terminated as soon as reasonably
practicable after the Reorganization. Old Trust shall file such
instruments and take all other steps necessary to effect a complete
liquidation and dissolution of Old Fund.
3.2. New Fund represents and warrants as follows:
3.2.1. New Trust is a business trust that is duly organized,
validly existing, and in good standing under the laws of the State of
Delaware, and a copy of its Certificate of Trust has been duly filed
in the office of the Secretary of State thereof;
3.2.2. Before the Effective Time, New Fund will be a duly
established and designated series of New Trust;
6
<PAGE>
3.2.3. New Fund has not commenced operations and will not
commence operations until after the Closing;
3.2.4. Prior to the Effective Time, there will be no issued and
outstanding shares in New Fund or any other securities issued by New
Fund;
3.2.5. No consideration other than New Fund Shares (and New
Fund's assumption of the Liabilities) will be issued in exchange for
the Assets in the Reorganization;
3.2.6. The New Fund Shares to be issued and delivered to Old Fund
hereunder will, at the Effective Time, have been duly authorized and,
when issued and delivered as provided herein, will be duly and validly
issued and outstanding shares of New Fund, fully paid and
non-assessable by New Trust (except as discussed in New Trust's
then-current prospectus and statement of additional information);
3.2.7. New Fund will be a "fund" as defined in section 851(g)(2)
of the Code and will meet all the requirements to qualify for
treatment as a RIC for its taxable year in which the Reorganization
occurs;
3.2.8. New Fund has no plan or intention to issue additional New
Fund Shares following the Reorganization except for shares issued in
the ordinary course of its business as a series of an open-end
investment company; nor does New Fund have any plan or intention to
redeem or otherwise reacquire any New Fund Shares issued to the
Shareholders pursuant to the Reorganization, other than in the
ordinary course of its business as an open-end investment company or
to the extent necessary to comply with its legal obligation under
section 22(e) of the 1940 Act;
3.2.9. Following the Reorganization, New Fund (a) will actively
continue Old Fund's "historic business" (within the meaning of
Treasury Regulations ss. 1.368-1(d)(2)) in substantially the same
manner that Old Fund conducted that business immediately before the
Reorganization (b) has no plan or intention to sell or otherwise
dispose of any of the Assets, except for dispositions made in the
ordinary course of its business and dispositions necessary to maintain
its status as a RIC, although in the ordinary course of its business
New Fund will continuously review its investment portfolio (as Old
Fund did before the Reorganization) to determine whether to retain or
dispose of particular stocks or securities, including those included
in the Assets, and (c) expects to retain substantially all the Assets
in the same form as it receives them in the Reorganization, unless and
until subsequent investment circumstances suggest the desirability of
change or it becomes necessary to make dispositions thereof to
maintain such status;
3.2.10. There is no plan or intention for New Fund to be
dissolved or merged into another business trust or a corporation or a
"fund" thereof (within the meaning of section 851(g)(2) of the Code)
following the Reorganization; and
7
<PAGE>
3.2.11. Immediately after the Reorganization, (a) not more than
25% of the value of New Fund's total assets (excluding cash, cash
items, and U.S. government securities) will be invested in the stock
and securities of any one issuer and (b) not more than 50% of the
value of such assets will be invested in the stock and securities of
five or fewer issuers.
3.3. Each Fund represents and warrants as follows:
3.3.1. The aggregate fair market value of the New Fund Shares
received by each Shareholder, when so received, will be approximately
equal to the aggregate fair market value of the Old Fund Shares
exchanged therefor;
3.3.2. Any amounts payable to Shareholders who seek redemption of
their New Fund Shares, and all other amounts payable to Shareholders,
including amounts due as a result of the declaration of a dividend or
other distribution, will be paid by New Fund and not by Old Fund;
3.3.3. Immediately following consummation of the Reorganization,
the Shareholders will own all the New Fund Shares and will own such
shares solely by reason of their ownership of Old Fund Shares
immediately before the Reorganization;
3.3.4. Old Fund Shareholders will pay their expenses, if any,
incurred in connection with the Reorganization. New Fund will pay or
assume only those expenses of Old Fund that are solely and directly
related to the Reorganization in accordance with the guidelines
established in Rev. Rul. 73-54, 1073-1 C.B.187;
3.3.5. There is no intercompany indebtedness between the Funds
that was issued or acquired, or will be settled, at a discount; and
3.3.6. Immediately following consummation of the Reorganization,
New Fund will possess the same assets and liabilities as those
possessed by Old Fund immediately prior to the Reorganization,
excepting assets used to pay expenses incurred in connection with the
Reorganization. Assets used to pay expenses and all redemptions and
distributions (except for redemptions made in the ordinary course of
Old Fund's business as an open-end investment company and
distributions made to conform to Old Fund's policy of distributing all
or substantially all of its income and gains to avoid the obligation
to pay federal income tax and/or the excise tax under section 4982 of
the Code) made by Old Fund immediately preceding the Reorganization
will, in the aggregate, constitute less than 1% of the net assets of
Old Fund.
8
<PAGE>
4. CONDITIONS PRECEDENT.
Each Fund's obligations hereunder shall be subject to (a) performance
by the other party of all its obligations to be performed hereunder at or before
the Effective Time, (b) all representations and warranties of the other party
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made on
and as of the Effective Time, and (c) the further conditions that, at or before
the Effective Time:
4.1. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. All consents, orders, and permits of federal,
state, and local regulatory authorities (including the SEC and state securities
authorities) deemed necessary by either Trust to permit consummation, in all
material respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain same would not involve a risk of a
material adverse effect on the assets or properties of either Fund, provided
that either Trust may for itself waive any of such conditions;
4.2. Old Trust shall have called a meeting of Old Fund's shareholders
("Shareholders Meeting") to consider and act on this Agreement and the
transactions contemplated thereby, and at such meeting the Agreement and the
transactions contemplated thereby shall have been approved by the affirmative
vote of a simple majority of the outstanding securities of Old Fund;
4.3. Each party shall have received opinions as follows:
4.3.1. Old Trust shall have received an opinion of Kramer Levin
Naftalis & Frankel LLP, counsel to New Trust, substantially to the
effect that:
4.3.1.1. New Fund is a duly established series of New Trust,
a business trust duly organized and validly existing under the
laws of the State of Delaware with power under its Trust
Instrument to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently
conducted;
4.3.1.2. This Agreement (a) has been duly authorized,
executed, and delivered by New Trust on behalf of New Fund and
(b) assuming due authorization, execution, and delivery of this
Agreement by Old Trust, on behalf of Old Fund, is a valid and
legally binding obligation of New Trust with respect to New Fund,
enforceable in accordance with its terms, except as the same may
be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or
affecting creditors' rights and by general principles of equity;
4.3.1.3. The New Fund Shares to be issued and distributed to
the Shareholders under this Agreement, assuming their due
delivery as contemplated by this Agreement, will be duly
authorized and validly issued and outstanding and fully
9
<PAGE>
paid and non-assessable by New Trust (except as disclosed in New
Fund's then current prospectus and statement of additional
information);
4.3.1.4. The execution and delivery of this Agreement did
not, and the consummation of the transactions contemplated hereby
will not, materially violate New Trust's Trust Instrument or
By-Laws or any provision of any agreement (known to such counsel,
without any independent inquiry or investigation) to which New
Trust (with respect to New Fund) is a party or by which it is
bound or (to the knowledge of such counsel, without any
independent inquiry or investigation) result in the acceleration
of any obligation, or the imposition of any penalty, under any
agreement, judgment, or decree to which New Trust (with respect
to New Fund) is a party or by which it is bound, except as set
forth in such opinion or as previously disclosed in writing to
and accepted by Old Trust;
4.3.1.5. To the knowledge of such counsel (without any
independent inquiry or investigation), no consent, approval,
authorization, or order of any court or governmental authority is
required for the consummation by New Trust on behalf of New Fund
of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act, and the 1940 Act and
such as may be required under state securities laws;
4.3.1.6. New Trust is registered with the SEC as an
investment company, and to the knowledge of such counsel no order
has been issued or proceeding instituted to suspend such
registration; and
4.3.1.7. To the knowledge of such counsel (without any
independent inquiry or investigation), (a) no litigation,
administrative proceeding, or investigation of or before any
court or governmental body is pending or threatened as to New
Trust (with respect to New Fund) or any of its properties or
assets attributable or allocable to New Fund and (b) New Trust
(with respect to New Fund) is not a party to or subject to the
provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects New
Fund's business, except as set forth in such opinion or as
otherwise disclosed in writing to and accepted by Old Trust.
4.3.1.8. In rendering such opinion, such counsel may (i)
rely, as to matters governed by the laws of the State of
Delaware, on an opinion of competent Delaware counsel, (ii) make
assumptions regarding the authenticity, genuineness, and/or
conformity of documents and copies thereof without independent
verification thereof, (iii) limit such opinion to applicable
federal and state law, (iv) define the word "knowledge" and
related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly
related to this Agreement and the Reorganization, and (v) rely on
certificates of officers or trustees of the Old Trust; in each
case reasonably acceptable to New Trust.
10
<PAGE>
4.3.2. New Trust shall have received an opinion of Kirkpatrick &
Lockhart LLP, counsel to Old Trust, substantially to the effect that:
4.3.2.1. Old Fund is a duly established series of Old Trust,
a business trust duly organized and validly existing under the
laws of the State of Ohio with power under its Declaration of
Trust to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently
conducted;
4.3.2.2. This Agreement (a) has been duly authorized,
executed, and delivered by Old Trust on behalf of Old Fund and
(b) assuming due authorization, execution, and delivery of this
Agreement by New Trust on behalf of New Fund, is a valid and
legally binding obligation of Old Trust with respect to Old Fund,
enforceable in accordance with its terms, except as the same may
be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or
affecting creditors' rights and by general principles of equity;
4.3.2.3. The execution and delivery of this Agreement did
not, and the consummation of the transactions contemplated hereby
will not, materially violate Old Trust's Declaration of Trust or
By-Laws or any provision of any agreement (known to such counsel,
without any independent inquiry or investigation) to which Old
Trust (with respect to Old Fund) is a party or by which it is
bound or (to the knowledge of such counsel, without any
independent inquiry or investigation) result in the acceleration
of any obligation, or the imposition of any penalty, under any
agreement, judgment, or decree to which Old Trust (with respect
to Old Fund) is a party or by which it is bound, except as set
forth in such opinion or as previously disclosed in writing to
and accepted by New Trust;
4.3.2.4. To the knowledge of such counsel (without any
independent inquiry or investigation), no consent, approval,
authorization, or order of any court or governmental authority is
required for the consummation by Old Trust on behalf of Old Fund
of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act, and the 1940 Act and
such as may be required under state securities laws;
4.3.2.5. Old Trust is registered with the SEC as an
investment company, and to the knowledge of such counsel no order
has been issued or proceeding instituted to suspend such
registration; and
4.3.2.6. To the knowledge of such counsel (without any
independent inquiry or investigation), (a) no litigation,
administrative proceeding, or investigation of or before any
court or governmental body is pending or threatened as to Old
Trust (with respect to Old Fund) or any of its properties or
assets attributable or allocable to Old Fund and (b) Old Trust
(with respect to Old Fund) is not a party to or subject to the
provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Old
Fund's
11
<PAGE>
business, except as set forth in such opinion or as otherwise
disclosed in writing to and accepted by New Trust.
4.3.2.7. In rendering such opinion, such counsel may (i)
rely, as to matters governed by the laws of the State of Ohio, on
an opinion of competent Ohio counsel, (ii) make assumptions
regarding the authenticity, genuineness, and/or conformity of
documents and copies thereof without independent verification
thereof, (iii) limit such opinion to applicable federal and state
law, (iv) define the word "knowledge" and related terms to mean
the knowledge of attorneys then with such firm who have devoted
substantive attention to matters directly related to this
Agreement and the Reorganization, and (v) rely on certificates of
officers or trustees of the New Trust; in each case reasonably
acceptable to Old Trust.
4.4. Each Trust shall have received an opinion from Kramer Levin
Naftalis & Frankel LLP addressed to and in form and substance satisfactory to
it, as to the federal income tax consequences of the Reorganization ("Tax
Opinion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the
representations made in this Agreement (and/or in separate letters addressed to
such counsel) and each Fund's separate covenants. The Tax Opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein and conditioned on consummation of the Reorganization in accordance with
this Agreement, for federal income tax purposes:
4.4.1. The Reorganization will constitute a reorganization within the
meaning of section 368(a)(1)(F) of the Code, and each Fund will be "a party
to a reorganization" within the meaning of section 368(b) of the Code;
4.4.2. Old Fund will not recognize any gain or loss as a result of the
Reorganization;
4.4.3. New Fund will not recognize any gain or loss on its receipt of
the Assets in exchange for New Fund Shares and its assumption of the
Liabilities;
4.4.4. New Fund's adjusted tax bases in the Assets will be the same as
the adjusted tax bases of such Assets in Old Fund's hands immediately prior
to the Reorganization, and New Fund's holding periods in the Assets will
include the holding periods of such Assets in Old Fund's hands immediately
prior to the Reorganization;
4.4.5. The Shareholders will not recognize any gain or loss on the
exchange of their Old Fund Shares for New Fund Shares in the
Reorganization;
4.4.6. The aggregate tax basis of the New Fund Shares received by each
Shareholder in the Reorganization will be the same as the aggregate tax
basis of the Old Fund Shares exchanged therefor, and holding period of each
Shareholder in the New Fund Shares received in the Reorganization will
include period during which such Shareholder held the Old Fund Shares
exchanged therefor, if such Old Fund Shares were held as a capital asset by
the Shareholder at the Effective Time; and
12
<PAGE>
4.5. Immediately upon delivery to Old Fund of New Fund Shares, Old
Trust, as the then sole shareholder of New Fund, shall approve an investment
advisory agreement between New Trust and Key Asset Management Inc., and to the
extent required under the 1940 Act, other matters necessary for New Fund to
commence operations; and
4.6. New Trust (on behalf of and with respect to New Fund) shall have
entered into an investment management agreement, administration agreement,
sub-administration agreement, distribution agreement, plan of distribution
pursuant to Rule 12b-1 under the 1940 Act, and such other agreements as are
necessary for New Fund's operation as a series of an open-end investment
company. Each such agreement shall have been approved by New Trust's trustees
and, to the extent required by law, by such of those trustees who are not
"interested persons" thereof (as defined in the 1940 Act) and by Old Fund as the
sole shareholder of New Fund.
At any time prior to the Closing, any of the foregoing conditions
(except that set forth in paragraph 4.2) may be waived by the trustees of either
Trust if, in their judgment, such waiver will not have a material adverse effect
on the interests of Old Fund's shareholders.
5. EXPENSES.
Except as otherwise provided in subparagraph 3.3.4, all expenses
incurred in connection with the transactions contemplated by this Agreement
(regardless of whether they are consummated) will be borne by the parties as
they mutually agree.
6. ENTIRE AGREEMENT; SURVIVAL.
Neither party has made any representation, warranty, or covenant not
set forth herein, and this Agreement constitutes the entire agreement between
the parties. The representations, warranties, and covenants contained herein or
in any document delivered pursuant hereto or in connection herewith shall
survive the Closing.
7. AMENDMENT.
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Old Fund's shareholders, in such manner as
may be mutually agreed upon in writing by the parties; provided that following
such approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
8. TERMINATION.
This Agreement may be terminated at any time at or prior to the
Effective Time, whether before or after approval by Old Fund's shareholders:
8.1. By either Fund (a) in the event of the other Fund's material
breach of any representation, warranty, or covenant contained herein to be
performed at or prior to the Effective Time, (b) if a condition to its
obligations has not been met and it reasonably appears that such
13
<PAGE>
condition will not or cannot be met, or (c) if the Closing has not occurred on
or before April 30, 1999; or
8.2. By the parties' mutual agreement.
In the event of termination under paragraphs 8.1(c) or 8.2, there shall be no
liability for damages on the part of either Fund -- or the trustees or officers
of either Trust -- to the other Fund.
9. MISCELLANEOUS.
9.1. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Delaware; provided that, in the case of
any conflict between such laws and the federal securities laws, the latter shall
govern.
9.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
9.3. The execution and delivery of this Agreement have been authorized
by each Trust's trustees, and this Agreement has been executed and delivered by
authorized officers of each Trust acting as such; neither such authorization by
such trustees nor such execution and delivery by such officers shall be deemed
to have been made by any of them individually or to impose any liability on any
of them or any shareholder of either Trust personally, but shall bind only the
assets and property of the respective Funds, as provided in Old Trust's
Declaration of Trust and New Trust's Trust Instrument.
9.4. New Trust agrees to indemnify and hold harmless each trustee of
Old Trust at the time of the execution of this Agreement, whether or not such
person is or becomes a trustee of New Trust subsequent to the Reorganization,
against expenses, including reasonable attorneys' fees, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by such trustee in
connection with any claim that is asserted against such trustee arising out of
such person's service as a trustee of Old Trust, provided that such
indemnification shall be limited to the full extent of the indemnification that
is available to the trustees of New Trust pursuant to the provisions of New
Trust's Declaration of Trust and applicable law.
9.5. For the period beginning at the time of the Reorganization and
ending not less than three years thereafter, New Trust shall provide for a
liability policy covering the actions of each trustee of Old Trust at the time
of the execution of this Agreement for the period they served as such, which may
be accomplished by causing such persons to be added as insured under the
liability policy of New Trust.
14
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be executed
and delivered by its duly authorized officers as of the day and year first
written above.
GRADISON GROWTH TRUST
on behalf of its series, Gradison Established
Value Fund
By:
----------------------
Title:
-------------------
THE VICTORY PORTFOLIOS
on behalf of its series, Established Value
Fund
By:
----------------------
Title:
-------------------
15
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement")
is made as of ________, 1999, between The Victory Portfolios, a Delaware
business trust ("Victory"), on behalf of Victory Ohio Municipal Bond Fund, a
segregated portfolio of assets ("series") thereof ("Acquiring Fund"), and
Gradison McDonald Municipal Custodian Trust (operating through a single series,
Gradison Ohio Tax-Free Income Fund), an Ohio business trust ("Target").
(Acquiring Fund and Target are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and Victory and Target are sometimes
referred to herein individually as an "Investment Company" and collectively as
the "Investment Companies.")
All agreements, representations, actions, and obligations described
herein made or to be taken or undertaken by Acquiring Fund are made or shall be
taken or undertaken by Victory on its behalf.
This Agreement is intended to be, and is adopted as, a plan of a
reorganization described in section 368(a)(1) of the Internal Revenue Code of
1986, as amended ("Code"). The reorganization will consist of the transfer to
Acquiring Fund of all of Target's assets in exchange solely for Class G voting
shares of beneficial interest in Acquiring Fund ("Acquiring Fund Shares") and
the assumption by Acquiring Fund of Target's liabilities, followed by the
distribution of Acquiring Fund Shares pro rata to the holders of shares of
beneficial interest in Target ("Target Shares") in liquidation of Target, all
upon the terms and conditions set forth in this Agreement. All such transactions
are referred to herein collectively as the "Reorganization."
Acquiring Fund's shares currently are divided into two classes,
designated Class A and Class G shares. Class G has been established but its
shares will not be sold until the Effective Time (as defined in paragraph 3.1).
In consideration of the mutual promises herein, the parties covenant
and agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION OF TARGET
1.1. At the Effective Time (as defined in paragraph 3.1), Target agrees
to assign, sell, convey, transfer, and deliver all of its assets described in
paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring Fund agrees in exchange
therefor --
(a) to issue and deliver to Target the number of full and fractional
Acquiring Fund Shares determined by dividing the net value of Target
(computed as set forth in paragraph 2.1) by the NAV (computed as set forth
in paragraph 2.2) of an Acquiring Fund Share; and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to regis-
<PAGE>
ter shares under applicable securities laws, books and records, deferred and
prepaid expenses shown as assets on Target's books, and other property owned by
Target at the Effective Time.
1.3. The Liabilities shall include (except as otherwise provided
herein) all of Target's liabilities, debts, obligations, and duties of whatever
kind or nature, whether absolute, accrued, contingent, or otherwise, whether or
not arising in the ordinary course of business, whether or not determinable at
the Effective Time, and whether or not specifically referred to in this
Agreement, including without limitation Target's share of the expenses described
in paragraph 7.2 and the liabilities to which the Transferred Assets are
subject. Notwithstanding the foregoing, Target agrees to use its best efforts to
discharge all of its known Liabilities prior to the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare
and pay to its shareholders a dividend and/or other distribution in an amount
large enough so that it will have distributed substantially all (and in any
event not less than 90%) of its investment company taxable income (computed
without regard to any deduction for dividends paid) and substantially all of its
realized net capital gain, if any, for the current taxable year through the
Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund Shares
received by it pursuant to paragraph 1.1 to Target's shareholders of record,
determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares and in
liquidation of Target. To accomplish this distribution, the Acquiring Fund's
transfer agent ("Transfer Agent") shall open accounts on Acquiring Fund's share
transfer books in the Shareholders' names and transfer such Acquiring Fund
Shares thereto. Each Shareholder's account shall be credited with the pro rata
number of full and fractional (rounded to the third decimal place) Acquiring
Fund Shares due that Shareholder. All outstanding Target Shares, including any
represented by certificates, shall simultaneously be canceled on Target's share
transfer books. Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with the Reorganization. However,
certificates representing Target Fund Shares shall represent Acquiring Fund
Shares after the Reorganization.
1.6. As soon as reasonably practicable after distribution of the
Acquiring Fund Shares pursuant to paragraph 1.5, Target shall be terminated and
any further actions shall be taken in connection therewith as required by
applicable law. Target shall file such instruments and shall take all other
steps necessary to effect a complete liquidation and dissolution of Target.
1.7. Any reporting responsibility of Target to a public authority is
and shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares
in a name other than that of the registered holder on Target's books of the
Target Shares constructively exchanged therefor shall be paid by the person to
whom such Acquiring Fund Shares are to be issued, as a condition of such
transfer.
2
<PAGE>
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a)
the value of the Assets computed as of the close of regular trading on the New
York Stock Exchange ("NYSE") on the date of the Closing ("Valuation Time"),
using the valuation procedures set forth in Target's then-current prospectus and
statement of additional information less (b) the amount of the Liabilities as of
the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of an Acquiring Fund
Share shall be computed as of the Valuation Time, using the valuation procedures
set forth in Acquiring Fund's then-current prospectus and statement of
additional information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made
by or under the direction of Key Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Funds' principal office on
March __, 1999, or at such other place and/or on such other date upon which the
parties may agree. All acts taking place at the Closing shall be deemed to take
place simultaneously as of the close of business on the date thereof or at such
other time upon which the parties may agree ("Effective Time"). If, immediately
before the Valuation Time, (a) the NYSE is closed to trading or trading thereon
is restricted or (b) trading or the reporting of trading on the NYSE or
elsewhere is disrupted, so that accurate appraisal of the net value of Target
and the NAV per Acquiring Fund Share is impracticable, the Effective Time shall
be postponed until the first business day after the day when such trading shall
have been fully resumed and such reporting shall have been restored.
3.2. Target shall deliver to Victory at the Closing a schedule of the
Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax bases and holding periods by lot.
Target's custodian shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets held by the custodian will be transferred to
Acquiring Fund at the Effective Time and (b) all necessary taxes in conjunction
with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made.
3.3. The Transfer Agent shall deliver at the Closing a certificate as
to the opening on Acquiring Fund's share transfer books of accounts in the
Shareholders' names. Victory shall issue and deliver a confirmation to Target
evidencing the Acquiring Fund Shares to be credited to Target at the Effective
Time or provide evidence satisfactory to Target that such Acquiring Fund Shares
have been credited to Target's account on Acquiring Fund's books. At the
Closing, each party shall deliver to the other such bills of sale, checks,
assignments, stock certificates, receipts, or other documents as the other party
or its counsel may reasonably request.
3
<PAGE>
3.4. Each Investment Company shall deliver to the other at the Closing
a certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to the
effect that the representations and warranties it made in this Agreement are
true and correct in all material respects at the Effective Time, with the same
force and effect on it made on and as at the Effective Time, except as they may
be affected by the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. Target is operating under a written declaration of trust,
the beneficial interest in which is divided into transferable shares,
it is duly organized, validly existing, and in good standing under the
laws of the State of Ohio; and a copy of its Declaration of Trust is
on file with the Secretary of the State of Ohio;
4.1.2. Target is duly registered as an open-end management
investment company under the Investment Company Act of 1940, as
amended (The "1940 Act"), and such registration will be in full force
and effect at the Effective Time;
4.1.3. At the Closing, Target will have good and marketable title
to the Assets and full right, power, and authority to sell, assign,
transfer, and deliver the Assets free of any liens or other
encumbrances; and upon delivery and payment for the Assets, Acquiring
Fund will acquire good and marketable title thereto;
4.1.4. Acquiring Fund Shares are not being acquired for the
purpose of making any distribution thereof, other than in accordance
with the terms hereof;
4.1.5. Target's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended ("1933 Act"),
and the 1940 Act and the rules and regulations thereunder and do not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading;
4.1.6. Target is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Ohio law or any
provision of Target's Declaration of Trust or By-Laws or of any
agreement, instrument, lease, or other undertaking to which Target is
a party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Target is a party or by which it is
bound, except as previously disclosed in writing to and accepted by
Victory;
4.1.7. Except as otherwise disclosed in writing to and accepted
by Victory, all material contracts and other commitments of or
applicable to Target (other than this
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Agreement and investment contracts, including options and futures, and
forward contracts) will be terminated, or provision for discharge of
any liabilities of Target thereunder will be made, at or prior to the
Effective Time, without either Fund's incurring any liability or
penalty with respect thereto and without diminishing or releasing any
rights Target may have had with respect to actions taken or omitted to
be taken by any other party thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and accepted
by Victory, no litigation, administrative proceeding, or investigation
of or before any court or governmental body is presently pending or
(to Target's knowledge) threatened against Target or any of its
properties or assets that, if adversely determined, would materially
and adversely affect Target's financial condition or the conduct of
its business; Target knows of no facts that might form the basis for
the institution of any such litigation, proceeding, or investigation
and is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially
or adversely affects its business or its ability to consummate the
transactions contemplated hereby;
4.1.9. The execution, delivery, and performance of this Agreement
has been duly authorized as of the date hereof by all necessary action
on the part of Target's board of trustees, which has made the
determinations required by Rule 17a-8(a) under the 1940 Act; and,
subject to approval by Target's shareholders and receipt of any
necessary exemptive relief or no-action assurances requested from the
Securities and Exchange Commission ("SEC") or its staff with respect
to Sections 17(a) and 17(d) of the 1940 Act, this Agreement will
constitute a valid and legally binding obligation of Target,
enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.1.10. At the Effective Time, the performance of this Agreement
shall have been duly authorized by all necessary action by Target's
shareholders;
4.1.11. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act
of 1934, as amended ("1934 Act"), or the 1940 Act for the execution or
performance of this Agreement by Target, except for (a) the filing
with the SEC of a registration statement by Victory on Form N-14
relating to the Acquiring Fund Shares issuable hereunder, and any
supplement or amendment thereto ("Registration Statement"), including
therein a prospectus/proxy statement ("Proxy Statement"), (b) receipt
of the exemptive relief referenced in subparagraph 4.1.9, and (c) such
consents, approvals, authorizations, and filings as have been made or
received or as may be required subsequent to the Effective Time;
4.1.12. On the effective date of the Registration Statement, at
the time of the shareholders' meeting referred to in paragraph 5.2,
and at the Effective Time, the Proxy Statement will (a) comply in all
material respects with the applicable provisions of the 1933 Act, the
1934 Act, and the 1940 Act and the rules and regulations thereunder
and (b) not
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contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the shall not apply to statements in
or omissions from the Proxy Statement made in reliance on and in
conformity with information furnished by Victory for use therein;
4.1.13. The Liabilities were incurred by Target in the ordinary
course of its business and are associated with the Assets;
4.1.14. Target is a "fund" as defined in section 851(g)(2) of the
Code; it qualified for treatment as a regulated investment company
under Subchapter M of the Code ("RIC") for each past taxable year
since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year (and
the Assets will be invested all times through the Effective Time in a
manner that ensures compliance with the foregoing); it has no earnings
and profits accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it; and it has made all distributions
for each such past taxable year that are necessary to avoid the
imposition of federal excise tax or has paid or provided for the
payments of any excise tax imposed for any such year;
4.1.15. There is no plan or intention by Shareholders who own 5%
or more of Target Shares, and to the best of the knowledge of the
management of Target, there is no plan or intention on the part of the
remaining Shareholders to redeem or otherwise sell to Acquiring Fund
or Victory any Acquiring Fund Shares received in the Reorganization.
Target's management does not anticipate dispositions of Acquiring Fund
Shares at the time or soon after the Reorganization to exceed the
usual rate and frequency of redemptions of Target Shares in the
ordinary course of its operation as a series of an open-end investment
company. Consequently, Target's management expects that the percentage
of Shareholder interests, if any, that will be disposed of as a result
of or at the time of the Reorganization will be de miminis;
4.1.16. Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case
within the meaning of section 368(a)(3)(A) of the Code;
4.1.17. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is
invested in the stock and securities of any one issuer and not more
than 50% of the value of such assets is invested in the stock and
securities of five or fewer issuers;
4.1.18. Target will, pursuant to this Agreement, distribute, in
liquidation of Target, the Acquiring Fund Shares it receives in the
Reorganization as soon as reasonably practicable after the
Reorganization. Each Shareholder will receive solely Acquiring Fund
Shares in exchange for its Target Shares. Target will receive solely
Acquiring Fund Shares and the assumption by the Acquiring Fund of the
Liabilities in exchange for the Assets it transfers to Acquiring Fund.
None of the compensation received by any Shareholder that is an
employee or a direct or indirect provider of investment advisory or
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administrative services to Target ("Shareholder/Service Provider") (if
any) will be separate consideration for, or allocable to, any of its
Target Shares; none of the Acquiring Fund Shares received by any
Shareholder/Service Provider (if any) will be separate consideration
for, or allocable to, any employment agreement or any investment
advisory services provided to Target; and the compensation paid to any
Shareholder/Service Provider (if any) will be for services actually
rendered and will be commensurate with the amounts paid to third
parties bargaining at arm's length for similar services;
4.1.19. As of the Effective Time, Target will not have
outstanding any warrants, options, convertible securities, or any
other type of right pursuant to which any person could acquire Target
Shares; and
4.1.20. Target will be terminated as soon as reasonably
practicable after the Reorganization.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Victory is a business trust that is duly organized,
validly existing, and in good standing under the laws of the State of
Delaware; and a copy of its Certificate of Trust is on file with the
Secretary of the State of Delaware;
4.2.2 Victory is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be
in full force and effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series
of Victory;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in
exchange for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to
Target hereunder will, at the Effective Time, have been duly
authorized and, when issued and delivered as provided herein, will be
duly and validly issued and outstanding shares of Acquiring Fund,
fully paid and non-assessable by Victory (except as disclosed in
Victory's then-current prospectus and statement of additional
information). Except as contemplated by this Agreement, Acquiring Fund
does not have outstanding any options, warrants, or other rights to
subscribe for or purchase any of its shares, nor is there outstanding
any security convertible into any of its shares;
4.2.6. Acquiring Fund's current prospectus and statement of
additional information conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations thereunder and do not include any untrue statement of
a material fact or omit to state any material fact required to be
stated therein or necessary to
7
<PAGE>
make the statements therein, in light of the circumstances under which
they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution
and delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Delaware law or
any provision of Victory's Certificate of Trust or Trust Instrument or
By-Laws or of any provision of any agreement, instrument, lease, or
other undertaking to which Acquiring Fund is a party or by which it is
bound or result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to
which Acquiring Fund is a party or by which it is bound, except as
previously disclosed in writing to and accepted by Target;
4.2.8. Except as otherwise disclosed in writing to and accepted
by Target, no litigation, administrative proceeding, or investigation
of or before any court or governmental body is presently pending or
(to Acquiring Fund's knowledge) threatened against Victory with
respect to Acquiring Fund or any of its properties or assets that, if
adversely determined, would materially and adversely affect Acquiring
Fund's financial condition or the conduct of its business; Acquiring
Fund knows of no facts that might form the basis for the institution
of any such litigation, proceeding, or investigation and is not a
party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially or
adversely affects its business or its ability to consummate the
transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement
has been duly authorized as of the date hereof by all necessary action
on the part of Victory's board of trustees, which has made the
determinations required by Rule 17a-8(a) under the 1940 Act; and,
subject to receipt of any necessary exemptive relief or no-action
assurances requested from the SEC or its staff with respect to
Sections 17(a) and 17(d) of the 1940 Act, this Agreement will
constitute a valid and legally binding obligation of Acquiring Fund,
enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act
for the execution or performance of this Agreement by Victory, except
for (a) the filing with the SEC of the Registration Statement and a
post-effective amendment to Trust's registration statement on Form
N-1A, (b) receipt of the exemptive relief referenced in subparagraph
4.2.9, and (c) such consents, approvals, authorizations, and filings
as have been made or received or as may be required subsequent to the
Effective Time;
4.2.11. On the effective date of the Registration Statement, at
the time of the shareholders' meeting referred to in paragraph 5.2,
and at the Effective Time, the Proxy Statement will (a) comply in all
material respects with the applicable provisions of the 1933 Act, the
1934 Act, and the 1940 Act and the rules and regulations thereunder
and (b) not
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contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not misleading; provided that the foregoing
shall not apply to statements in or omissions from the Proxy Statement
made in reliance on and in conformity with information furnished by
Target for use therein;
4.2.12. Acquiring Fund is a "fund" as defined in Section
851(g)(2) of the Code; it qualified for treatment as a RIC for each
past taxable year since it commenced operations and will continue to
meet all the requirements for such qualification for its current
taxable year; Acquiring Fund intends to continue to meet all such
requirements for the next taxable year; and it has no earnings and
profits accumulated in any taxable year in which the provisions of
Subchapter M of the Code did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue
additional Acquiring Fund Shares following the Reorganization except
for shares issued in the ordinary course of its business as a series
of an open-end investment company; nor does Acquiring Fund have any
plan or intention to redeem or otherwise reacquire any Acquiring Fund
Shares issued to the Shareholders pursuant to the Reorganization,
other than in the ordinary course of its business as an open-end
investment company or to the extent necessary to comply with its legal
obligation under Section 22(e) of the 1940 Act.
4.2.14. Following the Reorganization Acquiring Fund (a) will
actively continue Target's "historic business" in substantially the
same manner that Target conducted that business immediately before the
Reorganization, (b) has no plan or intention to sell or otherwise
dispose of any of the Assets, except for dispositions made in the
ordinary course of its business and dispositions necessary to maintain
its status as a RIC, although in the ordinary course of its business
Acquiring Fund will continuously review its investment portfolio (as
the Target did before the Reorganization) to determine whether to
retain or dispose of particular stocks or securities, including those
included in the Assets, and (c) expects to retain substantially all
the Assets in the same form as it receives them in the Reorganization,
unless and until subsequent investment circumstances suggest the
desirability of change or it becomes necessary to make dispositions
thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another business trust or corporation or
"fund" thereof (within the meaning of section 851(g)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than
25% of the value of Acquiring Fund's total assets (excluding cash,
cash items, and U.S. government securities) will be invested in the
stock and securities of any one issuer and (b) not more than 50% of
the value of such assets will be invested in the stock and securities
of five or fewer issuers;
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4.2.17. Acquiring Fund does not own, directly or indirectly, nor
at the Effective Time will it own, directly or indirectly, nor has it
owned, directly or indirectly, at any time during the past five years,
any shares of Target; and
4.2.18. Acquiring Fund's management does not anticipate that
there will be extraordinary redemptions of Acquiring Fund Shares
immediately following the Reorganization.
4.3. Each Fund represents and warrants as follows:
4.3.1. The aggregate fair market value of the Acquiring Fund
Shares received by each Shareholder, when so received, will be
approximately equal to the aggregate fair market value of the Target
Shares exchanged therefor;
4.3.2. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject
to substantially the same liabilities that Target held or was subject
to immediately prior thereto (in addition to the assets and
liabilities Acquiring Fund then holds or is subject to), plus any
liabilities and expenses of the parties incurred in connection with
the Reorganization;
4.3.3. The fair market value of the Assets will on a going
concern basis equal or exceed the Liabilities;
4.3.4. There is no intercompany indebtedness between the Funds
that was issued or acquired, or will be settled, at a discount;
4.3.5. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the
fair market value of the net assets, and at least 70% of the fair
market value of the gross assets, held by Target immediately before
the Reorganization. For purposes of this representation, amounts paid
by Target to dissenters, amounts used by Target to pay its
Reorganization expenses, amounts paid by Target to Shareholders who
receive cash or other property, and all redemptions (except for
redemptions occurring in the ordinary course of Target's business as
an open-end investment company) and distributions (except for
distributions made to conform to its policy of distributing all or
substantially all of its income and gains to avoid the obligation to
pay federal income tax and/or the excise tax under Section 4982 of the
Code) made by Target immediately preceding the Reorganization will be
included as assets thereof held immediately before the Reorganization;
4.3.6. Any amounts payable to Shareholders who seek redemption of
their Target shares, and all other amounts payable to Shareholders,
including amounts due as a result of the declaration of a dividend or
other distribution, will be paid by Target and not by Acquiring Fund;
and
4.3.7. The Shareholders will pay their expenses, if any, incurred
in connection with the Reorganization. The Acquiring Fund will pay or
assume only those expenses of
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the Target that are solely and directly related to the Reorganization
in accordance with the guidelines established in Rev. Rul. 73-54,
1073-1 C.B. 187.
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that (a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and (b) each Fund will
retain exclusive control of the composition of its portfolio until the Closing;
provided that Target shall not dispose of more than an insignificant portion of
its historic business assets during such period without Acquiring Fund's prior
consent.
5.2. Target covenants to call a special meeting of shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist Victory in obtaining such
information as Victory reasonably requests concerning the beneficial ownership
of Target Shares.
5.5. Target covenants that its books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Victory at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement
in compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target, title to and possession of the Acquiring Fund
Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the 1940 Act, and
such state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
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<PAGE>
5.9. Subject to this Agreement, each Fund covenants to take or cause to
be taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance
by the other Fund of all the obligations to be performed hereunder at or before
the Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by each Investment Company's board of trustees
and shall have been approved by Target's shareholders in accordance with
applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Fund to permit consummation, in all material respects, of
the transactions contemplated hereby shall have been obtained, except where
failure to obtain same would not involve a risk of a material adverse effect on
the assets or properties of either Fund, provided that either Fund may for
itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall
be pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Target shall have received an opinion of Kramer Levin Naftalis &
Frankel LLP, counsel to Victory, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of Victory, a
business trust duly organized and validly existing under the laws of the
State of Delaware with power under its Trust Instrument to own all of its
properties and assets and, to the knowledge of such counsel, to carry on
its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Victory on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and
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delivery of this Agreement by Target, is a valid and legally binding
obligation of Victory with respect to Acquiring Fund, enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by general principles
of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized and validly issued
and outstanding and fully paid and non-assessable (except as disclosed in
New Trust's then-current prospectus and statement of additional
information);
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Victory's Trust Instrument or By-Laws or any provision of any
agreement (known to such counsel, without any independent inquiry or
investigation) to which Victory (with respect to Acquiring Fund) is a party
or by which it is bound or (to the knowledge of such counsel, without any
independent inquiry or investigation) result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Victory (with respect to Acquiring Fund) is a
party or by which it is bound, except as set forth in such opinion or as
previously disclosed in writing to and accepted by Target;
6.4.5. To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order of
any court or governmental authority is required for the consummation by
Victory on behalf of Acquiring Fund of the transactions contemplated
herein, except such as have been obtained under the 1933 Act, the 1934 Act,
and the 1940 Act and such as may be required under state securities laws;
6.4.6. Victory is registered with the SEC as an investment company,
and to the knowledge of such counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Victory (with respect to Acquiring Fund) or any of its
properties or assets attributable or allocable to Acquiring Fund and (b)
Victory (with respect to Acquiring Fund) is not a party to or subject to
the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Acquiring Fund's
business, except as set forth in such opinion or as otherwise disclosed in
writing to and accepted by Target.
In rendering such opinion, such counsel may (i) rely, as to matters governed by
the laws of the State of Delaware, on an opinion of competent Delaware counsel,
(ii) make assumptions regarding the authenticity, genuineness, and/or conformity
of documents and copies thereof without independent verification thereof, (iii)
limit such opinion to applicable federal and state law, and (iv)
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<PAGE>
define the word "knowledge" and related terms to mean the knowledge of attorneys
then with such firm who have devoted substantive attention to matters directly
related to this Agreement and the Reorganization; and (v) rely on certificates
of officers or trustees of Victory, in each case reasonably acceptable to
Target.
6.5. Victory shall have received an opinion of Kirkpatrick & Lockhart
LLP, counsel to Target, substantially to the effect that:
6.5.1. Target is a business trust duly organized and validly existing
under the laws of the State of Ohio with power under its Declaration of
Trust to own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Target and (b) assuming due authorization, execution, and
delivery of this Agreement by Victory on behalf of Acquiring Fund, is a
valid and legally binding obligation of Target, enforceable in accordance
with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by general principles
of equity;
6.5.3. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Target's Declaration of Trust or By-Laws or any provision of any
agreement (known to such counsel, without any independent inquiry or
investigation) to which Target is a party or by which it is bound or (to
the knowledge of such counsel, without any independent inquiry or
investigation) result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, judgment, or decree to
which Target is a party or by which it is bound, except as set forth in
such opinion or as previously disclosed in writing to and accepted by
Victory;
6.5.4 To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, or order of
any court or governmental authority is required for the consummation by
Target of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act, and the 1940 Act and such as may
be required under state securities laws;
6.5.5. Target is registered with the SEC as an investment company, and
to the knowledge of such counsel no order has been issued or proceeding
instituted to suspend such registration; and
6.5.6. To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Target or any of its properties or assets attributable or
allocable to Target and (b) Target is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental
body that
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<PAGE>
materially and adversely affects Target's business, except as set forth in
such opinion or as otherwise disclosed in writing to and accepted by
Victory.
In rendering such opinion, such counsel may (i) rely, as to matters governed by
the laws of the State of Ohio, on an opinion of competent Ohio counsel, (ii)
make assumptions regarding the authenticity, genuineness, and/or conformity of
documents and copies thereof without independent verification thereof, (iii)
limit such opinion to applicable federal and state law, (iv) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly related to this
Agreement and the Reorganization, and (v) rely on certificates of officers or
trustees of Target; in each case reasonably acceptable to Victory.
6.6. Each Investment Company shall have received an opinion of Kramer
Levin Naftalis & Frankel LLP addressed to and in form and substance satisfactory
to it, as to the federal income tax consequences of the Reorganization ("Tax
Opinion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the
representations made in this Agreement (and/or in separate letters addressed to
such counsel) and each Fund's separate covenants. The Tax Opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein and conditioned on consummation of the Reorganization in accordance with
this Agreement, for federal income tax purposes:
6.6.1. The Reorganization will constitute a reorganization within the
meaning of section 368(a)(1) of the Code, and each Fund will be "a party to
a reorganization" within the meaning of section 368(b) of the Code;
6.6.2. No gain or loss will be recognized by Target on the transfer to
Acquiring Fund of the Assets in exchange solely for Acquiring Fund Shares
and Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in liquidation of Target;
6.6.3. No gain or loss will be recognized by Acquiring Fund on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4. Acquiring Fund's adjusted tax basis in the Assets will be equal
to the basis thereof in Target's hands immediately before the
Reorganization, and Acquiring Fund's holding period for the Assets will
include Target's holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the exchange of
its Target Shares solely for Acquiring Fund Shares pursuant to the
Reorganization; and
6.6.6. A Shareholder's aggregate tax basis in the Acquiring Fund
Shares received by it in the Reorganization will equal its aggregate tax
basis in its Target Shares surrendered in exchange therefor, and its
holding period for those Acquiring Fund Shares will include its holding
period for those Target Shares, provided such Target Shares are held as
capital assets by the Shareholder at the Effective Time.
15
<PAGE>
At any time before the Closing, (a) Acquiring Fund may waive any of the
foregoing conditions if, in the judgment of Victory's board of trustees, such
waiver will not have a material adverse effect on its shareholders' interests,
and (b) Target may waive any of the foregoing conditions if, in the judgment of
Target's board of trustees, such waiver will not have a material adverse effect
on the Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company represents and warrants to the other that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
7.2. Each Fund will be responsible for its own expenses incurred in
connection with the Reorganization.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not
set forth herein, and this Agreement constitutes the entire agreement between
the parties. The representations, warranties, and covenants contained herein or
in any document delivered pursuant hereto or in connection herewith shall
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the
Effective Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material
breach of any representation, warranty, or covenant contained herein to be
performed at or prior to the Effective Time, (b) if a condition to its
obligations has not been met and it reasonably appears that such condition will
not or cannot be met, or (c) if the Closing has not occurred on or before April
30, 1999; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or the trustees or officers of
either Investment Company, to the other Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as may
be mutually agreed upon in
16
<PAGE>
writing by the parties; provided that following such approval no such amendment
shall have a material adverse effect on the Shareholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Delaware; provided that, in the case of
any conflict between such laws and the federal securities laws, the latter shall
govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3. The parties acknowledge that each Investment Company is a
business trust. Notice is hereby given that this instrument is executed on
behalf of each Investment Company's trustees solely in their capacity as
trustees, and not individually, and that each Investment Company's obligations
under this instrument are not binding on or enforceable against any of its
trustees, officers, or shareholders, but are only binding on and enforceable
against the respective Funds' assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look only to the
other Fund's assets and property in settlement of such rights or claims and not
to such trustees or shareholders.
11.4. Victory agrees to indemnify and hold harmless each trustee of
Target at the time of the execution of this Agreement, whether or not such
person is or becomes a trustee of Victory subsequent to the Reorganization,
against expenses, including reasonable attorneys' fees, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by such trustee in
connection with any claim that is asserted against such trustee arising out of
such person's service as a trustee of Target, provided that such indemnification
shall be limited to the full extent of the indemnification that is available to
the trustees of Victory pursuant to the provisions of Victory's Trust Instrument
and applicable law.
11.5 For the period beginning at the time of the Reorganization and
ending not less than three years thereafter, Victory shall provide for a
liability policy covering the actions of each trustee of Target at the time of
the execution of this Agreement for the period they served as such, which may be
accomplished by causing such persons to be added as insured under the liability
policy of Victory.
17
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be executed
by its duly authorized officer.
ATTEST: GRADISON McDONALD MUNICIPAL
CUSTODIAN TRUST
______________________
______________________ By: _______________________
Secretary Vice President
ATTEST: THE VICTORY PORTFOLIOS
on behalf of its series,
VICTORY OHIO MUNICIPAL BOND FUND
______________________
By:______________________
______________________
Secretary Vice President
18
KRAMER LEVIN NAFTALIS & FRANKEL LLP
9 1 9 T H I R D A V E N U E
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
FAX
(212) 715-8000
-----
WRITER'S DIRECT NUMBER
(212) 715-9100
December 15, 1998
The Victory Portfolios
3435 Stelzer Road
Columbus, Ohio 43219
Re: The Victory Portfolios
Registration Statement on Form N-14
For the Reorganization with certain Gradison
Funds
Dear Ladies and Gentlemen:
We hereby consent to the reference of our firm as Counsel in this
Registration Statement on Form N-14.
Very truly yours,
/s/ Kramer Levin Naftalis & Frankel LLP
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants we hereby consent to the incorporation by
reference in this Form N-14 filing of our auditors reports on the financial
statements of Gradison Established Value Fund, Gradison Growth & Income Fund,
Gradison Opportunity Value Fund and Gradison International Fund of Gradison
Growth Trust dated May 6, 1998; Gradison Ohio Tax-Free Income Fund of
Gradison-McDonald Municipal Custodian Trust dated July 28, 1998; Gradison U.S.
Government Reserves of Gradison-McDonald Cash Reserves Trust dated October 23,
1998 and Gradison Government Income Fund of Gradison Custodian Trust dated
January 30, 1998 and to all references to our Firm included in or made a part of
this Form N-14.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Cincinnati, Ohio
December 11, 1998
- --------------------------------------------------------------------------------
IMPORTANT NOTICE: Please take a moment now to vote your shares. You may vote
directly over the telephone by calling 800-786-8764. Representatives are
available from ______ to ______ Eastern Time. You may also fax your ballot to
800-733-1885 or return it in the enclosed postage paid envelope. Internet voting
is available at ---------------.
Your vote is important. Thank you for your prompt action.
- --------------------------------------------------------------------------------
GRADISON GROWTH TRUST
Gradison Established Value Fund
Gradison Growth & Income Fund
Gradison Opportunity Value Fund
Gradison International Fund
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
Gradison Ohio Tax-Free Income Fund
GRADISON-McDONALD CASH RESERVES TRUST
Gradison U.S. Government Reserves
GRADISON CUSTODIAN TRUST
Gradison Government Income Fund
-----------------------------------------------
SPECIAL MEETING OF SHAREHOLDERS SCHEDULED
TO BE HELD ON MARCH 5, 1999
------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF GRADISON GROWTH TRUST,
GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST, GRADISON MCDONALD CASH RESERVES
TRUST AND GRADISON CUSTODIAN TRUST (the "Trusts") on behalf of the Funds listed
above (the "Funds") for use at a Special Meeting of Shareholders to be held at
the offices of the Trusts, 580 Walnut Street, Cincinnati, Ohio on March 5, 1999,
at 9:30 a.m. Eastern Time. The undersigned hereby appoints ________ and
___________, and each of them with full power of substitution, as Proxies of the
undersigned, to vote at the above-stated Special Meeting, and at all
adjournments thereof, all shares of beneficial interest of the Funds that are
held of record by the undersigned on the record date for the Special Meeting
upon the matters enumerated below.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK
IF THIS PROXY CARD IS RETURNED, AND NO CHOICE IS INDICATED AS TO ANY MATTER,
THIS PROXY WILL BE VOTED AFFIRMATIVELY ON THE MATTERS PRESENTED
THE BOARD OF TRUSTEES RECOMMENDS
THAT YOU VOTE "FOR" THE FOLLOWING PROPOSALS
1. To approve the Agreement and Plan of Reorganization and
Termination, as is more fully described in the accompanying
Combined Prospectus/Proxy Statement, together with each and
every of the transactions contemplated thereby.
<PAGE>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To approve a new investment advisory agreement between the
Trusts, on behalf of the Funds, and McDonald Investments Inc.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. THIS PROPOSAL IS FOR GRADISON INTERNATIONAL FUND
SHAREHOLDERS ONLY.
To approve a new investment sub-advisory agreement between
Blairlogie Capital Management and McDonald Investments Inc.,
on behalf of Gradison International Fund.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before the
meeting.
Please sign exactly as your name appears on this card. When
account is joint tenants, all should sign. When signing as
executor, administrator, trustee, or guardian, please give
title. If a corporation or partnership, sign entity's name and
by authorized person.
X___________________________________________________
Signature
X___________________________________________________
Signature (if jointly held)
Date: ________________, 1999
