AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON JUNE 12, 1998.
FILE NO. 33-8982
ICA NO. 811-4852
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. _____
POST-EFFECTIVE AMENDMENT NO. 40 [X]
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 41
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)
COPY TO:
MICHAEL J. SULLIVAN CARL FRISCHLING, ESQ.
BISYS FUND SERVICES KRAMER, LEVIN, NAFTALIS & FRANKEL
3435 STELZER ROAD 919 THIRD AVENUE
COLUMBUS, OHIO 43219 NEW YORK,NEW YORK 10022
(NAME AND ADDRESS OF AGENT FOR SERVICE)
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
|_| IMMEDIATELY UPON FILING PURSUANT TO |_| ON (DATE) PURSUANT TO
PARAGRAPH (B) PARAGRAPH (B)
|_| 60 DAYS AFTER FILING PURSUANT TO |_| ON (DATE)PURSUANT TO
PARAGRAPH (A)(1) PARAGRAPH (A)(1)
|X| 75 DAYS AFTER FILING PURSUANT TO |_| ON (DATE) PURSUANT TO
PARAGRAPH (A)(2) PARAGRAPH (A)(2) OF RULE 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
|_| THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
<PAGE>
CROSS-REFERENCE SHEET
THE VICTORY PORTFOLIOS
NATIONAL MUNICIPAL BOND FUND (SHORT-INTERMEDIATE)
NATIONAL MUNICIPAL BOND FUND (LONG)
<TABLE>
<CAPTION>
Item Number
Form N-1A
Part A Prospectus Caption
------ ------------------
<S> <C> <C>
1. Cover Page Cover Page; Introduction
2. Synopsis Fund Expenses
3. Condensed Financial Information InApplicable
4. General Description of Registrant Introduction; AN OVERVIEW OF EACH OF
THE FUNDS: National Municipal Bond Fund
(Short-Intermediate), National Municipal Bond
Fund (Long); Risk Factors; Investment
Limitations; Additional Information
5. Management of the Fund Organization and Management of the Fund
5.A. Management's Discussion of Fund Investment Performance
Performance
6. Capital Stock and Other Securities INVESTING WITH VICTORY: How to
Purchase Shares, How to Exchange Shares,
How to Redeem Shares; Dividends, Distributions
and Taxes; Organization and Management of the
Funds; Additional Information; Other Securities
and Investment Practices
7. Purchase of Securities Being Offered How to Purchase Shares; How to Exchange Shares
8. Redemption or Repurchase How to Exchange Shares; How to Redeem Shares
9. Pending Legal Proceedings Inapplicable
<PAGE>
CROSS REFERENCE SHEET
THE VICTORY PORTFOLIOS
NATIONAL MUNICIPAL BOND FUND (SHORT-INTERMEDIATE)
NATIONAL MUNICIPAL BOND FUND (LONG)
Item Number
Form N-1A Statement of Additional
Part B Information Caption
------ -------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Additional Information
13. Investment Objectives and Policies Investment Objectives and Investment Policies and
Limitations
14. Management of the Fund Trustees and Officers
15. Control Persons and Principal Additional Information
Holders of Securities
16. Investment Advisory and Other Advisory and Other Contracts
Services
17. Brokerage Allocation and Other PracticAdvisory and Other Contracts
18. Capital Stock and Other Securities Valuation of Portfolio Securities ; Additional
Purchase, Exchange and Redemption Information;
Additional Information
19. Purchase, Redemption and Pricing Valuation of Portfolio Securities ; Additional
of Securities Being Offered Purchase, Exchange and Redemption
Information; Performance of the Funds;
Additional Information
20. Tax Status Dividends and Distributions; Taxes
21. Underwriters Advisory and Other Contracts
22. Calculation of Performance Data Performance of Funds; Additional Information
23. Financial Statements Inapplicable
</TABLE>
<PAGE>
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not solciting an offer to buy these securities
in any state where the offer or sale is not permitted.
LOGO(R)
VICTORY FUNDS
PROSPECTUS
NATIONAL MUNICIPAL BOND FUND (SHORT-INTERMEDIATE)
NATIONAL MUNICIPAL BOND FUND (LONG)
800-539-FUND OR 800-539-3863
SEPTEMBER 15, 1998
<PAGE>
THE VICTORY PORTFOLIOS
PROSPECTUS FOR:
NATIONAL MUNICIPAL BOND FUND (SHORT-INTERMEDIATE)
NATIONAL MUNICIPAL BOND FUND (LONG)
800-539-FUND 800-539-3863
The two Victory Funds discussed in this prospectus (the Funds) are a part of The
Victory Portfolios (Victory), an open-end investment management company. Each
Fund is a non-diversified mutual fund. This prospectus explains the objectives,
policies, risks, and strategies of the Funds. You should read this prospectus
before investing in the Funds and keep it for future reference. A detailed
Statement of Additional Information (SAI) describing each of the Funds is also
available for your review. The SAI has been filed with the Securities and
Exchange Commission (SEC), and is incorporated by reference into this
prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference into both this prospectus and the SAI,
and other information regarding registrants that file electronically with the
SEC. If you would like a free copy of the SAI, please request one by calling us
at 800-539-FUND.
SHARES OF THE FUNDS ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, KEYBANK, ANY OF
ITS AFFILIATES, OR ANY OTHER BANK;
o SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
SEPTEMBER 15, 1998
2
<PAGE>
TABLE OF CONTENTS PAGE
Introduction 2
AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies, strategies and
expenses
National Municipal Bond Fund (Short-Intermediate)
National Municipal Bond Fund (Long)
Risk Factors
Investment Limitations
Investment Performance
Share Price
Dividends, Distributions, and Taxes
INVESTING WITH VICTORY
How to Purchase Shares
How to Exchange Shares
How to Redeem Shares
Organization and Management of the Funds
Additional Information
Other Securities and Investment Practices
KEY TO FUND INFORMATION:
(1) Objective and Strategy: The goals and the strategy that a Fund plans to use
in pursuing its investment objective.
(2) Risk Factors: The risks that you may assume as an investor in a Fund.
(3) Expenses: The costs that you will pay as an investor in a Fund, including
sales charges and ongoing expenses.
3
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGY
(1) OBJECTIVE
The NATIONAL MUNICIPAL BOND FUND (SHORT-INTERMEDIATE) seeks to generate income
that is exempt from federal regular income tax. The NATIONAL MUNICIPAL BOND FUND
(LONG) seeks to generate income that is exempt from regular federal income tax.
(1) STRATEGY
Each of the Funds pursues its investment objective by investing primarily in
municipal bonds, including general obligation bonds and revenue bonds and other
debt instruments that are exempt from regular federal income tax. However, each
of the Funds has unique investment strategies and its own risk/reward profile.
Please review the section about the Fund in which you are interested in
investing and "Other Securities and Investment Practices" for an overview of the
Funds.
(2)RISK FACTORS
The Funds are:
o not insured by the FDIC;
o not deposits or other obligations of, or guaranteed by, KeyBank, any of
its affiliates, or any other bank;
o subject to investment risks, including possible loss of the principal
amount invested.
In addition, there are other potential risks, which are discussed in the section
"Risk Factors."
WHO SHOULD INVEST
o Investors in higher tax brackets seeking tax-exempt income
o Investors seeking income over the long term
o Investors with moderate risk tolerance
o Investors willing to accept price and dividend fluctuations
(3)FEES AND EXPENSES
You may pay a sales charge of up to 5.75% of the offering price, depending on
the amount you invest. You also will incur expenses for investment advisory
fees, administrative fees and shareholder services, all of which are included in
a Fund's expense ratio. See "Fund Expenses" for the Fund in which you plan to
invest.
PURCHASES
The minimum initial investment is $500 for most accounts ($250 for Individual
Retirement Accounts) and $25 thereafter. If you purchase shares through an
Investment Professional, you may be subject to different minimums. An initial
investment must be accompanied by a Fund's Account Application. Fund shares may
be purchased by check, Automated Clearing House or wire. See "How to Purchase
Shares." Generally, municipal bond funds are not appropriate investments for IRA
accounts.
4
<PAGE>
REDEMPTIONS
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, a Fund will redeem the
shares and credit your bank account or send the proceeds to the address
designated on your Account Application. See "How to Redeem Shares."
DIVIDENDS/DISTRIBUTIONS
Income is accrued daily and is declared and paid monthly. Any net capital gains
realized by a Fund are paid as dividends annually. A Fund can send your
dividends directly to you by mail, credit them to your bank account, reinvest
them in the Fund, or invest them in another fund of the Victory Group. The
"Victory Group" includes other funds of The Victory Portfolios. You can make
this choice when you fill out an Account Application. See "Dividends,
Distributions, and Taxes."
OTHER SERVICES
Victory offers a number of other services to better serve shareholders including
exchange privileges and automated investment and withdrawal plans. See "How to
Exchange Shares" and "How to Redeem Shares." Our toll-free fax number is
800-529-2244. You can reach Victory's Telecommunication Device for the Deaf
(TDD) at 800-970-5296.
GENERAL INFORMATION ABOUT EACH OF THE FUNDS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ESTIMATED ANNUAL
EXPENSES AFTER MAXIMUM NEWSPAPER ABBREVIATION*
VICTORY FUND WAIVERS (AS A % OF SALES CHARGE
NET ASSETS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
National Municipal Bond Fund (Short-Intermediate) 0.90% 5.75% Victory NatMunSI
- --------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund (Long) 1.00% 5.75% Victory NatMunL
- --------------------------------------------------------------------------------------------------------------------
*All newspapers do not use the same abbreviation.
</TABLE>
The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, risks, and expenses to determine
which Fund will best suit your risk tolerance and investment needs. You also
should review the "Other Securities and Investment Practices" section for
additional information about the individual securities in which the Funds can
invest and the risks related to these investments.
5
<PAGE>
NATIONAL MUNICIPAL BOND FUND (SHORT-INTERMEDIATE)
(1)INVESTMENT OBJECTIVE
The National Municipal Bond Fund (Short-Intermediate) seeks to generate income
that is exempt from regular federal income tax.
(1)INVESTMENT POLICIES AND STRATEGY
The National Municipal Bond Fund (Short-Intermediate) pursues its investment
objective by investing primarily in municipal bonds. The interest on these bonds
is exempt from regular federal income taxes. Under normal circumstances, at
least 80% of the income distributions of the National Municipal Bond Fund
(Short-Intermediate) will be exempt from federal income taxes, including the
alternative minimum tax.
Under normal market conditions, the National Municipal Bond Fund
(Short-Intermediate) primarily invests in:
o General obligation bonds and revenue bonds
o Municipal securities with fixed, variable, or floating interest rates
o Zero coupon, tax, revenue and bond anticipation notes
o Tax-exempt commercial paper
Important Characteristics of Investments of the National Municipal Bond Fund
(Short-Intermediate):
o QUALITY: Municipal securities rated A or above at the time of purchase by
S&P, Fitch, Moody's, or another NRSRO, or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the SAI.
o MATURITY: The dollar-weighted effective average maturity of the National
Municipal Bond Fund (Short-Intermediate) will generally range from 1 to 5
years. Under certain market conditions, the Portfolio Manager may go
outside these boundaries.
*An NRSRO is a nationally recognized statistical ratings organization such as
S&P, Fitch, or Moody's which assigns credit ratings to securities based on the
borrower's ability to meet its obligation to make principal and interest
payments.
(2) RISK
The National Municipal Bond Fund (Short-Intermediate) primarily invests in
municipal securities from several states, rather than from a single state. The
National Municipal Bond Fund (Short-Intermediate) is subject to the risks common
to all mutual funds that invest in debt securities; that is, interest rate risk,
credit risk, reinvestment risk, and inflation risk. It also is subject to the
risks common to mutual funds that invest in municipal debt securities. These
include the risk that certain investments could lose their tax-exempt status. It
also is subject to the risks common to mutual funds that invest in
mortgage-related securities, like prepayment and extension risk. PLEASE READ
"RISK FACTORS" CAREFULLY BEFORE INVESTING.
PORTFOLIO MANAGEMENT
Brad Postema has served as the Portfolio Manager for the National Municipal Bond
Fund (Short-Intermediate) since its inception. He is a Senior Portfolio Manager
and Director of KAM and has been in the investment business since 1992.
6
<PAGE>
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the National Municipal Bond Fund
(Short-Intermediate).
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 5.75%**
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None**
Redemption Fees None
Exchange Fees None
* You may be charged additional fees if you purchase, exchange or redeem shares
through a broker or agent.
** Except for investments of $1 million or more. See "Investing with Victory."
The Annual Fund Operating Expenses Table illustrates the estimated operating
expenses that you will incur as a shareholder of the National Municipal Bond
Fund (Short-Intermediate). THESE EXPENSES ARE CHARGED DIRECTLY TO THE NATIONAL
MUNICIPAL BOND FUND (SHORT-INTERMEDIATE). Expenses include management fees as
well as costs of maintaining accounts, administering the National Municipal Bond
Fund (Short-Intermediate), providing shareholder services, and other activities.
The expenses shown are estimated based on anticipated expenses of the National
Municipal Bond Fund (Short-Intermediate).
ANNUAL FUND OPERATING EXPENSES
AFTER EXPENSE WAIVERS AND REIMBURSEMENTS CLASS A SHARES
(as a percentage of average daily net assets)
Management Fees 0.55%
Other Expenses(1,2) 0.35%
-----
Total Fund Operating Expenses(2) 0.90%
(1) These expenses have been voluntarily reduced. Without this expense
reduction, Other Expenses would be .53% and Total Fund Operating Expenses
would be 1.08%.
(2) Other Expenses includes an estimate of shareholder servicing fees the
National Municipal Bond Fund (Short-Intermediate) expects to pay. See
"Organization and Management of the Funds - Shareholder Servicing Plan."
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the National Municipal Bond
Fund (Short-Intermediate).
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
National Municipal Bond Fund (Short-Intermediate) assuming: (1) a 5% annual
return and (2) redemption at the end of each time period.
1 YEAR 3 YEARS
------ -------
CLASS A SHARES $66 $85
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
7
<PAGE>
PERFORMANCE
The National Municipal Bond Fund (Short-Intermediate) is the successor to the
Key Trust Short-Term Tax-Free Fund, a fund managed by KAM for Key Trust
fiduciary clients. The National Municipal Bond Fund (Short-Intermediate)'s
portfolio manager and investment objective and policies are essentially the same
as those of the pre-existing Key Trust fund. (Since the Fund will continue to
operate in substantially the same manner as the pre-existing trust fund, past
performance can be considered relevant.) HOWEVER, PAST PERFORMANCE DOES NOT
NECESSARILY INDICATE HOW THE FUND WILL PERFORM IN THE FUTURE.
As a mutual fund, the National Municipal Bond Fund (Short-Intermediate) is
subject to different rules and regulations than those that govern trust fund
operations. In addition, the pre-existing trust fund was not subject to the same
operating expenses to which mutual funds are subject. While the historical
information shown has been adjusted to reflect the Fund's maximum sales charge
of 5.75%, it has not been adjusted for the estimated operating expenses of the
Fund, and only reflects expenses that were incurred by the trust fund during the
periods shown.
<TABLE>
<CAPTION>
=======================================================================================================
AVERAGE ANNUAL TOTAL RETURNS
COMMON TRUST FUND
FOR THE PERIODS ENDED MAY 31, 1998
=======================================================================================================
<S> <C> <C> <C>
Common Trust Fund One Three Since Commencement
Year Years (__________ ___, 19__)
- -------------------------------------------------------------------------------------------------------
Key Trust Short-Term Tax-Free Fund _____% _____% _____%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
TOTAL RETURNS
COMMON TRUST FUND
FOR THE YEARS ENDED MAY 31
- --------------------------------------------------------------------------------
Key Trust Short-Term
Common Trust Fund: Tax-Free Fund
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
1996*
- --------------------------------------------------------------------------------
* Not annualized.
****Past performance is not a guarantee of future results.****
8
<PAGE>
NATIONAL MUNICIPAL BOND FUND (LONG)
(1)INVESTMENT OBJECTIVE
The National Municipal Bond Fund (Long) seeks to generate income that is exempt
from regular federal income tax.
(1)INVESTMENT POLICIES AND STRATEGY
The National Municipal Bond Fund (Long) pursues its investment objective by
investing primarily in municipal bonds. The interest on these bonds is exempt
from regular federal income taxes. Under normal circumstances, at least 80% of
the income distributions of the National Municipal Bond Fund (Long) will be
exempt from federal income taxes, including the alternative minimum tax.
Under normal market conditions, the National Municipal Bond Fund (Long)
primarily invests in:
o General obligation bonds and revenue bonds
o Municipal securities with fixed, variable, or floating interest rates
o Zero coupon, tax, revenue and bond anticipation notes
o Tax-exempt commercial paper
Important Characteristics of Investments of the National Municipal Bond Fund:
o QUALITY: Municipal securities rated A or above at the time of purchase by
Standard & Poor's (S&P), Fitch, Moody's, or another NRSRO*, or if unrated,
of comparable quality. For more information on ratings, see the Appendix to
the SAI.
o MATURITY: The dollar-weighted effective average maturity of the National
Municipal Bond Fund (Long) will generally be 10 or more years. Under
certain market conditions, the Portfolio Manager may go outside these
boundaries.
(2) RISK
The National Municipal Bond Fund (Long) primarily invests in municipal
securities from several states, rather than from a single state. The National
Municipal Bond Fund (Long) is subject to the risks common to all mutual funds
that invest in debt securities; that is, interest rate risk, credit risk,
reinvestment risk, and inflation risk. It also is subject to the risks common to
mutual funds that invest in municipal debt securities. These include the risk
that certain investments could lose their tax-exempt status. It also is subject
to the risks common to mutual funds that invest in mortgage-related securities,
like prepayment and extension risk. PLEASE READ "RISK FACTORS" CAREFULLY BEFORE
INVESTING.
PORTFOLIO MANAGEMENT
Paul Toft has served as the Portfolio Manager for the National Municipal Bond
Fund (Long) since its inception. He is a Senior Portfolio Manager and Managing
Director of Key Asset Management Inc. (KAM or the Adviser) and has been in the
investment business since 1986.
9
<PAGE>
NATIONAL MUNICIPAL BOND FUND (LONG)
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the National Municipal Bond Fund
(Long).
SHAREHOLDER TRANSACTION EXPENSES* CLASS A SHARES
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 5.75%**
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None**
Redemption Fees None
Exchange Fees None
*You may be charged additional fees if you purchase, exchange or redeem shares
through a broker or agent.
**Except for investments of $1 million or more. See "Investing with Victory."
The Annual Fund Operating Expenses table illustrates the estimated operating
expenses that you will incur as a shareholder of the National Municipal Bond
Fund (Long). THESE EXPENSES ARE CHARGED DIRECTLY TO THE NATIONAL MUNICIPAL BOND
FUND (LONG). Expenses include management fees as well as the costs of
maintaining accounts, administering the National Municipal Bond Fund (Long),
providing shareholder services, and other activities. The expenses shown are
estimated based on anticipated expenses of the National Municipal Bond Fund
(Long).
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES
AFTER EXPENSE WAIVERS AND REIMBURSEMENTS
(as a percentage of average daily net assets)
Management Fees 0.60%
Other Expenses(1,2) 0.40%
-----
Total Fund Operating Expenses(1) 1.00%
(1) These expenses have been voluntarily reduced. Without this expense
reduction, Other Expenses would be .53%, and Total Fund Operating Expenses
would be 1.13%.
(2) Other Expenses includes an estimate of shareholder servicing fees the
National Municipal Bond Fund (Long) expects to pay. See "Organization and
Management of the Funds -- Shareholder Servicing Plan".
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the National Municipal Bond
Fund (Long).
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
National Municipal Bond Fund (Long) assuming: (1) a 5% annual return and (2)
redemption at the end of each time period.
1 YEAR 3 YEARS
------ -------
CLASS A SHARES $67 $88
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
10
<PAGE>
PERFORMANCE
The National Municipal Bond Fund (Long) is the successor to the Key Trust
Tax-Free Fund, a fund managed by KAM for Key Trust fiduciary clients. The
National Municipal Bond Fund (Long)'s portfolio manager and investment objective
and policies are the same as those of the pre-existing Key Trust fund. Since the
Fund will continue to operate substantially identically to the pre-existing
trust fund, past performance can be considered relevant. HOWEVER, PAST
PERFORMANCE DOES NOT NECESSARILY INDICATE HOW A FUND WILL PERFORM IN THE FUTURE.
As mutual funds, the National Municipal Bond Fund (Long) is subject to different
rules and regulations than those that govern trust fund operations. In addition,
the pre-existing trust fund was not subject to the same operating expenses to
which mutual funds are subject. While the historical information shown has been
adjusted to reflect the Fund's maximum sales charge of 5.75%, it has not been
adjusted for the estimated operating expenses of the Fund, and only reflects
expenses that were incurred by the trust fund during the periods shown.
<TABLE>
<CAPTION>
====================================================================================================================
AVERAGE ANNUAL TOTAL RETURNS
COMMON TRUST FUND
FOR THE PERIODS ENDED MAY 31, 1998
====================================================================================================================
<S> <C> <C> <C> <C>
Common Trust Fund One Three Five Since Commencement
Year Years Years (__________ ___, 19__)
- --------------------------------------------------------------------------------------------------------------------
Key Trust Tax-Free Fund _____% _____% _____% _____%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
TOTAL RETURNS
COMMON TRUST FUND
FOR THE YEARS ENDED MAY 31
- --------------------------------------------------------------------------------
Common Trust Fund: Key Trust Tax-Free Fund
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
19___
[First partial year]*
- --------------------------------------------------------------------------------
* Not annualized.
****Past performance is not a guarantee of future results. History does not
always repeat itself.****
11
<PAGE>
(2)RISK FACTORS
****It is important to keep in mind one basic principle of investing: the
greater the risk, the greater the potential reward. The reverse is also
generally true: the lower the risk, the lower the potential reward.****
This prospectus describes some of the risks that you may assume as an investor
in the Funds. By matching your investment objective with a comfortable level of
risk, you can create your own customized investment plan. Some limitations on
the Funds' investments are described in the section that follows. "Other
Securities and Investment Practices" at the end of this prospectus provides
additional information on the securities mentioned in the overview of each of
the Funds. As with any mutual fund, there is no guarantee that a Fund will earn
income or show a positive total return over time. A Fund's price, yield, and
total return will fluctuate. You may lose money if a Fund's investments do not
perform well.
THE FOLLOWING RISKS ARE COMMON TO ALL MUTUAL FUNDS:
o MARKET RISK is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price a
Fund originally paid for it or less than the security was worth at an
earlier time. Market risk may affect a single issuer, an industry, a sector
of the economy, or the entire market, and is common to all investments.
o MANAGER RISK is the risk that a Fund's Portfolio Manager may use a strategy
that does not produce the intended result.
THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN DEBT SECURITIES:
o INTEREST RATE RISK. The value of a debt security typically changes in the
opposite direction from a change in interest rates. Therefore, when
interest rates go up, the value of a fixed-rate security typically goes
down. When interest rates go down, the value of these securities typically
goes up. Generally, the market values of securities with longer maturities
are more sensitive to changes in interest rates.
o INFLATION RISK is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities.
o REINVESTMENT RISK is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested at a
lower interest rate. Generally, interest rate risk and reinvestment risk
have offsetting effects.
o CREDIT (OR DEFAULT) RISK is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although
the Funds generally invest in only high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities.
Credit risk is measured by NRSROs such as S&P, Fitch or Moody's.
THE FOLLOWING RISK IS COMMON TO MUTUAL FUNDS THAT INVEST IN MUNICIPAL DEBT
SECURITIES:
o TAX-EXEMPT STATUS RISK is the risk that a municipal debt security issued as
a tax-exempt security may be declared by the IRS to be taxable.
THE FOLLOWING RISK IS COMMON TO MUTUAL FUNDS THAT ARE NON-DIVERSIFIED:
o CONCENTRATION AND DIVERSIFICATION RISK is the risk that only a limited
number of high-quality securities of a particular type may be available.
12
<PAGE>
THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN MORTGAGE-RELATED
SECURITIES:
o PREPAYMENT RISK. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. Mortgage
prepayments are affected by the level of interest rates and other factors.
In periods of rising interest rates, the prepayment rate tends to decrease,
lengthening the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to increase,
shortening the average life of a pool of mortgage-related securities.
Prepayment risk is the risk that, because prepayments generally occur when
interest rates are falling, a Fund may have to reinvest the proceeds from
prepayments at lower interest rates.
o EXTENSION RISK is the risk that the rate of anticipated payments on
principal may not occur, typically because of a rise in interest rates, and
the expected maturity of the security will increase. During periods of
rapidly rising interest rates, the maturity of a security may be extended
past what the Fund's Portfolio Manager anticipated that it would be,
affecting the maturity and volatility of a Fund.
INVESTMENT LIMITATIONS
****The SEC and the Internal Revenue Service (IRS) have certain restrictions
with which all mutual funds must comply. The Funds monitor these limitations on
an ongoing basis.****
To help reduce risk, the Funds have adopted limitations on some investment
policies. These limits involve a Fund's ability to borrow money and the amount
it can invest in various types of securities, including illiquid securities.
Certain limitations can be changed only with the approval of shareholders.
Victory's Board of Trustees can change other investment limitations without
shareholder approval. See "Other Securities and Investment Practices" and the
SAI for more information.
Each Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations). Each Fund limits its
borrowing to 33-1/3% of its total assets. Borrowing would be in the form of
selling a security that it owns and agreeing to repurchase that security later
at a higher price. The Funds do not intend to borrow for leveraging purposes.
DIVERSIFICATION REQUIREMENTS
o SEC REQUIREMENT: The Funds are not "diversified" according to certain
federal securities provisions regarding diversification of their assets. As
a non-diversified investment company, a Fund may devote a larger portion of
its assets to the securities of a single issuer than if it were
diversified.
o IRS REQUIREMENT: Each Fund intends to comply with certain federal tax
requirements regarding the diversification of its assets, which generally
are less restrictive than the securities provisions. Generally, under these
requirements, a Fund must invest at least 50% of its total assets so that
no more than 5% of its total assets are invested in the securities of any
one issuer at the time of purchase.
These diversification provisions and requirements are discussed in the SAI.
INVESTMENT PERFORMANCE
****Past performance does not guarantee future results. You may obtain the
current 30-day yield by calling 800-539-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 8:00 p.m. Eastern Time Monday
through Friday.****
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<PAGE>
Victory may advertise the performance of a Fund by comparing it to other mutual
funds with similar objectives and policies. Performance information may also
appear in various publications. Any fees charged by Investment Professionals may
not be reflected in these performance calculations. Performance information is
contained in the annual and semi-annual reports. You may obtain a copy free of
charge by calling 800-539-FUND.
The "30-day yield" is an "annualized" figure -- the amount you would earn if you
stayed in a Fund for a year and the Fund continued to earn the same net interest
income throughout that year. To calculate 30-day yield, a Fund's net investment
income per share for the most recent 30 days is divided by the maximum offering
price per share for Class A Shares.
To calculate "total return," a Fund starts with the total number of shares that
you can buy for $1,000 at the beginning of the period. Then the Fund adds all
dividends and distributions paid as if they were reinvested in additional
shares. This takes into account the Fund's dividend distributions, if any. The
total number of shares is multiplied by the net asset value on the last day of
the period and the result is divided by the initial $1,000 investment to
determine the percentage gain or loss. For periods of more than one year, the
cumulative total return is adjusted to get an average annual total return.
o YIELD is a measure of dividend income.
o TAX-EQUIVALENT YIELD shows the taxable income you would have to earn to
obtain a yield equal to an investment in one of the Funds.
o AVERAGE ANNUAL TOTAL RETURN is a hypothetical measure of past dividend
income plus capital appreciation. It is the sum of all of the parts of a
Fund's investment return for periods greater than one year.
o TOTAL RETURN is the sum of all parts of a Fund's investment return.
Whenever you see information on a Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in a Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.
SHARE PRICE
Each Fund's share price, called its net asset value (NAV), is calculated each
business day as of the close of regular trading on the New York Stock Exchange
(normally at 4:00 p.m. Eastern Time). Shares are purchased, exchanged, and
redeemed at the next share price calculated after your investment is received
and accepted. A business day is a day on which the New York Stock Exchange is
open for trading or any day in which enough trading has occurred in the
securities held by a Fund to affect the NAV materially. If your account is
established with an Investment Professional or a bank, you may not be able to
purchase or sell shares on other holidays when the Federal Reserve Bank of
Cleveland is closed, but the New York Stock Exchange is open.
The NAV is calculated by adding up the total value of a Fund's investments and
other assets, subtracting its liabilities, and then dividing that figure by the
number of outstanding shares of the Fund:
Total Assets - Liabilities
NAV = -------------------------------------
Number of Shares Outstanding
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<PAGE>
Each Fund's net asset value may be found daily in The Wall Street Journal and
other newspapers.
****The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own, gives you the dollar amount and value of
your investment.****
DIVIDENDS, DISTRIBUTIONS AND TAXES
****BUYING A DIVIDEND. You should check a Fund's distribution schedule before
you invest. If you buy shares of a fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.****
As a shareholder, you are entitled to your share of net income and capital gains
on a Fund's investments. The Funds pass their earnings along to investors in the
form of dividends. Dividend distributions are the net interest earned on
investments after expenses. If a Fund makes a capital gain distribution, it is
paid once a year. As with any investment, you should consider the tax
consequences of an investment in a Fund.
Ordinarily, net income earned on securities owned by a Fund accrues daily and is
paid monthly. The Funds pay any net capital gains realized as dividends at least
annually. Distributions can be received in one of the following ways:
o REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of
a Fund. If you do not indicate another choice on your Account Application,
this option will be assigned to you automatically.
o CASH OPTION
A check will be mailed to you no later than 7 days after the pay date.
o INCOME EARNED OPTION
Dividends can be automatically reinvested in a Fund in which you have
invested and your capital gains can be paid in cash, or capital gains can
be reinvested and dividends paid in cash.
o DIRECTED DIVIDENDS OPTION
You can have distributions automatically reinvested in shares of another
fund of the Victory Group. If distributions from Class A Shares are
reinvested in Class A Shares of another fund, you will not pay a sales
charge on the reinvested distributions.
o DIRECTED BANK ACCOUNT OPTION
In most cases, you can have distributions automatically transferred to your
bank checking or savings account. Under normal circumstances, dividends
will be transferred within 7 days of the dividend payment date. The bank
account must have a registration identical to that of your Fund account.
****Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you presently use, please
call the Transfer Agent at 800-539-FUND.****
IMPORTANT INFORMATION ABOUT TAXES
Each Fund intends to qualify as a regulated investment company, in which case it
will pay no federal income tax on the earnings or capital gains it distributes
to its shareholders.
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<PAGE>
o Certain dividends from a Fund will be "exempt-interest dividends," which
are exempt from federal income tax. However, exempt-interest dividends are
not necessarily exempt from state or local taxes.
o Ordinary dividends from a Fund, if taxable, are treated as ordinary income;
dividends from a Fund's long-term capital gains are taxable as capital
gain.
o Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
o Some dividends may be subject to the federal alternative minimum tax.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you in December of the previous year.
o Tax statements will be mailed from a Fund every January showing the amounts
and tax status of distributions made to you.
o Certain dividends from the Funds will be exempt from certain state and
local taxes specific to that state.
o Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
o You should review the more detailed discussion of federal income tax
considerations in the SAI.
****THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL
INFORMATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISER
ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT IN A FUND.****
INVESTING WITH VICTORY
****All you need to do to get started is to fill out an application.****
If you are looking for a convenient way to open an account, or to add money to
an existing account, Victory can help. The sections that follow will serve as a
guide to your investments with Victory. The following sections will describe how
to access information on your account, how to open an account, and how to
purchase, exchange, and redeem shares of a Fund. We want to make it simple for
you to do business with us. If you have questions about any of this information,
please call your Investment Professional or one of our customer service
representatives at 800-539-FUND. They will be happy to assist you.
The Funds in this prospectus offer only Class A Shares. Class A Shares have a
front end sales charge of 5.75%.
CALCULATION OF SALES CHARGES
Shares are sold at their public offering price, which includes the initial sales
charge. The sales charge as a percentage of your investment decreases as the
amount you invest increases. The current sales charge rates and commissions paid
to Investment Professionals are as follows:
<TABLE>
<CAPTION>
- -------------------------------------- -------------------------- ---------------------------- --------------------------
SALES CHARGE SALES CHARGE DEALER REALLOWANCE AS A
YOUR INVESTMENT AS A PERCENTAGE OF AS A PERCENTAGE OF PERCENTAGE OF
OFFERING PRICE YOUR INVESTMENT THE OFFERING PRICE
- -------------------------------------- -------------------------- ---------------------------- --------------------------
<S> <C> <C> <C>
Up to $50,000 5.75% 6.10% 5.00%
- -------------------------------------- -------------------------- ---------------------------- --------------------------
$50,000 up to $100,000 4.50% 4.71% 4.00%
- -------------------------------------- -------------------------- ---------------------------- --------------------------
16
<PAGE>
- -------------------------------------- -------------------------- ---------------------------- --------------------------
$100,000 up to $250,000 3.50% 3.63% 3.00%
- -------------------------------------- -------------------------- ---------------------------- --------------------------
$250,000 up to $500,000 2.50% 2.56% 2.00%
- -------------------------------------- -------------------------- ---------------------------- --------------------------
$500,000 up to $1,000,000 2.00% 2.04% 1.75%
- -------------------------------------- -------------------------- ---------------------------- --------------------------
$1,000,000 and above* 0.00% 0.00% *
- -------------------------------------- -------------------------- ---------------------------- --------------------------
</TABLE>
*There is no initial sales charge on purchases of $1 million or more. However,
you will pay a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price if you redeem your shares in the first year after purchase, or at
.50% within two years of the purchase. This charge will be based on either the
cost of the shares or net asset value at the time of redemption, whichever is
lower. There will be no CDSC on reinvested distributions. Investment
Professionals may be paid at a rate of up to 1.00% of the purchase price.
The Distributor reserves the right to pay the entire commission to dealers. If
that occurs, the dealer may be considered an "underwriter" under federal
securities laws.
****There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.****
SALES CHARGE REDUCTIONS AND WAIVERS FOR CLASS A SHARES: You may qualify for
reduced sales charges in the following cases:
1. A Letter of Intent lets you purchase Class A Shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at one time. You must start with a minimum initial investment of
5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds (excluding money
market funds) for purposes of calculating the sales charge. The combination
privilege also allows you to combine the total investments from the
accounts of household members of your immediate family (spouse and children
under the age of 21) for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a) Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers,"*
dealers who have an agreement with the Distributor, and any trade
organization to which the Adviser or the Administrator belong.
b) Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c) Investors who reinvest a distribution from a deferred compensation
plan, agency, trust, or custody account that was maintained by KeyBank
National Association and its affiliates, the Victory Group, or who
invested in a fund of the Victory Group.
d) Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales
charge for those shares.
e) Investment Professionals who purchase Fund shares in fee-based
investment products or accounts, selling brokers and their sales
representatives.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organizations that provide services to the Victory Group.
17
<PAGE>
HOW TO PURCHASE SHARES
****All you need to do to get started is to fill out an application.****
Shares can be purchased in a number of different ways. The minimum initial
investment is $500 ($250 for Individual Retirement Accounts) and $25 thereafter.
If you purchase shares through an Investment Professional you may be subject to
different minimums. You can send in your investment by check, wire transfer,
exchange from another fund of the Victory Group, or through arrangements with
your Investment Professional. An Investment Professional is a salesperson,
financial planner, investment adviser, or trust officer who provides you with
investment information. Sometimes they will charge you for these services. Their
fee will be in addition to, and unrelated to, the fees and expenses charged by a
Fund. If your investment is received and accepted by 4:00 p.m. Eastern Time,
your purchase will be processed the same day.
MAKE YOUR CHECK PAYABLE TO:
The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
REGULAR U.S. MAIL ADDRESS:
Send a completed Account Application with your check, bank draft, or money order
to:
The Victory Funds
P.O. Box 8527
Boston MA 02266-8527
OVERNIGHT MAIL ADDRESS:
Use the following address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-539-FUND
WIRE ADDRESS:
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring funds
to obtain a confirmation number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert account number, name, and
confirmation number assigned by the Transfer Agent)
TELEPHONE NUMBER:
800-539-FUND
800-539-3863
18
<PAGE>
FAX NUMBER:
800-529-2244
TELECOMMUNICATION DEVICE FOR THE DEAF (TDD):
800-970-5296
ACH. After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up the ACH account. Currently, the Funds do not charge a
fee for ACH transfers.
STATEMENTS AND REPORTS. You will receive a periodic statement reflecting any
transactions that affect the balance or registration of your account. You will
receive a confirmation after any purchase, exchange, or redemption. If your
account has been set up by an Investment Professional, account activity will be
detailed in his or her statements to you. Share certificates are not issued.
Twice a year, you will receive the financial reports of the Funds. By January 31
of each year, you will be mailed an IRS form reporting distributions for the
previous year, which also will be filed with the IRS.
SYSTEMATIC INVESTMENT PLAN. To enroll in the Systematic Investment Plan, you
should check this box on the Account Application. We will need your bank
information and the amount and frequency of your investment. You can select
monthly, quarterly, semi-annual, or annual investments. You should attach a
voided personal check so the proper information can be obtained. You must first
meet the minimum investment requirement of $500, then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account and
invest it in shares of a Fund.
RETIREMENT PLANS. You can use the Funds as part of your retirement portfolio.
Your Investment Professional can set up your new account under one of several
tax-deferred retirement plans. Please contact your Investment Professional or
the Fund for details regarding an IRA or other retirement plan that works best
for your financial situation. Generally, funds that pay tax-free income are not
appropriate investments for retirement plans.
****If you would like to make additional investments after your account is
already established, use the Investment Stub attached to your statement and send
it with your check to the address indicated.****
All purchases must be made in U.S. Dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order, in its sole discretion. If your check is
returned for any reason, you may be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only invest or exchange
into fund shares legally available in your state. If your account falls below
$500, we may ask you to re-establish the minimum investment. If you do not do so
within 60 days, we may close your account and send you the value of your
account.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges.
You can exchange shares of the Fund by writing or calling the Transfer Agent at
800-539-FUND. When you exchange shares of the Fund, you should keep the
following in mind:
o Shares of the fund selected for exchange must be available for sale in your
state of residence.
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<PAGE>
o The Fund whose shares you would like to exchange and the fund whose shares
you want to buy must offer the exchange privilege.
o Shares of a Fund may be exchanged at relative net asset value. This means
that if you own Class A Shares of the Fund, you can only exchange them for
Class A Shares of another fund and not pay 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 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any business day.
o Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
****You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-539-FUND.****
HOW TO REDEEM SHARES
****There are a number of convenient ways to redeem shares of a Fund. You can
use the same mailing addresses listed for purchases. You will earn dividends up
to the date your redemption request is processed.****
If your request is received and accepted by 4:00 p.m. Eastern Time, your
redemption will be processed the same day.
BY TELEPHONE. The easiest way to redeem shares is by calling 800-539-FUND. When
you fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when your are ready to redeem, call us and tell
us which one of the following options you would like to use:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o Electronically transfer the funds via ACH.
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory nor its servicing agents, the Adviser, nor the Transfer Agent
will be responsible for any losses. If these procedures are not followed, the
Transfer Agent may be liable to you for losses resulting from unauthorized
instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
BY MAIL. Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. All account owners must sign. A
signature guarantee is required for the following redemption requests:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
20
<PAGE>
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
BY WIRE. If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time,
your funds will be wired on the next business day.
BY ACH. Normally, your redemption will be processed on the same day or the next
day if received after 4:00 p.m. Eastern Time. It will be transferred by ACH as
long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividends accrued will be included with the redemption proceeds.
SYSTEMATIC WITHDRAWAL PLAN. If you check this box on the Account Application, we
will send monthly, quarterly, semi-annual, or annual payments to the person you
designate. The minimum withdrawal is $25, and you must have a balance of $5,000
or more to start withdrawals. You must send us a voided personal check to
activate this feature. You should be aware that your account eventually may be
depleted. However, you cannot automatically close your account using the
Systematic Withdrawal Plan. If your balance falls below $500, we may ask you to
bring the account back to the $500 minimum balance. If you decide not to
increase your account to the minimum balance, your account may be closed and the
proceeds mailed to you.
ORGANIZATION AND MANAGEMENT OF THE FUNDS
****We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
service their shareholders. They are paid a fee for their services.****
ABOUT VICTORY:
Each Fund is a member of the Victory Funds, a family of 37 distinct investment
portfolios organized as a Delaware business trust. Some of the Victory Funds
have been operating since 1983.
The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.
****The Funds are supervised by the Board of Trustees, who monitors the services
provided to investors.****
THE INVESTMENT ADVISER:
One of a Fund's most important contracts is its Advisory Agreement with KAM, a
New York corporation registered as an investment adviser with the SEC. KAM is a
subsidiary of KeyBank
21
<PAGE>
National Association, a wholly-owned subsidiary of KeyCorp. The Adviser and its
affiliates manage approximately $60 billion for a limited number of individual
and institutional clients.
The Advisory Agreement allows the Adviser to hire employees of its affiliates to
manage the Funds. It also allows KAM to choose brokers or dealers to handle the
purchases and sales of a Funds' securities. Subject to Board approval, Key
Investments, Inc. (KII) and/or Key Clearing Corporation (KCC) may act as
clearing broker for the Funds' securities transactions in accordance with
procedures adopted by the Funds and receive commissions or fees in connection
with their services to the Funds. Both KII and KCC are wholly-owned indirect
subsidiaries of KeyCorp and are affiliates of the Adviser. KAM will be paid a
monthly advisory fee at an annual rate based on the average daily net assets of
each Fund as follows:
National Municipal Bond Fund (Short-Intermediate) 0.55%
National Municipal Bond Fund (Long) 0.60%
MANAGEMENT OF THE FUNDS
-------------------------------------------------
TRUSTEES
Supervise each Fund's activities.
-------------------------------------------------
-------------------------------------------------
INVESTMENT ADVISER
KAM
127 Public Square
Cleveland, OH 44114
Manages each Fund's business and
investment activities.
-------------------------------------------------
THE ADMINISTRATOR, DISTRIBUTOR, AND FUND ACCOUNTANT:
BISYS Fund Services is the Administrator and Distributor. Each Fund pays BISYS a
fee as the Administrator at the following annual rate based on the Fund's
average daily net assets:
o .15% for portfolio assets of $300 million and less,
o .12% for the next $300 million through $600 million of portfolio assets;
and
o .10% for portfolio assets greater than $600 million.
Under a Sub-Administration Agreement, BISYS pays KAM a fee at the annual rate of
up to .05% of each Fund's average daily net assets to perform some of the
administrative duties for the Funds. The Funds do not pay BISYS a fee for its
services as Distributor, although BISYS receives the sales charge. Each Fund
pays BISYS Fund Services Ohio, Inc. a fee for serving as the Fund's Accountant.
As permitted under current rules and regulations, the Distributor may provide
sales support, including cash or other compensation to dealers for selling
shares of a Fund. Payments may be in the form of trips, tickets, and/or
merchandise offered through sales contests. It does this at its own expense and
not at the expense of a Fund or its shareholders.
22
<PAGE>
SHAREHOLDER SERVICING PLAN:
The Funds have adopted a Shareholder Servicing Plan. A shareholder servicing
agent performs a number of services for their customers who are shareholders of
the Funds. It establishes and maintains accounts and records, processes dividend
and distribution payments, arranges for bank wires, assists in transactions, and
changes account information. For these services a Fund pays a fee at an annual
rate of up to .25% of the average daily net assets of the shares serviced by the
agent. The Funds may enter into agreements with various shareholder servicing
agents, including KeyBank National Association and its affiliates, other
financial institutions, and securities brokers. The Funds may pay a servicing
fee to broker-dealers and others who sponsor "no transaction fee" or similar
programs for the purchase of shares. Shareholder servicing agents may waive all
or a portion of their fee periodically.
DISTRIBUTION PLAN:
According to Rule 12b-1 under the Investment Company Act of 1940, as amended,
Victory has adopted a Distribution and Service Plan for the Funds. The Funds do
not currently pay expenses under this plan.
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P. serves as independent accountants to the Funds.
LEGAL COUNSEL:
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.
23
<PAGE>
OTHER COMPANIES THAT PROVIDE SERVICES TO THE
FUNDS
----------------------
SHAREHOLDERS
----------------------
----------------------
----------------------------------------------
FINANCIAL SERVICES FIRMS AND
THEIR INVESTMENT PROFESSIONALS
Advise current and prospective
shareholders on their Fund investments.
----------------------------------------------
----------------------------------------------
TRANSFER AGENT/SERVICING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as recordkeeping,
statements, processing of buy and
sell requests, distribution of dividends,
and servicing of shareholders' accounts.
----------------------------------------------
- --------------------------------------------------------------------------------
DISTRIBUTOR AND
ADMINISTRATOR FUND ACCOUNTANT
BISYS Fund Services, Inc. BISYS Fund Services Ohio, Inc.
3435 Stelzer Road 3435 Stelzer Road
Columbus, OH 43219 Columbus, OH 43219
As Distributor, markets the Funds and Calculates the value of Fund shares
distributes shares through Investment and keeps certain Fund records.
Professionals. As Administrator, handles
the day-to-day operations of the Funds.
- --------------------------------------------------------------------------------
SUB-ADMINISTRATOR CUSTODIAN
Key Asset Management Inc. Key Trust Company of Ohio, N.A.
127 Public Square 127 Public Square
Cleveland, OH 44114 Cleveland, OH 44114
Handles some day-to-day Provides for safekeeping of the Funds'
operations of the Funds. investments and cash, and settles
trades made by the Funds.
- --------------------------------------------------------------------------------
24
<PAGE>
ADDITIONAL INFORMATION
****Some additional information you should know about the Funds.****
SHARE CLASSES
The Funds offer only the classes of shares described in this prospectus, but at
some future date, the Funds may offer additional classes of shares through a
separate prospectus. The Funds are the successor to the following Key Trust
funds:
Key Trust Short-Term Tax-Free Fund - The National Municipal Bond Fund
(Short-Intermediate)
Key Trust Tax-Free Fund - The National Municipal Bond Fund
(Long)
YOUR RIGHTS AS A SHAREHOLDER. All shareholders of each class have equal voting,
liquidation, and other rights. As a shareholder of a Fund, you have rights and
privileges similar to those enjoyed by other corporate shareholders. Delaware
Trust law limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of the Fund, may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.
CODE OF ETHICS. Victory and the Adviser have each adopted a Code of Ethics to
which all investment personnel and all other access persons to the Fund must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination of
employment.
BANKING LAWS. Banking laws, including the Glass-Steagall Act, prevent a bank
holding company or its affiliates from sponsoring, organizing, or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian or
shareholder servicing agent. They also may purchase shares of such a company for
their customers and pay third parties for performing these functions for their
customers. Should these laws ever change in the future, the Trustees would
consider selecting another qualified firm so that all services would continue.
SHAREHOLDER COMMUNICATIONS. You will receive unaudited Semi-Annual Reports and
audited Annual Reports on a regular basis from each Fund. In addition, you also
may receive updated prospectuses or supplements to this prospectus. In order to
eliminate duplicate mailings to an address at which two or more shareholders
with the same last name reside, the Fund will send only one copy of the above
communications.
****If you would like to receive additional copies of any materials, please call
the Funds at 800-539-FUND.****
25
<PAGE>
The securities described in this prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer or
other person is authorized to give any information or make any representation
other than those contained in this prospectus and the SAI.
26
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists some of the types of securities each of the Funds may
choose to purchase under normal market conditions. The majority of the portfolio
for each of the Funds is made up of general obligation bonds and revenue bonds.
However, the Funds also are permitted to invest in the securities shown in the
table below and in the SAI.
% Percentage of TOTAL assets
# No limitation of usage; Fund may be using currently.
O Indicates a "derivative security," whose value is linked to, or derived from
another security, instrument or index.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NATIONAL MUNICIPAL
BOND FUND NATIONAL
LIST OF ALLOWABLE INVESTMENTS (SHORT-INTERMEDIATE) MUNICIPAL BOND
AND INVESTMENT PRACTICES FUND (LONG)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE BONDS. Payable only from the proceeds of a specific revenue # #
source, such as the users of a municipal facility.
- ---------------------------------------------------------------------------------------------------------------------------
GENERAL OBLIGATION BONDS. Secured by the issuer's full faith, credit, and # #
taxing power for payment of interest and principal.
- ---------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. A security that is purchased 33-1/3% 33-1/3%
for delivery at a later time. The market value may change before the delivery
date, and the value is included in the NAV of the Fund.
- ---------------------------------------------------------------------------------------------------------------------------
ZERO COUPON BONDS. These securities are purchased at a discount from the
face value. The face value is received at maturity, with no interest # #
payments before then. These may be subject to greater risks of price
fluctuation.
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SECURITIES. Shares of other mutual funds with similar
investment objectives. The following limitations apply: (1) No more than 5% 5%
5% of the Fund's total assets may be invested in one mutual fund, (2) a 3% 3%
Fund and its affiliates may not own more than 3% of the securities of any 10% 10%
one mutual fund, and (3) no more than 10% of the Fund's total assets may be
invested in combined mutual fund holdings.
- ---------------------------------------------------------------------------------------------------------------------------
MUNICIPAL LEASE OBLIGATIONS. Issued to acquire land, equipment, or
facilities. They may become taxable if the lease is assigned. The lease 30% 30%
could terminate, resulting in default.
- ---------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF PARTICIPATION. A certificate that states that an investor 20% 20%
will receive a portion of the lease payments from a municipality.
- ---------------------------------------------------------------------------------------------------------------------------
REFUNDING CONTRACTS. Issued to refinance an issuer's debt. The Fund buys
these at a stated price for a future settlement date. # #
- ---------------------------------------------------------------------------------------------------------------------------
TAX, REVENUE AND BOND ANTICIPATION NOTES. Issued in expectation of future # #
revenues.
- ---------------------------------------------------------------------------------------------------------------------------
LOWER-RATED MUNICIPAL SECURITIES. Municipal securities that have been 5% 5%
down-graded to below investment grade.
- ---------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Some are direct 20% 20%
obligations of the U.S. Treasury; others are obligations only of the U.S.
agency.
- ---------------------------------------------------------------------------------------------------------------------------
O VARIABLE & FLOATING RATE SECURITIES. Investment grade instruments, some
of which may be derivatives and illiquid, with interest rates that reset # #
periodically.
- ---------------------------------------------------------------------------------------------------------------------------
27
<PAGE>
- ---------------------------------------------------------------------------------------------------------------------------
NATIONAL MUNICIPAL
BOND FUND NATIONAL
LIST OF ALLOWABLE INVESTMENTS (SHORT-INTERMEDIATE) MUNICIPAL BOND
AND INVESTMENT PRACTICES FUND (LONG)
- ---------------------------------------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES. Debt securities backed by loans or accounts
receivable originated by banks, credit card companies, student loan 35% 35%
issuers, or other providers of credit. These securities may be enhanced
by a bank letter of credit or by insurance coverage provided by a third
party.
- ---------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES, TAX-EXEMPT. Tax-exempt investments secured by 35% 35%
a mortgage or pools of mortgages.
- ---------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS, TAX-EXEMPT. Debt obligations that
are secured by mortgage-backed certificates. Some are issued by U.S. 25% 25%
government agencies and instrumentalities.
- ---------------------------------------------------------------------------------------------------------------------------
RESOURCE RECOVERY BONDS. Issued to build waste-to-energy facilities and # #
equipment.
- ---------------------------------------------------------------------------------------------------------------------------
TAX PREFERENCE ITEMS. Tax-exempt obligations that pay interest which is
subject to the federal "alternative minimum tax. 20% 20%
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS. Secured by lease
payments made by a corporation, these bonds are issued for financing 25% 25%
large industrial projects; i.e., building industrial parks or factories.
- ---------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT COMMERCIAL PAPER. Short-term obligations that are exempt from # #
state and federal income tax.
- ---------------------------------------------------------------------------------------------------------------------------
O FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Contracts involving 5% in margins or 5% in margins or
the right or obligation to deliver or receive assets or money depending premiums; 33-1/3% premiums; 33-1/3%
on the performance of one or more assets or a securities index. To subject to futures subject to
reduce the effects of leverage, liquid assets equal to the contract or options on futures or
commitment are set aside to cover the commitment limit. The Funds may futures options on futures
invest in futures in an effort to hedge against market risk or interest
rate risk.
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The purchase of a security that must later be sold
back to the seller at the same price plus interest. The seller's 20% 20%
obligation is secured by collateral.
- ---------------------------------------------------------------------------------------------------------------------------
DEMAND FEATURES, OR "PUTS." Contract for the right to sell or redeem a
security at a predetermined price on or before a stated date. Usually # #
the issuer may obtain a stand-by or direct pay letter of credit or
guarantee from banks as backup.
- ---------------------------------------------------------------------------------------------------------------------------
TAXABLE OBLIGATIONS. Only used for temporary investments. Fund does not 20% 20%
intend to use.
- ---------------------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES. Investments that cannot be sold readily within 15% of 15% of
seven days in the usual course of business at approximately the price at net assets net assets
which a Fund values them.
- ---------------------------------------------------------------------------------------------------------------------------
RESTRICTED SECURITIES. Securities that are not registered under federal
securities laws but that may be traded among qualified institutional # #
investors and the Fund. Some of these securities may be illiquid.
- ---------------------------------------------------------------------------------------------------------------------------
BORROWING, REVERSE REPURCHASE AGREEMENTS. The borrowing of money from 5% 5%
banks (up to 5% of total assets) or through reverse repurchase agreements 33 1/3% 33 1/3%
(up to 33 1/3% of total assets). The Funds will not use borrowing to
create leverage.
- ---------------------------------------------------------------------------------------------------------------------------
28
<PAGE>
- ---------------------------------------------------------------------------------------------------------------------------
NATIONAL MUNICIPAL
BOND FUND NATIONAL
LIST OF ALLOWABLE INVESTMENTS (SHORT-INTERMEDIATE) MUNICIPAL BOND
AND INVESTMENT PRACTICES FUND (LONG)
- ---------------------------------------------------------------------------------------------------------------------------
DOLLAR WEIGHTED EFFECTIVE AVERAGE MATURITY. Based on the value at the time of
purchase of a Fund's investments in securities with different maturity dates. 1 to 5 10 or more
This measures the sensitivity of a debt security's value to changes in interest Years Years
rates. Longer term debt securities are more volatile than shorter term debt
securities because their prices are more sensitive to interest rate changes.
Therefore, the NAV of a fund with a longer dollar weighted effective average
maturity may fluctuate more.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each Fund may also hold up to 100% of its total assets in cash or short-term
money market instruments or taxable short-term obligations for temporary
defensive purposes or cash management. For more information on ratings and
detailed descriptions of each of the above instrument vehicles, see the SAI.
29
<PAGE>
The information in this statement of additional information is not complete
and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This statement of additional
information is not an offer to sell these securities and
is not solicitng an offer to buy these securities
in any state where the offer or sale is
not permitted.
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
The Victory National Municipal Bond Fund (Short-Intermediate)
The Victory National Municipal Bond Fund (Long)
September 15, 1998
<PAGE>
This Statement of Additional Information ("SAI") is not a prospectus, but should
be read in conjunction with the combined prospectus of The Victory National
Municipal Bond Fund (Short-Intermediate) and The Victory National Municipal Bond
Fund (Long) (the "Prospectus"), each dated September 15, 1998, as amended or
supplemented from time to time. This SAI is incorporated by reference in its
entirety into the Prospectus. Copies of the Prospectus may be obtained by
writing The Victory Portfolios at P.O. Box 8527, Boston, MA 02266-8527, or by
calling toll free 800-539-FUND or 800-539-3863.
INVESTMENT ADVISER AND SUB-ADMINISTRATOR Key Asset Management Inc.
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services
TRANSFER AGENT
State Street Bank and Trust Company
DIVIDEND DISBURSING AGENT
AND SERVICING AGENT
Boston Financial Data Services, Inc.
CUSTODIAN
Key Trust Company of Ohio, N.A.
INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P.
COUNSEL
Kramer, Levin, Naftalis & Frankel
<PAGE>
Table of Contents
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS................
FUNDAMENTAL RESTRICTIONS OF THE FUNDS........................................
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS....................................
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST....................................
Municipal Securities................................................
Tax-Exempt Obligations..............................................
Municipal Lease Obligations.........................................
Lower-Rated Municipal Securities....................................
Federally Taxable Obligations.......................................
Refunded Municipal Bonds............................................
Short-Term Obligations..............................................
Demand Features.....................................................
Bankers' Acceptances................................................
Certificates of Deposit.............................................
Commercial Paper....................................................
Repurchase Agreements...............................................
Reverse Repurchase Agreements.......................................
Short-Term Funding Agreements.......................................
Variable Amount Master Demand Notes.................................
Variable Rate Demand Notes..........................................
Variable and Floating Rate Notes....................................
Extendible Debt Securities..........................................
Receipts............................................................
Zero-Coupon Bonds...................................................
Loans and Other Direct Debt Instruments.............................
Securities of Other Investment Companies............................
U.S. Government Obligations.........................................
When-Issued Securities..............................................
Delayed-Delivery Transactions.......................................
Mortgage-Backed Securities..........................................
In General.................................................
U.S. Government Mortgage-Backed Securities.................
GNMA Certificates..........................................
FHLMC Securities...........................................
FNMA Securities............................................
Collateralized Mortgage Obligations........................
Non-Government Mortgage-Backed Securities..................
Asset-Backed Securities.............................................
Futures and Options.................................................
Futures Contracts..........................................
Restrictions on the Use of Futures Contracts...............
Risk Factors in Futures Transactions.......................
Options....................................................
Illiquid Investments................................................
Short Sales Against the Box.........................................
Restricted Securities...............................................
Investment-Grade and High Quality Securities........................
Participation Interests.............................................
Refunding Contracts.................................................
Standby Commitments.................................................
<PAGE>
VALUATION OF PORTFOLIO SECURITIES............................................
PERFORMANCE OF THE FUNDS.....................................................
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION....................
DIVIDENDS AND DISTRIBUTIONS..................................................
TAXES ....................................................................
TRUSTEES AND OFFICERS........................................................
ADVISORY AND OTHER CONTRACTS.................................................
ADDITIONAL INFORMATION.......................................................
APPENDIX.....................................................................
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Trust") is an open-end management investment
company. The Trust consists of 36 series (each a "Fund," and collectively, the
"Funds") of units of beneficial interest ("shares"). The outstanding shares
represent interests in the 36 separate investment portfolios. This SAI relates
to the shares of two of the 36 Funds and are listed below. Much of the
information contained in this SAI expands on subjects discussed in the
Prospectus. Capitalized terms not defined herein are used as defined in the
Prospectus. No investment in shares of a Fund should be made without first
reading the Prospectus.
THE VICTORY PORTFOLIOS:
The Victory National Municipal Bond Fund (Short-Intermediate) (the "Short
Intermediate Fund")
The Victory National Municipal Bond Fund (Long) (the "Long Fund")
<PAGE>
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding voting securities.
There can be no assurance that a Fund will achieve its investment objective.
ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS.
The following policies and limitations supplement the Funds' investment policies
set forth in the Prospectus. The Funds' investments in the following securities
and other financial instruments are subject to the other investment policies and
limitations described in the Prospectus and this SAI.
Each Fund is classified as "non-diversified," i.e., a Fund may invest more than
5% of its total assets in any one issuer of the securities or financial
instruments described below.
Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any security or
other asset, or sets forth a policy regarding quality standards, such standard
or percentage limitation will be determined immediately after and as a result of
the Fund's acquisition of such security or other asset except in the case of
borrowing (or other activities that may be deemed to result in the issuance of a
"senior security" under the Investment Company Act of 1940, as amended (the
"1940 Act")). Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with a Fund's investment policies and limitations. If the value of a
Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of that Fund's outstanding voting securities unless
(1) a policy expressly is deemed to be a fundamental policy of the Fund or (2) a
policy expressly is deemed to be changeable only by such majority vote. A Fund
may, following notice to its shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Fund or which
currently are not available but which may be developed to the extent such
investment practices are both consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus.
The following sections list each Fund's investment policies, limitations, and
restrictions. The securities in which the Funds can invest and the risks
associated with these securities are discussed in the section "Instruments in
Which the Funds Can Invest."
DEFINED TERMS. All capitalized terms listed in a Fund's Investment Policies and
Limitations section referring to permissible investments are described in the
section "Instruments in Which the Funds Can Invest."
The following terms are used throughout the Investment Objective and Investment
Policies and Limitations sections:
S&P: Standard & Poor's Ratings Services
Moody's: Moody's Investors Service, Inc.
Fitch: Fitch Investors Service, Inc.
NRSRO: Nationally recognized statistical rating organization
FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. SENIOR SECURITIES
2
<PAGE>
The Funds may not:
Issue any senior security (as defined in the 1940 Act), except that (a) each
Fund may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) each Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
2. UNDERWRITING
The Funds may not:
Underwrite securities issued by others, except to the extent that a Fund may be
considered an underwriter within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), in the disposition of restricted securities.
3. BORROWING
The Funds may not:
Borrow money, except that (a) each Fund may enter into commitments to purchase
securities and instruments in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3 % of
the Fund's total assets; and (b) each Fund may borrow money in an amount not
exceeding 33 1/3% of the value of its total assets at the time when the loan is
made.
4. REAL ESTATE
The Funds may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by the Funds in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not hereby precluded.
5. COMMODITIES
The Funds may not:
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Funds from
purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities.)
6. CONCENTRATION
Each Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided that this
limitation shall not apply to Municipal Securities or governmental guarantees of
Municipal Securities; but for these purposes only, industrial development bonds
3
<PAGE>
that are backed only by the assets and revenues of a non-governmental user shall
not be deemed to be Municipal Securities. In the utilities category, the
industry shall be determined according to the service provided. For example,
gas, electric, water, and telephone will be considered as separate industries.
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. ILLIQUID SECURITIES
Each Fund:
Will not invest more than 15% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under, the Securities Act
("Restricted Securities") shall not be deemed illiquid solely by reason of being
unregistered. Key Asset Management Inc. ("KAM" or the "Adviser") determines
whether a particular security is deemed to be liquid based on the trading
markets for the specific security and other factors.
2. SHORT SALES AND PURCHASES ON MARGIN
The Funds:
Will not make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will not
be applied to limit the use of options, futures contracts and related options,
in the manner otherwise permitted by the investment restrictions, policies and
investment program of a Fund.
3. OTHER INVESTMENT COMPANIES
Each Fund:
May invest up to 5% of its total assets in the securities of any one investment
company, but may not own more than 3% of the securities of any one investment
company or invest more than 10% of its total assets in the securities of other
investment companies. Pursuant to an exemptive order received by the Trust from
the Securities and Exchange Commission (the "SEC"), the Funds may invest in
money market funds of the Trust. The Adviser will waive the portion of its fee
attributable to the assets of each Fund invested in such money market funds to
the extent required by the laws of any jurisdiction in which shares of the Funds
are registered for sale.
The Funds may not:
Purchase the securities of any registered open-end investment company or
registered unit investment trust in reliance on Section 12(d)(1)(G) or Section
12(d)(1)(F) of the 1940 Act, which permits operation as a "fund of funds."
4. MISCELLANEOUS
a. INVESTMENT GRADE OBLIGATIONS
Each Fund may not:
Hold more than 5% of its total assets in securities that have been downgraded
below investment grade.
4
<PAGE>
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST
The instruments in which the Funds can invest, according to their investment
policies and limitations are described below.
The following paragraphs provide a brief description of some of the types of
securities in which the Funds may invest in accordance with their investment
objective, policies, and limitations, including certain transactions the Funds
may make and strategies they may adopt. The following also contains a brief
description of certain risk factors. The Funds may, following notice to their
shareholders, take advantage of other investment practices which presently are
not contemplated for use by the Funds or which currently are not available but
which may be developed, to the extent such investment practices are both
consistent with a Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in the Prospectus and this
SAI.
MUNICIPAL SECURITIES. Municipal Securities are obligations, typically bonds and
notes, issued by or on behalf of states, territories, and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities, and instrumentalities, the interest on which, in the
opinion of the issuer's bond counsel at the time of issuance, is both exempt
from federal income tax and not treated as a preference item for individuals for
purposes of the federal alternative minimum tax.
Generally, Municipal Securities are issued by governmental entities to obtain
funds for various public purposes, such as the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to other public
institutions and facilities. Municipal Securities may include fixed, variable,
or floating rate obligations. Municipal Securities may be purchased on a
when-issued or delayed-delivery basis (including refunding contracts).
The two principal categories of Municipal Securities are "general obligation"
issues and "revenue" issues. Other categories of Municipal Securities are "moral
obligation" issues, private activity bonds, and industrial development bonds.
The prices and yields on Municipal Securities are subject to change from time to
time and depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer (or other entities whose
financial resources are supporting the Municipal Security), general conditions
in the market for tax-exempt obligations, the size of a particular offering, the
maturity of the obligation, and the rating(s) of the issue. There are variations
in the quality of Municipal Securities, both within a particular category of
Municipal Securities and between categories. Current information about the
financial condition of an issuer of tax-exempt bonds or notes usually is not as
extensive as that which is made available by corporations whose securities are
publicly traded.
The term Municipal Securities, as used in this SAI, includes private activity
bonds and industrial development bonds issued by or on behalf of public
authorities to finance various privately-operated facilities if the interest
paid thereon is both exempt from federal income tax and not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax. The term Municipal Securities also includes short-term instruments issued
in anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues, such as short-term general obligation notes, tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax-exempt
commercial paper, construction loan notes, and other forms of short-term
tax-exempt loans. Additionally, the term Municipal Securities includes project
notes, which are issued by a state or local housing agency and are sold by the
Department of Housing and Urban Development.
An issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code. Congress or state
legislatures may enact laws extending the time for payment of principal or
interest, or both,
5
<PAGE>
or imposing other constraints upon the enforcement of such obligations or upon
the ability of municipalities to levy taxes. The power or ability of an issuer
to meet its obligations for the payment of interest on and principal of its
Municipal Securities may be materially adversely affected by litigation or other
conditions. There is also the possibility that, as a result of litigation or
other conditions, the power or ability of certain issuers to meet their
obligations to pay interest on and principal of their tax-exempt bonds or notes
may be materially impaired or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may, from time to time, have the
effect of introducing uncertainties in the market for tax-exempt obligations or
certain segments thereof, or may materially affect the credit risk with respect
to particular bonds or notes. Adverse economic, business, legal, or political
developments might affect all or a substantial portion of the Fund's tax-exempt
bonds and notes in the same manner.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. The U.S. Supreme Court has held that Congress has the constitutional
authority to enact such legislation. It is not possible to determine what effect
the adoption of such proposals could have on the availability of tax-exempt
bonds for investment by the Fund and the value of its portfolio. Proposals also
may be introduced before state legislatures that would affect the state tax
treatment of Municipal Securities. If such proposals were enacted, the
availability of Municipal Securities and their value would be affected.
The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
continuing requirements on issuers of tax-exempt bonds regarding the use,
expenditure and investment of bond proceeds and the payment of rebate to the
United States of America. Failure by the issuer to comply with certain of these
requirements subsequent to the issuance of tax-exempt bonds could cause interest
on the bonds to become includable in gross income retroactive to the date of
issuance.
General obligation issues are backed by the full taxing power of a state or
municipality and are payable from the issuer's general unrestricted revenues and
not from any particular fund or source. The characteristics and method of
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue issues or special obligation issues are backed
only by the revenues from a specific tax, project, or facility. "Moral
obligation" issues are normally issued by special purpose authorities.
Private activity bonds and industrial development bonds generally are revenue
bonds and not payable from the resources or unrestricted revenues of the issuer.
The credit and quality of industrial development revenue bonds is usually
directly related to the credit of the corporate user of the facilities. Payment
of principal of and interest on industrial development revenue bonds is the
responsibility of the corporate user (and any guarantor).
Private activity bonds, as discussed above, may constitute Municipal Securities
depending on their tax treatment. The source of payment and security for such
bonds is the financial resources of the private entity involved; the full faith
and credit and the taxing power of the issuer normally will not be pledged. The
payment obligations of the private entity also will be subject to bankruptcy as
well as other exceptions similar to those described above. Certain debt
obligations known as "industrial development bonds" under prior federal tax law
may have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, sewage or
solid waste disposal facilities, and certain local facilities for water supply
or other heating or cooling facilities. Other private activity bonds and
industrial development bonds issued to fund the construction, improvement or
equipment of privately-operated industrial, distribution, research or commercial
facilities may also be Municipal Securities, but the size of such issues is
limited under current and prior federal tax law. The aggregate amount of most
private activity bonds and industrial development bonds is limited (except in
the case of certain types of facilities) under federal tax law by an annual
"volume cap." The volume cap limits the annual aggregate principal amount of
such obligations issued by or on behalf of all government instrumentalities in
the state. Such obligations are included within the term Municipal Securities
6
<PAGE>
if the interest paid thereon is, in the opinion of bond counsel, at the time of
issuance, excluded from gross income for purposes of both federal income
taxation (including any alternative minimum tax) and state personal income tax.
The Fund may not be a desirable investment for "substantial users" of facilities
financed by private activity bonds or industrial development bonds or for
"related persons" of substantial users.
Project notes are secured by the full faith and credit of the United States
through agreements with the issuing authority which provide that, if required,
the U.S. government will lend the issuer an amount equal to the principal of and
interest on the project notes, although the issuing agency has the primary
obligation with respect to its project notes.
Some municipal securities are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. Insured investments are covered by an insurance policy applicable to a
specific security, either obtained by the issuer of the security or by a third
party from a private insurer. Insurance premiums for the municipal bonds are
paid in advance by the issuer or the third party obtaining such insurance. Such
policies are noncancellable and continue in force as long as the municipal bonds
are outstanding and the respective insurers remain in business.
The insurer unconditionally guarantees the timely payment of the principal of
and interest on the insured municipal bonds when and as such payments become due
but shall not be paid by the issuer, except that in the event of any
acceleration of the due date of the principal by reason of mandatory or optional
redemption (other than acceleration by reason of a mandatory sinking fund
payment), default, or otherwise, the payments guaranteed will be made in such
amounts and at such times as payments of principal would have been due had there
not been such acceleration. The insurer will be responsible for such payments
less any amounts received by the bondholder from any trustee for the municipal
bond issuers or from any other source. The insurance does not guarantee the
payment of any redemption premium, the value of the shares of a Fund, or
payments of any tender purchase price upon the tender of the municipal bonds.
With respect to small issue industrial development municipal bonds and pollution
control revenue municipal bonds, the insurer guarantees the full and complete
payments required to be made by or on behalf of an issuer of such municipal
bonds if there occurs any change in the tax-exempt status of interest on such
municipal bonds, including principal, interest, or premium payments, if any, as
and when required to be made by or on behalf of the issuer pursuant to the terms
of such municipal bonds. This insurance is intended to reduce financial risk,
but the cost thereof will reduce the yield available to shareholders of a Fund.
The ratings of NRSROs represent their opinions as to the quality of Municipal
Securities. In this regard, it should be emphasized that the ratings of any
NRSRO are general and are not absolute standards of quality, and Municipal
Securities with the same maturity, interest rate, and rating may have different
yields, while Municipal Securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to purchase by a Fund, an
issue of Municipal Securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Fund. The Adviser will
consider such an event in determining whether the Fund should continue to hold
the obligation.
The Adviser believes that it is likely that sufficient Municipal Securities will
be available to satisfy the Fund's investment objective and policies. In meeting
its investment policies, the Fund may invest all or any part of its total assets
in Municipal Securities which are private activity bonds. Moreover, although the
Fund does not presently intend to do so on a regular basis, it may invest more
than 25% of its total assets in Municipal Securities which are related in such a
way that an economic, business or political development or change affecting one
such security would likewise affect the other Municipal Securities. Examples of
such securities are obligations, the repayment of which is dependent upon
similar types of projects or projects located in the same state. Such
investments would be made only if deemed necessary or appropriate by the
Adviser.
MUNICIPAL LEASE OBLIGATIONS. A Fund may invest a portion of its assets in
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment
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purchase, or a conditional sale contract, are issued by state and local
governments and authorities to acquire land and a wide variety of equipment and
facilities. Generally, Funds will not hold such obligations directly as a lessor
of the property, but will purchase a participation interest in a municipal
obligation from a bank or other third party. A participation interest gives a
Fund a specified, undivided interest in the obligation in proportion to its
purchased interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses" providing
that the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance limitations.
LOWER-RATED MUNICIPAL SECURITIES. Each Fund may hold up to 5% of its assets in
municipal securities that have been downgraded below investment grade. It should
be noted that adverse publicity and changing investor perceptions may affect the
ability of outside pricing services used by the Fund to value portfolio
securities, and the Fund's ability to dispose of lower-rated securities. Outside
pricing services are consistently monitored to assure that securities are valued
by a method that the Board of Trustees of the Trust (the "Board") believes
accurately reflects fair value. The impact of changing investor perceptions may
be especially pronounced in markets where municipal securities are thinly
traded.
A Fund may choose, at its expense, or in conjunction with others, to pursue
litigation seeking to protect the interests of security holders if it determines
this to be in the best interest of shareholders.
FEDERALLY TAXABLE OBLIGATIONS. Neither of the Funds intends to invest in
securities whose interest is federally taxable; however, from time to time, each
Fund may invest a portion of its assets on a temporary basis in fixed-income
obligations whose interest is subject to federal income tax. For example, a Fund
may invest in obligations whose interest is federally taxable pending the
investment or reinvestment in municipal securities of proceeds from the sale of
its shares of portfolio securities.
Should a Fund invest in federally taxable obligations, it would purchase
securities which in the Adviser's judgment are of high quality. This would
include obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of domestic banks; and repurchase agreements.
These Funds' standards for high quality taxable obligations are essentially the
same as those described by Moody's in rating corporate obligations within its
two highest ratings of Prime-1 and Prime-2, and those described by S&P in rating
corporate obligations within its two highest ratings of A-1 and A-2. In making
high quality determinations each Fund may also consider the comparable ratings
of other nationally recognized rating services.
The Supreme Court has held that Congress may subject the interest on municipal
obligations to federal income tax. Proposals to restrict or eliminate the
federal income tax exemption for interest on municipal obligations are
introduced before Congress from time to time. Proposals also may be introduced
before the state legislatures that would affect the state tax treatment of the
Fund's distributions. If such proposals were enacted, the availability of
municipal obligations and the value of the Fund's holdings would be affected and
the Trustees would reevaluate the Fund's investment objective and policies.
Each Fund anticipates being as fully invested as practicable in municipal
securities; however, there may be occasions when, as a result of maturities of
portfolio securities, sales of Fund shares, or in order to meet redemption
requests, the Fund may hold cash that is not earning income. In addition, there
may be
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occasions when, in order to raise cash to meet redemptions, a Fund may be
required to sell securities at a loss.
REFUNDED MUNICIPAL BONDS. Investments by a Fund in refunded municipal bonds that
are secured by escrowed obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities are considered to be investments in U.S.
Government obligations for purposes of the diversification requirements to which
the Funds is subject under the 1940 Act. As a result, more than 5% of a Fund's
total assets may be invested in such refunded bonds issued by a particular
municipal issuer. The escrowed securities securing such refunded municipal bonds
will consist exclusively of U.S. Government obligations, and will be held by an
independent escrow agent or be subject to an irrevocable pledge of the escrow
account to the debt service on the original bonds.
SHORT-TERM OBLIGATIONS. These include high quality, short-term obligations such
as domestic commercial paper (including variable-amount master demand notes),
bankers' acceptances, certificates of deposit and demand and time deposits of
domestic and foreign branches of U.S. banks, and repurchase agreements.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
BANKERS' ACCEPTANCES. Bankers' Acceptances are negotiable drafts or bills of
exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' Acceptances will be those guaranteed by domestic and foreign banks, if
at the time of purchase such banks have capital, surplus, and undivided profits
in excess of $100,000,000 (as of the date of their most recently published
financial statements).
CERTIFICATES OF DEPOSIT. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Certificates of Deposit and demand and time deposits invested in by a Fund will
be those of domestic and foreign banks and savings and loan associations, if (a)
at the time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation (the
"FDIC") or the Savings Association Insurance Fund.
COMMERCIAL PAPER. Commercial paper is unsecured promissory notes issued by
corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by an NRSRO or, if not rated, found by the
Trustees to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by an NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments. For a description of the rating symbols of
each NRSRO see the Appendix to this SAI.
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REPURCHASE AGREEMENTS. Securities held by a Fund may be subject to Repurchase
Agreements. Under the terms of a Repurchase Agreement, a Fund would acquire
securities from financial institutions or registered broker-dealers deemed
creditworthy by the Adviser pursuant to guidelines adopted by the Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest).
If the seller were to default on its repurchase obligation or become insolvent,
a Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.
REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds for temporary purposes by
entering into Reverse Repurchase Agreements. Reverse Repurchase Agreements are
considered to be borrowings under the 1940 Act. Pursuant to such agreement, a
Fund would sell a portfolio security to a financial institution such as a bank
and a broker-dealer, and agree to repurchase such security at a mutually
agreed-upon date and price. At the time a Fund enters into a Reverse Repurchase
Agreement, it will place in a segregated custodial account assets (such as cash
or other liquid high-grade securities) consistent with the Fund's investment
restrictions having a value equal to the repurchase price (including accrued
interest). The collateral will be marked-to-market on a daily basis, and will be
monitored continuously to ensure that such equivalent value is maintained.
Reverse Repurchase Agreements involve the risk that the market value of the
securities sold by a Fund may decline below the price at which the Fund is
obligated to repurchase the securities.
SHORT-TERM FUNDING AGREEMENTS. A Fund may invest in Short-Term Funding
Agreements (sometimes referred to as "GICs") issued by insurance companies.
Pursuant to such agreements, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
the Fund, on a monthly basis, guaranteed interest which is based on an index.
The Short-Term Funding Agreement provides that this guaranteed interest will not
be less than a certain minimum rate. Because the principal amount of a
Short-Term Funding Agreement may not be received from the insurance company on
seven days notice or less, the agreement is considered to be an illiquid
investment and, together with other instruments in a Fund which are not readily
marketable, will not exceed 15% of the Fund's net assets. In determining
dollar-weighted average portfolio maturity, a Short-Term Funding Agreement will
be deemed to have a maturity equal to the period of time remaining until the
next readjustment of the guaranteed interest rate.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable Amount Master Demand Notes are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Although there is no secondary market for these notes, a Fund
may demand payment of principal and accrued interest at any time and may resell
the notes at any time to a third party. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of a Variable
Amount Master Demand Note if the issuer defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. While the notes typically are not rated by credit rating agencies,
issuers of Variable Amount Master Demand Notes must satisfy the same criteria as
set forth above for unrated commercial paper, and the Adviser will monitor
continuously the issuer's financial status and ability to make payments due
under the instrument. Where necessary to ensure that a note is of "high
quality," a Fund will require that the issuer's obligation to pay the principal
of the note be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. For purposes of a Fund's investment policies, a
Variable Amount Master Demand Note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand.
VARIABLE RATE DEMAND NOTES. Variable Rate Demand Notes are tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed
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seven days. The Funds also may invest in participation Variable Rate Demand
Notes, which provide a Fund with an undivided interest in underlying Variable
Rate Demand Notes held by major investment banking institutions. Any purchase of
Variable Rate Demand Notes will meet applicable diversification and
concentration requirements.
VARIABLE AND FLOATING RATE NOTES. A Variable Rate Note is one whose terms
provide for the readjustment of its interest rate on set dates and which, upon
such readjustment, reasonably can be expected to have a market value that
approximates its par value. A Floating Rate Note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, reasonably can be expected to have a market value that
approximates its par value. Such notes frequently are not rated by credit rating
agencies; however, unrated Variable and Floating Rate Notes purchased by the
Fund will only be those determined by the Adviser, under guidelines established
by the Trustees, to pose minimal credit risks and to be of comparable quality,
at the time of purchase, to rated instruments eligible for purchase under the
Fund's investment policies. In making such determinations, the Adviser will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such notes (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
Although there may be no active secondary market with respect to a particular
Variable or Floating Rate Note purchased by a Fund, the Fund may resell the note
at any time to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of a Variable or Floating
Rate Note in the event that the issuer of the note defaulted on its payment
obligations and a Fund could, for this or other reasons, suffer a loss to the
extent of the default. Variable or Floating Rate Notes may be secured by bank
letters of credit.
Variable or Floating Rate Notes may have maturities of more than one year, as
follows:
1. A Variable or Floating Rate Note that is issued or guaranteed by the United
States government or any agency thereof and which has a variable rate of
interest readjusted no less frequently than annually will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A Variable or Floating Rate Note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A Variable or Floating Rate Note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A Variable or Floating Rate Note that is subject to a demand feature will be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where a Fund is entitled
to receive the principal amount of the note either at any time on no more than
30 days' notice or at specified intervals not exceeding one year and upon no
more than 30 days' notice.
EXTENDIBLE DEBT SECURITIES. Extendible Debt Securities are securities that can
be retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, a Fund may treat Extendible Debt
Securities as maturing on the next optional retirement date.
RECEIPTS. Receipts are separately traded interest and principal component parts
of bills, notes, and bonds issued by the U.S. Treasury that are transferable
through the Federal book entry system, known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry
Safekeeping ("CUBES"). These instruments are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank; the custodian holds
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the interest and principal payments for the benefit of the registered owners of
the certificates or receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register.
Receipts include Treasury Receipts ("TRs"), Treasury Investment Growth Receipts
("TIGRs"), and Certificates of Accrual on Treasury Securities ("CATS").
ZERO-COUPON BONDS. Zero-Coupon Bonds are purchased at a discount from the face
amount because the buyer receives only the right to a fixed payment on a certain
date in the future and does not receive any periodic interest payments. The
effect of owning instruments which do not make current interest payments is that
a fixed yield is earned not only on the original investment but also, in effect,
on accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yields on the Zero-Coupon Bond,
but at the same time eliminates the holder's ability to reinvest at higher
rates. For this reason, Zero-Coupon Bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently, which fluctuation increases
in accordance with the length of the period to maturity.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Loans and Other Direct Debt Instruments
are interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent amounts owed to lenders or lending syndicates
(loans and loan participations), to suppliers of goods or services (trade claims
or other receivables), or to other parties. Direct Debt Instruments involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to a Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct Debt Instruments may also include
standby financing commitments that obligate a Fund to supply additional cash to
the borrower on demand.
SECURITIES OF OTHER INVESTMENT COMPANIES. A Fund may invest up to 5% of its
total assets in the securities of any one investment company, but may not own
more than 3% of the securities of any one investment company or invest more than
10% of its total assets in the securities of other investment companies.
Pursuant to an exemptive order received by the Trust from the SEC, a Fund may
invest in the money market funds of the Trust. The Adviser will waive its
investment advisory fee with respect to assets of a Fund invested in any of the
money market funds of the Trust, and, to the extent required by the laws of any
state in which a Fund's shares are sold, the Adviser will waive its investment
advisory fee as to all assets invested in other investment companies.
U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations are obligations issued
or guaranteed by the U.S. Government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
WHEN-ISSUED SECURITIES. A Fund may purchase securities on a when-issued basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase securities on a when issued basis, the
custodian will set aside cash or liquid portfolio securities equal to the amount
of the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When a Fund
engages in when-issued transactions, it relies on the seller to consummate the
trade. Failure of the seller to do so may result in the Fund incurring a loss or
missing the opportunity to obtain a price considered
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to be advantageous. The Funds do not intend to purchase when issued securities
for speculative purposes, but only in furtherance of its investment objective.
DELAYED-DELIVERY TRANSACTIONS. A Fund may buy and sell securities on a
delayed-delivery basis. These transactions involve a commitment by the Fund to
purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security (and more than seven days in the future). Typically, no
interest accrues to the purchaser until the security is delivered. The Fund may
receive fees for entering into delayed delivery transactions.
When purchasing securities on a delayed-delivery basis, a Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because a Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When the Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.
MORTGAGE-BACKED SECURITIES--IN GENERAL. Mortgage-Backed Securities are backed by
mortgage obligations including, among others, conventional 30-year fixed rate
mortgage obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, Mortgage-Backed Securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. A Fund may purchase Mortgage-Backed Securities at a
premium or at a discount. Among the U.S. Government securities in which a Fund
may invest are Government Mortgage-Backed Securities (or government guaranteed
mortgage-related securities). Such guarantees do not extend to the value of
yield of the Mortgage-Backed Securities themselves or of the Fund's shares.
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES. Certain obligations of certain
agencies and instrumentalities of the U.S. Government are Mortgage-Backed
Securities. Some such obligations, such as those issued by GNMA are supported by
the full faith and credit of the U.S. Treasury; others, such as those of FNMA,
are supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Federal Farm Credit
Banks or FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies and instrumentalities if it is not
obligated to do so by law.
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The principal governmental (i.e., backed by the full faith and credit of the
U.S. Government) guarantor of Mortgage-Backed Securities is GNMA. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed as
to timely payment of principal and interest by FNMA and FHLMC, respectively, but
are not backed by the full faith and credit of the U.S. Government.
GNMA CERTIFICATES. Certificates of the GNMA are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that a Fund may purchase are the "modified pass-through" type,
which entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely payment of
principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and credit
of the U.S. Government. GNMA is also empowered to borrow without limitation from
the U.S. Treasury if necessary to make any payments required under its
guarantee.
The estimated average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures usually will
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.
FHLMC SECURITIES. FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. FHLMC issues
two types of mortgage pass-through securities ("FHLMC Certificates"), mortgage
participation certificates, and collateralized mortgage obligations ("CMOs").
Participation Certificates resemble GNMA Certificates in that each Participation
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FHLMC guarantees timely monthly payment of
interest on PCs and the ultimate payment of principal. Recently introduced FHLMC
Gold Participation Certificates guarantee the timely payment of both principal
and interest.
FHLMC CMOs are backed by pools of agency mortgage-backed securities and the
timely payment of principal and interest of each tranche is guaranteed by the
FHLMC. FHLMC guarantee is not backed by the full faith and credit of the U.S.
Government.
FNMA SECURITIES. FNMA was established in 1938 to create a secondary market in
mortgages insured by the FHA, but has expanded its activity to the secondary
market for conventional residential mortgages. FNMA primarily issues two types
of mortgage-backed securities, guaranteed mortgage pass-through certificates
("FNMA Certificates") and CMOs. FNMA Certificates resemble GNMA Certificates in
that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest and principal on FNMA Certificates and CMOs. The FNMA
guarantee is not backed by the full faith and credit of the U.S. Government.
COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-Backed Securities in which a Fund
may invest may also include CMOs. CMOs are securities backed by a pool of
mortgages in which the principal and interest cash flows of the pool are
channeled on a prioritized basis into two or more classes, or tranches, of
bonds.
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NON-GOVERNMENTAL MORTGAGE-BACKED SECURITIES. A Fund may invest in
mortgage-related securities issued by non-governmental entities. Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers, and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. Such issuers also may be the
originators of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are not direct or indirect government guarantees of payments
in the former pools. However, timely payment of interest and principal of these
pools is supported by various forms of insurance or guarantees, including
individual loan, title, pool, and hazard insurance. The insurance and guarantees
are issued by government entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers, thereof
will be considered in determining whether a Non-Governmental Mortgage-Backed
Security meets a Fund's investment quality standards. There can be no assurance
that the private insurers can meet their obligations under the policies. A Fund
may buy Non-Governmental Mortgage-Backed Related Securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the poolers, the Adviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the opinion of the Adviser are illiquid if, as a result, more
than 15% of the value of the Fund's net assets will be invested in illiquid
securities.
A Fund may purchase mortgage-related securities with stated maturities in excess
of 10 years. Mortgage-related securities include CMOs and participation
certificates in pools of mortgages. The average life of mortgage-related
securities varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments. The rate of such
prepayments, and hence the average life of the certificates, will be a function
of current market interest rates and current conditions in the relevant housing
markets. The impact of prepayment of mortgages is described under "Government
Mortgage-Backed Securities." Estimated average life will be determined by the
Adviser. Various independent mortgage-related securities dealers publish
estimated average life data using proprietary models, and in making such
determinations, the Adviser will rely on such data except to the extent such
data are deemed unreliable by the Adviser. The Adviser might deem data
unreliable which appeared to present a significantly different estimated average
life for a security than data relating to the estimated average life of
comparable securities as provided by other independent mortgage-related
securities dealers.
ASSET-BACKED SECURITIES. Asset-backed securities are debt securities backed by
pools of automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon. These
issues are normally traded over-the-counter and typically have a short to
intermediate maturity structure, depending on the paydown characteristics of the
underlying financial assets which are passed through to the security holder.
FUTURES AND OPTIONS
FUTURES CONTRACTS. The Funds may enter into futures contracts, options on
futures contracts, and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (the "CFTC"), a U.S. Government agency.
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The Funds may enter into contracts for the future delivery of securities and
futures contracts based on a specific security, class of securities or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is outstanding, cash payments based on the level of a specified
securities index.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. A futures
contract on a securities index is an agreement obligating either party to pay,
and entitling the other party to receive, while the contract is outstanding,
cash payments based on the level of a specified securities index. The
acquisition of put and call options on futures contracts will, respectively,
give a Fund the right (but not the obligation), for a specified price, to sell
or to purchase the underlying futures contract, upon exercise of the option, at
any time during the option period. Brokerage commissions are incurred when a
futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Initial margin deposits on futures contracts are customarily set at
levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on its margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for a Fund than might later be available in the market when it effects
anticipated purchases.
Each Fund will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase.
The Funds' ability to use futures trading effectively depends on several
factors. First, it is possible that there will not be a perfect price
correlation between a futures contract and its underlying stock index. Second,
it is possible that a lack of liquidity for futures contracts could exist in the
secondary market, resulting in an inability to close a futures position prior to
its maturity date. Third, the purchase of a futures contract involves the risk
that a Fund could lose more than the original margin deposit required to
initiate a futures transaction.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if a Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or
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<PAGE>
even highly correlated with the value of its portfolio securities, limiting a
Fund's ability to hedge effectively against interest rate and/or market risk and
giving rise to additional risks. There is no assurance of liquidity in the
secondary market for purposes of closing out futures positions.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Funds will not enter into
futures contract transactions for purposes other than bona fide hedging purposes
or as a substitute for the underlying securities to gain market exposure to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of a Fund's total assets. In
addition, a Fund will not enter into futures contracts to the extent that the
value of the futures contracts held would exceed 1/3 of the Fund's total assets.
Futures transactions will be limited to the extent necessary to maintain a
Fund's qualification as a regulated investment company.
The Trust has undertaken to restrict their futures contract trading as follows:
first, the Trust will not engage in transactions in futures contracts for
speculative purposes; second, the Trust will not market its funds to the public
as commodity pools or otherwise as vehicles for trading in the commodities
futures or commodity options markets; third, the Trust will disclose to all
prospective shareholders the purpose of and limitations on its funds' commodity
futures trading; fourth, the Trust will submit to the CFTC special calls for
information. Accordingly, registration as a Commodities Pool Operator with the
CFTC is not required.
In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the SEC. Under those requirements, where a Fund has a long position in a
futures contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or certain liquid
assets equal to the purchase price of the contract (less any margin on deposit).
For a short position in futures or forward contracts held by the Fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or certain liquid assets that,
when added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established). However, segregation of assets is
not required if a Fund "covers" a long position. For example, instead of
segregating assets, a Fund, when holding a long position in a futures contract,
could purchase a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by a Fund. In addition, where
a Fund takes short positions, or engages in sales of call options, it need not
segregate assets if it "covers" these positions. For example, where a Fund holds
a short position in a futures contract, it may cover by owning the instruments
underlying the contract. A Fund may also cover such a position by holding a call
option permitting it to purchase the same futures contract at a price no higher
than the price at which the short position was established. Where a Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. A Fund
could also cover this position by holding a separate call option permitting it
to purchase the same futures contract at a price no higher than the strike price
of the call option sold by a Fund.
In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Code's requirements for qualification as
a registered investment company and a Fund's intention to qualify as such.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge them. A Fund will minimize
the risk that they will be
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<PAGE>
unable to close out a futures contract by only entering into futures contracts
which are traded on national futures exchanges and for which there appears to be
a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by the Funds are only for hedging purposes, the
Adviser does not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. The Funds would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
Use of futures transactions by the Funds involve the risk of imperfect or no
correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It is also possible that
the Funds could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
the Funds of margin deposits in the event of bankruptcy of a broker with whom
the Funds have open positions in a futures contract or related option.
OPTIONS. The Funds may sell (write) call options which are traded on national
securities exchanges with respect to common stock in its portfolio. A Fund must
at all times have in its portfolio the securities which it may be obligated to
deliver if the option is exercised. A Fund may write call options in an attempt
to realize a greater level of current income than would be realized on the
securities alone. A Fund may also write call options as a partial hedge against
a possible stock market decline or to extend a holding period on a stock which
is under consideration for sale in order to create a long-term capital gain. In
view of their investment objective, a Fund generally would write call options
only in circumstances where the Adviser does not anticipate significant
appreciation of the underlying security in the near future or has otherwise
determined to dispose of the security. As the writer of a call option, a Fund
receives a premium for undertaking the obligation to sell the underlying
security at a fixed price during the option period, if the option is exercised.
So long as a Fund remains obligated as a writer of a call option, it forgoes the
opportunity to profit from increases in the market price of the underlying
security above the exercise price of the option, except insofar as the premium
represents such a profit. A Fund retains the risk of loss should the value of
the underlying security decline. A Fund may also enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call option
prior to the expiration of the option. Although the writing of call options only
on national securities exchanges increases the likelihood of a Fund's ability to
make closing purchase transactions, there is no assurance that a Fund will be
able to effect such transactions at any particular time or at any acceptable
price. The writing of call options could result in increases in a Fund's
portfolio turnover rate, especially during periods when market prices of the
underlying securities appreciate.
ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be sold
or disposed of, within seven business days, in the ordinary course of business
at approximately the prices at which they are valued.
Under the supervision of the Board, the Adviser determines the liquidity of the
Funds' investments and, through reports from the Adviser, the Trustees monitor
investments in illiquid instruments. In determining the liquidity of a Fund's
investments, the Adviser may consider various factors, including (1) the
frequency of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the
nature of the security (including any demand or tender features), and
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(5) the nature of the marketplace for trades (including the ability to assign or
offset the Funds' rights and obligations relating to the investment).
Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over the counter options, non-government stripped fixed-rate
mortgage-backed securities, and Restricted Securities.
Also, the Adviser may determine some securities to be illiquid.
However, with respect to over-the-counter options a Fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending on
the assets held to cover the option and the nature and terms of any agreement a
Fund may have to close out the option before expiration.
In the absence of market quotations, illiquid investments are priced at fair
value as determined in good faith by a committee appointed by the Trustees.
If through a change in values, net assets, or other circumstances, a Fund were
in a position where more than 15% of its net assets were invested in illiquid
securities, it would seek to take appropriate steps to protect liquidity.
SHORT SALES AGAINST-THE-BOX. The Funds will not make short sales of securities,
other than short sales "against-the-box." In a short sale against-the-box, a
Fund sells a security that it owns, or a security equivalent in kind and amount
to the security sold short that the Fund has the right to obtain, for delivery
at a specified date in the future. A Fund will enter into short sales
against-the-box to hedge against unanticipated declines in the market price of
portfolio securities or to defer an unrealized gain. If the value of the
securities sold short increases prior to the scheduled delivery date, a Fund
loses the opportunity to participate in the gain. Any gains realized by a Fund
on such sales will be recognized at the time the Fund enters into the short
sale.
RESTRICTED SECURITIES. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act, or in a registered public offering.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
it decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than prevailed when it decided to seek
registration of the shares.
INVESTMENT GRADE AND HIGH QUALITY SECURITIES. The Funds may invest in
"investment grade" obligations that are at the time of purchase within the three
highest rating categories assigned by an NRSRO or, if unrated, are obligations
that the Adviser determines to be of comparable quality. The applicable
securities ratings are described in the Appendix. "High-quality" short-term
obligations are those obligations which, at the time of purchase, (1) possess a
rating in one of the two highest ratings categories from at least one NRSRO (for
example, commercial paper rated "A-1" or "A-2" by S&P or "P-1" or "P-2" by
Moody's) or (2) are unrated by an NRSRO but are determined by the Adviser to
present minimal credit risks and to be of comparable quality to rated
instruments eligible for purchase by the Funds under guidelines adopted by the
Board.
PARTICIPATION INTERESTS. The Funds may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participation, beneficial interests in a trust, partnership interests or any
other form of indirect ownership. The Funds invest in these participation
interests, in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying securities.
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REFUNDING CONTRACTS. A Fund generally will not be obligated to pay the full
purchase price if it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated damages to the
issuer (currently 15-20% of the purchase price). A Fund may secure its
obligations under a refunding contract by depositing collateral or a letter of
credit equal to the liquidated damages provisions of the refunding contract.
When required by SEC guidelines, a Fund will place liquid assets in a segregated
custodial account equal in amount to its obligations under refunding contracts.
STANDBY COMMITMENTS. A Fund may enter into standby commitments, which are puts
that entitle holders to same-day settlement at an exercise price equal to the
amortized cost of the underlying security plus accrued interest, if any, at the
time of exercise. The Funds may acquire standby commitments to enhance the
liquidity of portfolio securities.
Ordinarily, the Funds may not transfer a standby commitment to a third party,
although they could sell the underlying municipal security to a third party at
any time. The Funds may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In the
latter case, the Funds would pay a higher price for the securities acquired,
thus reducing their yield to maturity.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the
Funds; and the possibility that the maturities of the underlying securities may
be different from those of the commitments.
VALUATION OF PORTFOLIO SECURITIES
The net asset value of each Fund is determined and the shares of each Fund are
priced as of the Valuation Time(s) on each Business Day. A "Business Day" is a
day on which the New York Stock Exchange, Inc. ("NYSE") is open for trading and
the Federal Reserve Bank of Cleveland is open and any other day (other than a
day on which no shares of a Fund are tendered for redemption and no order to
purchase any shares is received) during which there is sufficient trading in
portfolio instruments that a Fund's net asset value per share might be
materially affected. The NYSE will not open in observance of the following
holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas.
Investment securities held by the Funds are valued on the basis of security
valuations provided by an independent pricing service, approved by the Trustees,
which determines value by using information with respect to transactions of a
security, quotations from dealers, market transactions in comparable securities,
and various relationships between securities. Specific investment securities
which are not priced by the approved pricing service will be valued according to
quotations obtained from dealers who are market makers in those securities.
Investment securities with less than 60 days to maturity when purchased are
valued at amortized cost which approximates market value. Investment securities
not having readily available market quotations will be priced at fair value
using a methodology approved in good faith by the Trustees.
PERFORMANCE OF THE FUNDS
From time to time, the "standardized yield," "tax equivalent yield,"
"distribution return," "dividend yield," "average annual total return," "total
return," and "total return at net asset value" of an investment in each of the
Fund shares may be advertised. An explanation of how yields and total returns
are calculated for each class and the components of those calculations are set
forth below.
Yield and total return information may be useful to investors in reviewing the
Fund's performance. A Fund's advertisement of its performance must, under
applicable SEC rules, include the average annual total returns for each class of
shares of a Fund for the 1, 5, and 10-year period (or the life of the class, if
less) as of the most recently ended calendar quarter. This enables an investor
to compare the Fund's
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performance to the performance of other funds for the same periods. However, a
number of factors should be considered before using such information as a basis
for comparison with other investments. Investments in a Fund are not insured;
their yield and total return are not guaranteed and normally will fluctuate on a
daily basis. When redeemed, an investor's shares may be worth more or less than
their original cost. Yield and total return for any given past period are not a
prediction or representation by the Trust of future yields or rates of return on
its shares. The yield and total returns of the shares of the Funds are affected
by portfolio quality, portfolio maturity, the type of investments the Fund
holds, and operating expenses.
STANDARDIZED YIELDS. A Fund's "yield" (referred to as "standardized yield") for
a given 30-day period for the shares of the Fund is calculated using the
following formula set forth in rules adopted by the Commission that apply to all
funds that quote yields:
2[a-b +1^6-1]
Standardized Yield = ----
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense reimbursements).
c = the average daily number of shares of the Fund outstanding during the
30-day period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period,
adjusted for undistributed net investment income.
The standardized yield for a 30-day period may differ from its yield for any
other period. The Commission formula assumes that the standardized yield for a
30-day period occurs at a constant rate for a six-month period and is annualized
at the end of the six-month period. This standardized yield is not based on
actual distributions paid by the Fund to shareholders in the 30-day period, but
is a hypothetical yield based upon the net investment income from the Fund's
portfolio investments calculated for that period.
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time a Fund may quote a
"dividend yield" or a "distribution return." Dividend yield is based on the
share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share on the last day of the period.
When the result is annualized for a period of less than one year, the "dividend
yield" is calculated as follows:
Dividends + Number of days (accrual period) x 365
-------------------------------------------------
Dividend Yield = Max. Offering Price (last day of period
TAX EQUIVALENT YIELD. A Fund's tax equivalent yield is the rate an investor
would have to earn from a fully taxable investment after taxes to equal the
Fund's tax-free yield. Tax-equivalent yields are calculated by dividing the
Fund's yield by the result of one minus a stated combined federal and state tax
rate. (If only a portion of the Fund's yield was tax-exempt, only that portion
is adjusted in the calculation.)
TOTAL RETURNS. The "average annual total return" of a Fund, is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
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( ERV )^1n - 1 = Average Annual Total Return
-----
( P )
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns for the Funds, and for shares of the Funds, the
current maximum sales charge (as a percentage of the offering price) is deducted
from the initial investment ("P") (unless the return is shown at net asset
value, as discussed below). Total returns also assume that all dividends and net
capital gains distributions during the period are reinvested to buy additional
shares at net asset value per share, and that the investment is redeemed at the
end of the period.
OTHER PERFORMANCE COMPARISONS.
From time to time a Fund may publish the ranking of its performance or the
performance of its shares by Lipper Analytical Services, Inc. ("Lipper"), a
widely-recognized independent mutual fund monitoring service. Lipper monitors
the performance of regulated investment companies, including the Funds, and
ranks the performance of the Funds and their classes against all other funds in
similar categories, for both equity and fixed income funds. The Lipper
performance rankings are based on total return that includes the reinvestment of
capital gains distributions and income dividends but does not take sales charges
or taxes into consideration.
From time to time a Fund may publish the ranking of its performance or
performance of its shares by Morningstar, Inc., an independent mutual fund
monitoring service that ranks mutual funds, including the Funds, in broad
investment categories (domestic equity, international equity taxable bond,
municipal bond or other) monthly, based upon each fund's three, five, and
ten-year average annual total returns (when available) and a risk adjustment
factor that reflects fund performance relative to three-month U.S. Treasury bill
monthly returns. Such returns are adjusted for fees and sales loads. There are
five ranking categories with a corresponding number of stars: highest (5), above
average (4), neutral (3), below average (2), and lowest (1). Ten percent of the
funds, series or classes in an investment category receive five stars, 22.5%
receive four stars, 35% receive three stars, 22.5% receive two stars, and the
bottom 10% receive one star.
The total return on an investment made in a Fund may be compared with the
performance for the same period of one or more of the following indices: the
Consumer Price Index, the Shearson Lehman Government/Corporate Bond Index, the
Lehman Aggregate Bond Index, and the J.P. Morgan Government Bond Index. Other
indices may be used from time to time. The Consumer Price Index generally is
considered to be a measure of inflation. The Lehman Government/Corporate Bond
Index generally represents the performance of intermediate and long-term
government and investment grade corporate debt securities. The Lehman Aggregate
Bond Index measures the performance of U.S. corporate bond issues, U.S.
government securities and mortgage-backed securities. The J.P. Morgan Government
Bond Index generally represents the performance of government bonds issued by
various countries including the United States. The foregoing bond indices are
unmanaged indices of securities that do not reflect reinvestment of capital
gains or take investment costs into consideration, as these items are not
applicable to indices.
From time to time, the yields and the total returns of the Funds may be quoted
in and compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders. A
Fund also may include calculations in such communications that describe
hypothetical investment results. (Such performance examples are based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to
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time include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a Fund's investment are reinvested by being paid in additional
Fund shares, any future income or capital appreciation of a Fund would increase
the value, not only of the original Fund investment, but also of the additional
Fund shares received through reinvestment. As a result, the value of a Fund
investment would increase more quickly than if dividends or other distributions
had been paid in cash. A Fund may also include discussions or illustrations of
the potential investment goals of a prospective investor (including but not
limited to tax and/or retirement planning), investment management techniques,
policies or investment suitability of a Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund, as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Fund.) A Fund may also include in advertisements, charts, graphs
or drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to stock, bonds, and
Treasury bills, as compared to an investment in shares of a Fund, as well as
charts or graphs which illustrate strategies such as dollar cost averaging, and
comparisons of hypothetical yields of investment in tax-exempt versus taxable
investments. In addition, advertisements or shareholder communications may
include a discussion of certain attributes or benefits to be derived by an
investment in a Fund. Such advertisements or communications may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail therein. With proper authorization, a Fund may reprint
articles (or excerpts) written regarding a Fund and provide them to prospective
shareholders. Performance information with respect to the Funds is generally
available by calling 1-800-539-FUND.
Investors may also judge, and a Fund may at times advertise, the performance of
a Fund by comparing it to the performance of other mutual funds or mutual fund
portfolios with comparable investment objectives and policies, which performance
may be contained in various unmanaged mutual fund or market indices or rankings
such as those prepared by Dow Jones & Co., Inc., S&P, Lehman Brothers, Merrill
Lynch, and Salomon Brothers, and in publications issued by Lipper Analytical
Services, Inc. and in the following publications: Value Line Mutual Fund Survey,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, Ibbotson Associates, and U.S.A. Today. In addition to
yield information, general information about a Fund that appears in a
publication such as those mentioned above may also be quoted or reproduced in
advertisements or in reports to shareholders.
Advertisements and sales literature may include discussions of specifics of a
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis. Advertisements may also
include descriptive information about the investment adviser, including, but not
limited to, its status within the industry, other services and products it makes
available, total assets under management, and its investment philosophy.
When comparing yield, total return, and investment risk of an investment in
shares of a Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an investment
in shares of a Fund. For example, certificates of deposit may have fixed rates
of return and may be insured as to principal and interest by the FDIC, while a
Fund's returns will fluctuate and its share values and returns are not
guaranteed. U.S. Treasury securities are guaranteed as to principal and interest
by the full faith and credit of the U.S. Government.
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION
The NYSE holiday closing schedule indicated in the SAI under "Valuation of
Portfolio Securities" is subject to change.
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When the NYSE or the Federal Reserve Board of Cleveland is closed, or when
trading is restricted for any reason other than its customary weekend or holiday
closings, or under emergency circumstances as determined by the SEC to warrant
such action, the Funds will determine their net asset value at Valuation Time. A
Fund's net asset value may be affected to the extent that its securities are
traded on days that are not business days.
The Trust has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem
shares of the Funds solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund during any 90-day period for any one shareholder. The
remaining portion of the redemption may be made in securities or other property,
valued for this purpose as they are valued in computing the net asset value of
each class of the Fund. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes and may incur additional
costs as well as the associated inconveniences of holding and/or disposing of
such securities or other property.
Pursuant to Rule 11a-3 under the 1940 Act, the Funds are required to give
shareholders at least 60 days' notice prior to terminating or modifying a Fund's
exchange privilege. The 60-day notification requirement may, however, be waived
if (1) the only effect of a modification would be to reduce or eliminate an
administrative fee, redemption fee, or deferred sales charge ordinarily payable
at the time of exchange or (2) a Fund temporarily suspends the offering of
shares as permitted under the 1940 Act or by the SEC or because it is unable to
invest amounts effectively in accordance with its investment objective and
policies.
The Funds reserve the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in the Adviser's judgment,
a Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
PURCHASING SHARES.
REDUCED SALES CHARGE. Reduced sales charges are available for purchases of
$50,000 or more of shares of a Fund alone or in combination with purchases of
other shares of the Trust. To obtain the reduction of the sales charge, you or
your Investment Professional must notify the Transfer Agent at the time of
purchase whenever a quantity discount is applicable to your purchase.
In addition to investing at one time in any combination of shares of the Trust
in an amount entitling you to a reduced sales charge, you may qualify for a
reduction in the sales charge under the following programs:
COMBINED PURCHASES. When you invest in shares of the Trust for several accounts
at the same time, you may combine these investments into a single transaction if
purchased through one Investment Professional, and if the total is $50,000 or
more. The following may qualify for this privilege: an individual, or "company"
as defined in Section 2(a)(8) of the 1940 Act; an individual, spouse, and their
children under age 21 purchasing for his, her, or their own account; a trustee,
administrator or other fiduciary purchasing for a single trust estate or single
fiduciary account or for a single or a parent-subsidiary group of "employee
benefit plans" (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1947, as amended); and tax-exempt organizations under Section
501(c)(3) of the Code.
RIGHTS OF ACCUMULATION. "Rights of Accumulation" permit reduced sales charges on
future purchases of shares after you have reached a new breakpoint. You can add
the value of existing Trust shares held by you, your spouse, and your children
under age 21, determined at the previous day's net asset value at the close of
business, to the amount of your new purchase valued at the current offering
price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of shares of a
Fund alone or in combination with shares of certain other Victory Portfolios
within a 13-month period, you may obtain shares of the portfolios at the same
reduced sales charge as though the total quantity were invested in one lump sum,
by filing a non-binding Letter of Intent (the "Letter") within 90 days of the
24
<PAGE>
start of the purchases. You must start with a minimum initial investment of 5%
of the projected purchase amount. Each investment you make after signing the
Letter will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your Investment Professional must inform the Transfer Agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
You are not obligated to complete the additional purchases contemplated by a
Letter. If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
If you purchase more than the amount specified in the Letter and qualify for a
further sales charge reduction, the sales charge will be adjusted to reflect
your total purchase at the end of 13 months. Surplus funds will be applied to
the purchase of additional shares at the then current offering price applicable
to the total purchase.
EXCHANGING SHARES.
Shares of any Victory money market fund may be exchanged for shares of any of
the Trust, including Class A and Class B shares of the Trust where applicable.
Exchanges for Class A shares of the Trust may be subject to payment of a sales
charge.
Shares of a Fund may be exchanged for the same class of shares of any other fund
of the Trust. For example, an investor can exchange Class B shares of a Fund
only for Class B shares of another Fund. At present, not all Funds of the Trust
offer multiple classes of shares. If a Fund has only one class of shares that
does not have a class designation, that class is "Class A" for exchange
purposes. When Class B shares are redeemed to effect an exchange, the priorities
described in the Prospectus for the imposition of the Class B contingent
deferred sales charge ("CDSC") will be followed in determining the order in
which the shares are exchanged. Shareholders should take into account the effect
of any exchange on the applicability and rate of any CDSC that might be imposed
in the subsequent redemption of remaining shares. Shareholders owning shares of
both classes must specify whether they intend to exchange Class A or Class B
shares. If you do not make a selection, your exchange will be made in Class A
shares.
REDEEMING SHARES.
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of (1) Class A shares, or (2)
Class B shares that were subject to the Class B CDSC when redeemed, in Class A
shares of a Fund or any of the other series of the Trust into which shares of
the Fund are exchangeable as described below, at the net asset value next
computed after receipt by the Transfer Agent of the reinvestment order. No
service charge is currently made for reinvestment in shares of the Funds. The
shareholder must ask the Distributor for such privilege at the time of
reinvestment. Any capital gain that was realized when the shares were redeemed
is taxable, and reinvestment will not alter any capital gains tax payable on
that gain. If there has been a capital loss on the redemption, some or all of
the loss may not be tax deductible, depending on the timing and amount of the
reinvestment. Under the Code, if the redemption proceeds of Fund shares on which
a sales charge was paid are reinvested in shares of a Fund or another series of
the Trust within 90 days of payment of the sales charge, the shareholder's basis
in the shares of the Fund that were redeemed may not include the amount of the
sales charge paid. That would reduce the loss or increase the gain recognized
from redemption. The Funds may amend, suspend, or cease offering this
reinvestment privilege at any time as to shares redeemed after the date of such
amendment, suspension, or cessation. The reinstatement must be into an account
bearing the same registration.
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DIVIDENDS AND DISTRIBUTIONS
The Funds distribute substantially all of their net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent required for the Funds to qualify for favorable
federal tax treatment. Each Fund declares and pays income dividends monthly and
pays any net capital gains annually.
The amount of a Fund's distributions may vary from time to time depending on
market conditions, the composition of a Fund's portfolio, and expenses borne by
a Fund.
The net income of a Fund, from the time of the immediately preceding
determination thereof, shall consist of all interest income accrued on the
portfolio assets of the Fund, dividend income, if any, income from securities
loans, if any, and realized capital gains and losses on the Fund's assets, less
all expenses and liabilities of the Fund chargeable against income. Interest
income shall include discount earned, including both original issue and market
discount, on discount paper accrued ratably to the date of maturity. Expenses,
including the compensation payable to the Adviser, are accrued each day. The
expenses and liabilities of a Fund shall include those appropriately allocable
to the Fund as well as a share of the general expenses and liabilities of the
Trust in proportion to the Fund's share of the total net assets of the Trust.
TAXES
Information set forth in the Prospectus and this SAI that relates to federal
income taxation is only a summary of certain key federal tax considerations
generally affecting purchasers of shares of the Funds. The following is only a
summary of certain additional tax considerations generally affecting each Fund
and its shareholders that are not described in the Prospectus. No attempt is
made to present a complete explanation of the federal tax treatment of the Funds
or the implications to shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential purchasers of shares
of the Funds are urged to consult their tax advisers with specific reference to
their own tax circumstances. In addition, the tax discussion in the Prospectus
and this SAI is based on tax law in effect on the date of the Prospectus and
this SAI; such laws and regulations may be changed by legislative, judicial, or
administrative action, sometimes with retroactive effect.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a Fund is not
subject to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends, and other taxable ordinary income, net of expenses)
and capital gain net income (i.e., the excess of capital gains over capital
losses) that it distributes to shareholders, provided that it distributes at
least 90% of its investment company taxable income (i.e., net investment income
and the excess of net short-term capital gain over net long-term capital loss)
and at least 90% of its tax-exempt income (net of expenses allocable thereto)
for the taxable year (the "Distribution Requirement"), and satisfies certain
other requirements of the Code that are described below. Distributions by a Fund
made during the taxable year or, under specified circumstances, within twelve
months after the close of the taxable year, will be considered distributions of
income and gains for the taxable year and will therefore count toward
satisfaction of the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies (the "Income Requirement").
In general, gain or loss recognized by a Fund on the disposition of an asset
will be a capital gain or loss. In addition, gain will be recognized as a result
of certain constructive sales, including short sales "against the box." However,
gain recognized on the disposition of a debt obligation (including municipal
obligations) purchased by a Fund at a market discount (generally, at a price
less than its principal amount) will be treated as ordinary income to the
<PAGE>
extent of the portion of the market discount which accrued while the Fund held
the debt obligation.
In general, for purposes of determining whether capital gain or loss recognized
by a Fund on the disposition of an asset is long-term or short-term, the holding
period of the asset may be affected (as applicable, depending on the type of the
Fund involved) if (1) the asset is used to close a "short sale" (which includes
for certain purposes the acquisition of a put option) or is substantially
identical to another asset so used, (2) the asset is otherwise held by the Fund
as part of a "straddle" (which term generally excludes a situation where the
asset is stock and Fund grants a qualified covered call option (which, among
other things, must not be deep-in- the-money) with respect thereto), or (3) the
asset is stock and the Fund grants an in-the-money qualified covered call option
with respect thereto. In addition, a Fund may be required to defer the
recognition of a loss on the disposition of an asset held as part of a straddle
to the extent of any unrecognized gain on the offsetting position. Any gain
recognized by a Fund on the lapse of, or any gain or loss recognized by a Fund
from a closing transaction with respect to, an option written by the Fund will
be treated as a short-term capital gain or loss.
Further, the Code also treats as ordinary income a portion of the gain
attributable to a transaction where substantially all of the return realized is
attributable to the time value of a Fund's net investment in the transaction
and: (1) the transaction consists of the acquisition of property by the Fund and
a contemporaneous contract to sell substantially identical property in the
future; (2) the transaction is a straddle within the meaning of section 1092 of
the Code; (3) the transaction is one that was marketed or sold to the Fund on
the basis that it would have the economic characteristics of a loan but the
interest-like return would be taxed as capital gain; or (4) the transaction is
described as a conversion transaction in the Treasury Regulations. The amount of
such gain that is treated as ordinary income generally will not exceed the
amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the applicable federal long-term,
mid-term, or short-term rate, depending on the type of instrument at issue,
reduced by an amount equal to the sum of: (1) prior inclusions of ordinary
income items from the conversion transaction and (2) the capital interest on
acquisition indebtedness under Code section 263(g). Built-in losses will be
preserved where a Fund has a built-in loss with respect to property that becomes
a part of a conversion transaction. No authority exists that indicates that the
character of the income treated as ordinary under this rule will not pass
through to the Funds' shareholders.
Certain transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
Contracts." Section 1256 Contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such Section 1256 Contracts have not
terminated (by delivery, exercise, entering into a closing transaction, or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 Contracts is taken into account for
the taxable year together with any other gain or loss that was recognized
previously upon the termination of Section 1256
<PAGE>
Contracts during that taxable year. Any capital gain or loss for the taxable
year with respect to Section 1256 Contracts (including any capital gain or loss
arising as a consequence of the year-end deemed sale of such Section 1256
Contracts) generally is treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. A Fund, however, may elect not to have this
special tax treatment apply to Section 1256 Contracts that are part of a "mixed
straddle" with other investments of the Fund that are not Section 1256
Contracts.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after October
31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, a Fund must satisfy
an asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a Fund's taxable year,
at least 50% of the value of the Fund's assets must consist of cash and cash
items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (provided that, with respect to each
issuer, the Fund has not invested more than 5% of the value of the Fund's total
assets in securities of each such issuer and the Fund does not hold more than
10% of the outstanding voting securities of each such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option. For purposes
of asset diversification testing, obligations issued or guaranteed by certain
agencies or instrumentalities of the U.S. Government, such as the Federal
Agricultural Mortgage Corporation, the Farm Credit System Financial Assistance
Corporation, a Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, the Government National
Mortgage Corporation, and the Student Loan Marketing Association, are treated as
U.S. Government securities.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to 98% of its ordinary
taxable income for the calendar year and 98% of its capital gain net income for
the one-year period ended on
<PAGE>
October 31 of such calendar year (or, at the election of a regulated investment
company having a taxable year ending November 30 or December 31, for its taxable
year (a "taxable year election")). (Tax-exempt interest on municipal obligations
is not subject to the excise tax.) The balance of such income must be
distributed during the next calendar year. For the foregoing purposes, a
regulated investment company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
For purposes of calculating the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year and (2)
exclude foreign currency gains and losses and ordinary gains or losses arising
as a result of a PFIC mark-to-market election (or upon an actual disposition of
the PFIC stock subject to such election) incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that a Fund may in certain circumstances be required to liquidate portfolio
investments to make sufficient distributions to avoid excise tax liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but generally will not qualify for the 70% dividends-received
deduction for corporate shareholders.
A Fund may either retain or distribute to shareholders its net capital gain for
each taxable year. Each Fund currently intends to distribute any such amounts.
If net capital gain is distributed and designated as a capital gain dividend, it
will be taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his shares or whether such gain was
recognized by a Fund prior to the date on which the shareholder acquired his
shares. The Code provides, however, that under certain conditions only 50% (58%
for alternative minimum tax purposes) of the capital gain recognized upon a
Fund's disposition of domestic qualified "small business" stock will be subject
to tax.
Conversely, if a Fund elects to retain its net capital gain, the Fund will be
subject to tax thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as
<PAGE>
long-term capital gain, will receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain, and will increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.
The Funds intend to qualify to pay exempt-interest dividends by satisfying the
requirement that at the close of each quarter of the Funds' taxable year at
least 50% of each Fund's total assets consists of tax-exempt municipal
obligations. Distributions from a Fund will constitute exempt-interest dividends
to the extent of such Fund's tax-exempt interest income (net of expenses and
amortized bond premium). Exempt-interest dividends distributed to shareholders
of a Fund are excluded from gross income for federal income tax purposes.
However, shareholders required to file a federal income tax return will be
required to report the receipt of exempt-interest dividends on their returns.
Moreover, while exempt-interest dividends are excluded from gross income for
federal income tax purposes, they may be subject to alternative minimum tax
("AMT") in certain circumstances and may have other collateral tax consequences
as discussed below. Distributions by a Fund of any investment company taxable
income or of any net capital gain will be taxable to shareholders as discussed
above.
Alternative Minimum Tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for non-corporate taxpayers and 20% for corporate taxpayers on the excess of
the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. Exempt-interest dividends derived from certain "private activity"
municipal obligations issued after August 7, 1986 will generally constitute an
item of tax preference includable in AMTI for both corporate and non-corporate
taxpayers. In addition, exempt-interest dividends derived from all municipal
obligations, regardless of the date of issue, must be included in adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be included
in an individual shareholder's gross income and subject to federal income tax.
Further, a shareholder of a Tax-Exempt Fund is denied a deduction for interest
on indebtedness incurred or continued to purchase or carry shares of a
Tax-Exempt Fund. Moreover, a shareholder who is (or is related to) a
"substantial user" of a facility financed by industrial development bonds held
by a Tax-Exempt Fund will likely be subject to tax on dividends paid by the
Tax-Exempt Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions, property
and casualty insurance companies, and foreign corporations engaged in a trade or
business in the United States. Prospective investors should consult their own
advisers as to such consequences.
Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends, or capital gain dividends will be treated as a return
of capital to the extent of (and
<PAGE>
in reduction of) the shareholder's tax basis in his shares; any excess will be
treated as gain from the sale of the shares, as discussed below.
Distributions by a Fund will be treated in the manner described above regardless
of whether such distributions are paid in cash or reinvested in additional
shares of the Fund (or of another fund). Shareholders receiving a distribution
in the form of additional shares will be treated as receiving a distribution in
an amount equal to the fair market value of the shares received, determined as
of the reinvestment date. In addition, if the net asset value at the time a
shareholder purchases shares of a Fund reflects realized, but undistributed
income or gain, or unrealized appreciation in the value of the assets held by
the Fund, distributions of such amounts will be taxable to the shareholder in
the manner described above, although economically they constitute a return of
capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which they are made. However, dividends declared in
October, November or December of any year and payable to shareholders of record
on a specified date in such a month will be deemed to have been received by the
shareholders (and made by a Fund) on December 31 of such calendar year provided
such dividends are actually paid in January of the following year. Shareholders
will be advised annually as to the U.S. federal income tax consequences of
distributions made (or deemed made) during the year.
Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has failed to
provide a correct taxpayer identification number, (2) who is subject to backup
withholding for failure properly to report the receipt of interest or dividend
income, or (3) who has failed to certify to the Fund that it is not subject to
backup withholding or that it is an "exempt recipient" (such as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of shares of
a Fund in an amount equal to the difference between the proceeds of the sale or
redemption and the shareholder's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the shareholder purchases
other shares of a Fund within 30 days before or after the sale or redemption. In
general, any gain or loss arising from (or treated as arising from) the sale or
redemption of shares of a Fund will be considered capital gain or loss and will
be long-term capital gain or loss if the shares were held for longer than one
year. Long-term capital gain recognized by an individual shareholder will be
taxed at the lowest rates applicable to capital gains if the holder has held
such shares for more than 18 months at the time of the sale. However, any
capital loss arising from the sale or redemption of shares held for six months
or less will be disallowed to the extent of the amount of exempt-interest
dividends received with respect to such shares and (to the extent not
disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code Section 246(c)(3) and (4) (discussed above
in connection with the dividends-received deduction for corporations) generally
will apply in determining the holding period of
<PAGE>
shares. Capital losses in any year are deductible only to the extent of capital
gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a Fund, (2)
disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on such shares but shall be
treated as incurred on the acquisition of the subsequently acquired shares.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership
("foreign shareholder"), depends on whether the income from a Fund is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
such foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. Such a foreign
shareholder generally would be exempt from U.S. federal income tax on gains
realized on the sale of shares of a Fund, capital gain dividends and
exempt-interest dividends, and amounts retained by the Fund that are designated
as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then ordinary income dividends, capital
gain dividends, and any gains realized upon the sale of shares of the Fund will
be subject to U.S. federal income tax at the rates applicable to U.S. taxpayers.
In the case of foreign noncorporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund, including the
applicability of foreign taxes.
Effect of Future Legislation, Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court
<PAGE>
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect.
Rules of state and local taxation of ordinary income dividends, exempt-interest
dividends, and capital gain dividends from regulated investment companies may
differ from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences of
these and other state and local tax rules affecting investment in a Fund.
TRUSTEES AND OFFICERS
BOARD OF TRUSTEES.
Overall responsibility for management of the Trust rests with the Trustees, who
are elected by the shareholders of the Trust. The Trust is managed by the
Trustees in accordance with the laws of the State of Delaware. There are
currently eight Trustees, six of whom are not "interested persons" of the Trust
within the meaning of that term under the 1940 Act ("Independent Trustees"). The
Trustees, in turn, elect the officers of the Trust to supervise actively its
day-to-day operations.
29
<PAGE>
The Trustees of the Trust, their addresses, ages, and their principal
occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s)
Held with Principal Occupation
Name, Address and Age the Trust During Past 5 Years
--------------------- --------- -------------------
<S> <C> <C>
Roger Noall,* 63 Chairman From 1996 to present, Executive of KeyCorp; from 1995 c/o
Brighton Apt. 1603 and Trustee to 1996, General Counsel and
Secretary of KeyCorp; 8231 Bay Colony Drive from 1994 to 1996,
Senior Executive Vice Naples, Florida 34108 President and Chief
Administrative Officer of KeyCorp; from 1985 to 1994, Vice
Chairman of the Board and Chief Administrative Officer of
Society Corporation (now known as KeyCorp).
Leigh A. Wilson,** 53 President From 1989 to present, Chairman and Chief Executive Officer, New
New Century Care, Inc. and Trustee Century Care, Inc. (merchant bank); from 1995 to present,
53 Sylvan Road North Principal of New Century Living, Inc.; from 1989 to present,
Westport, CT 06880 Director of Chimney Rock Vineyard and Chimney Rock Winery.
Edward P. Campbell, 48 Trustee From October 1997 to present, President and Chief Executive
Nordson Corporation Officer of Nordson Corporation (manufacturer of application
28601 Clemens Road equipment); July 1996 to October 1997, President and Chief
Westlake, OH 44145 Operating Officer of Nordson Corporation; from March 1994 to
July 1996, Executive Vice President and Chief Operating Officer
of Nordson Corporation; from May 1988 to March 1994, Vice
President of Nordson Corporation; from 1987 to December 1994,
member of the Supervisory Committee of Society's Collective
Investment Retirement Fund; from May 1991 to August 1994,
Trustee, Financial Reserves Fund and from May 1993 to August
1994, Trustee, Ohio Municipal Money Market Fund. Currently,
Director of Nordson Corporation.
Dr. Harry Gazelle, 70 Trustee Retired radiologist, Drs. Hill and Thomas Corporation.
17822 Lake Road
Lakewood, OH 44107
Eugene J. McDonald, 65 Trustee From 1990 to present, Executive Vice President and Chief
Duke Management Company Investment Officer for Asset Management of Duke University and
2200 West Main Street President and CEO of Duke Management Company; Director of CCB
Suite 1000 Financial Corporation, Flag Group of Mutual Funds, DP Mann
Durham, N.C. 27705 Holdings, Greater Triangle Community Foundation, and NC Bar
Association Investment Committee.
- -----------------------
* Mr. Noall is an "interested person" and an "affiliated person of the Trust
** Mr. Wilson is deemed to be an "interested person" of the Trust under the
1940 Act solely by reason of his position as President.
30
<PAGE>
Dr. Thomas F. Morrissey, 64 Trustee 1995 Visiting Scholar, Bond University, Queensland, Australia;
Weatherhead School of Professor, Weatherhead School of Management, Case Western
Management Reserve University; from 1989 to 1995, Associate Dean of
Case Western Reserve Weatherhead School of Management; from 1987 to December 1994,
University Member of the Supervisory Committee of Society's Collective
10900 Euclid Avenue Investment Retirement Fund; from May 1991 to August 1994,
Cleveland, OH 44106-7235 Trustee, Financial Reserves Fund and from May 1993 to August
1994, Trustee, Ohio Municipal Money Market Fund.
Dr. H. Patrick Swygert, 55 Trustee President, Howard University; formerly President, State
Howard University University of New York at Albany; formerly, Executive Vice
2400 6th Street, N.W. President, Temple University.
Suite 402
Washington, D.C. 20059
Frank A. Weil, 67 Trustee Chairman and Chief Executive Officer of Abacus & Associates,
Abacus & Associates Inc. (private investment firm); Director and President of the
147 E. 47th Street Norman and Hickrill Foundations; Director, Trojan Industries.
New York, N.Y. 10017 Formerly United States Assistant Secretary of Commerce for
Industry and Trade.
</TABLE>
The Board presently has an Investment Policy Committee, a Business, Legal, and
Audit Committee, and a Board Process and Nominating Committee. The members of
the Investment Policy Committee are Messrs. Wilson and Morrissey, who will serve
until August 1999. The function of the Investment Policy Committee is to review
the existing investment policies of the Trust, including the levels of risk and
types of funds available to shareholders, and make recommendations to the
Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Trust's shareholders for their
consideration. The members of the Business, Legal and Audit Committee are
Messrs. Swygert (Chairman), Campbell, and Gazelle who will serve until August
1999. The function of the Business, Legal, and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters and to review
compliance and contract matters. Mr. Campbell is the Chairman of the Board
Process and Nominating Committee which nominates persons to serve as Independent
Trustees and Trustees to serve on committees of the Board.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.
Each Trustee (other than Mr. Wilson) receives an annual fee of $27,000 for
serving as Trustee of all the Funds of the Trust, and an additional per meeting
fee ($2,400 in person and $1,200 per telephonic meeting). Mr. Wilson receives an
annual fee of $33,000 for serving as President and Trustee for all of the funds
of the Trust, and an additional per meeting fee ($3,000 in person and $1,500 per
telephonic meeting). The Adviser pays the fees and expenses of Mr. Noall.
The following table indicates the estimated compensation received by each
Trustee from the Victory "Fund Complex"(1) for the 12 month period ended October
31, 1997.
<TABLE>
<CAPTION>
Pension or Retirement Estimated Annual Aggregate
Benefits Accrued as Benefits Upon Compensation from
Portfolio Expenses Retirement Victory Portfolios
------------------ ---------- ------------------
<S> <C> <C> <C>
Leigh A. Wilson................ -0- -0- $45,000
Robert G. Brown* -0- -0- $39,000
Edward P. Campbell............. -0- -0- $39,000
31
<PAGE>
Harry Gazelle.................. -0- -0- $39,000
Eugene J. McDonald**........... -0- -0- None
Thomas F. Morrissey............ -0- -0- $39,000
H. Patrick Swygert............. -0- -0- $36,000
Frank A. Weil**................ -0- -0- None
</TABLE>
* Mr. Brown resigned as of April 4, 1998.
** Mr. McDonald and Mr. Weil commenced service on the Board as of January
1, 1998 and, accordingly, received no compensation for the fiscal year
ended October 31, 1997.
OFFICERS.
The officers of the Trust, their ages, and principal occupations during the past
five years, are as follows:
<TABLE>
<CAPTION>
Position(s)
with the
Name and Age Trust Principal Occupation During Past 5 Years
------------ ----- ----------------------------------------
<S> <C> <C>
Leigh A. Wilson, 53 President See biographical information under "Board of Trustees" above.
and Trustee
William B. Blundin, 59 Vice Senior Vice President of BISYS Fund Services ("BISYS"); officer of
President other investment companies administered by BISYS; President and
Chief Executive Officer of Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and BNY Hamilton Distributors,
Inc., registered broker/dealers.
J. David Huber, 51 Vice Executive Vice President of BISYS.
President
Thomas E. Line, 30 Treasurer From December 1996 to present, employee of BISYS; from September
1989 to November 1996, Audit Senior Manager at KPMG Peat Marwick
LLP.
Michael J. Sullivan, 33 Secretary From December 1996 to present, Vice President of BISYS; from
February 1995 to November 1996, President, Performance Financial
Group (a mutual fund consulting firm); from January 1993 to January
1995, CEO, Manufacturing Company.
Jay G. Baris, 44 Assistant From 1994 to Present, Partner, Kramer, Levin, Naftalis & Frankel;
Secretary previously, Partner, Reid & Priest.
Alaina V. Metz, 31 Assistant From June 1995 to present, Chief Administrative and Regulatory
Secretary Services, BISYS; from May 1989 to June 1995, Supervisor, Mutual
Fund Legal Department, Alliance Capital Management.
</TABLE>
The mailing address of each of the officers of the Trust is 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
The officers of the Trust (other than Mr. Wilson) receive no compensation
directly from the Trust for performing the duties of their offices. BISYS
receives fees from the Trust as Administrator.
32
<PAGE>
As of May 31, 1998, the Trustees and officers as a group owned beneficially less
than 1% of all classes of outstanding shares of the Funds.
ADVISORY AND OTHER CONTRACTS
INVESTMENT ADVISER.
One of the Fund's most important contracts is with its investment adviser, KAM,
a New York corporation registered as an investment adviser with the SEC. KAM is
a wholly owned subsidiary of KeyBank National Association ("KeyBank"), a
wholly-owned subsidiary of KeyCorp. Affiliates of the Adviser manage
approximately $64 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals, and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127 Public
Square, Cleveland, Ohio 44114. As of March 31, 1998, KeyCorp had an asset base
of $73 billion, with banking offices in 13 states from Maine to Alaska, and
trust and investment offices in 14 states. KeyCorp is the resulting entity of a
merger in 1994 of Society Corporation, the bank holding company of which
KeyBank, formerly Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and leasing companies. KeyBank is the lead affiliate bank of
KeyCorp.
The Adviser will receive a monthly advisory fee at an annual rate of .55% and
.60% of the average daily net assets of the Short-Intermediate Fund and the Long
Fund, respectively.
THE INVESTMENT ADVISORY AGREEMENT.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Trust, on behalf of the Funds (the "Investment Advisory Agreement"),
provides that it will continue in effect as to the Funds for an initial two-year
term and for consecutive one-year terms thereafter, provided that such
continuance is approved at least annually by the Trustees or by vote of a
majority of the outstanding shares of each Fund (as defined under "Additional
Information - Miscellaneous"), and, in either case, by a majority of the
Trustees who are not parties to the Investment Advisory Agreement or interested
persons (as defined in the 1940 Act) of any party to the Investment Advisory
Agreement, by votes cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to any particular Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, by vote of the Board, or by the
Adviser. The Investment Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with the performance of services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its duties, or from reckless disregard by it of its duties
and obligations thereunder.
GLASS-STEAGALL ACT.
In 1971 the United States Supreme Court held in Investment Company Institute v.
Camp that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the
33
<PAGE>
Federal Reserve System (the "Board") issued a regulation and interpretation to
the effect that the Glass-Steagall Act and such decision: (a) forbid a bank
holding company registered under the Federal Bank Holding Company Act of 1956
(the "Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective shareholders of the Funds may include
descriptions of Key Trust Company of Ohio, N.A. ("Key Trust") and the Adviser
including, but not limited to, (1) descriptions of the operations of Key Trust
Company of Ohio, N.A. and the Adviser; (2) descriptions of certain personnel and
their functions; and (3) statistics and rankings related to the operations of
Key Trust and the Adviser.
PORTFOLIO TRANSACTIONS.
The Trust will not execute portfolio transactions through, acquire portfolio
securities issued by, make savings deposits in, or enter into repurchase or
reverse repurchase agreements with the Adviser, Key Trust or their affiliates,
or BISYS or its affiliates, and will not give preference to Key Trust's
correspondent banks or affiliates, or BISYS with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements.
Investment decisions for each Fund are made independently from those made for
the other Funds of the Trust or any other investment company or account managed
by the Adviser. Such other investment companies or accounts may also invest in
the securities in which the Funds invest, and the Funds may invest in similar
securities. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and any other Fund, investment
company or account, the transaction will be averaged as to price, and available
investments allocated as to amount, in a manner which the Adviser believes to be
equitable to such Funds, investment company or account. In some instances, this
investment procedure may affect the price paid or received by a Fund or the size
of the position obtained by the Fund in an adverse manner relative to the result
that would have been obtained if only that particular Fund had participated in
or been allocated such trades. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for the other funds of the Trust or for other investment
companies or accounts in order to obtain best execution. In making investment
recommendations for the Trust, the Adviser will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by a
Fund is a customer of the Adviser, its parents or subsidiaries or affiliates
and, in dealing with their commercial customers, the Adviser, their parents,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.
PORTFOLIO TURNOVER.
The turnover rate stated in the Prospectus for a Fund's investment portfolio is
calculated by dividing the lesser of a Fund's purchases or sales of portfolio
securities for the year by the monthly average value of the portfolio
securities. The calculation excludes all securities whose maturities, at the
time of acquisition, were one year or less.
34
<PAGE>
ADMINISTRATOR.
BISYS (or the "Administrator") serves as administrator to the Funds pursuant to
an administration agreement dated October 1, 1997 (the "Administration
Agreement"). The Administrator assists in supervising all operations of the
Funds (other than those performed by the Adviser under the Investment Advisory
Agreement), subject to the supervision of the Board.
For the services rendered to the Funds and related expenses borne by BISYS as
Administrator, each Fund pays BISYS an annual fee, computed daily and paid
monthly, at the following annual rates based on each Fund's average daily net
assets:
.15% for portfolio assets of $300 million and less,
.12% for the next $300 million through $600 million of portfolio
assets; and
.10% for portfolio assets greater than $600 million.
BISYS may periodically waive all or a portion of its fee with respect to any
Fund in order to increase the net income of one or more of the Funds available
for distribution to shareholders.
Unless sooner terminated, the Administration Agreement will continue in effect
as to each Fund for a period of two years, and for consecutive one-year terms
thereafter, provided that such continuance is ratified at least annually by the
Trustees or by vote of a majority of the outstanding shares of each Fund, and in
either case by a majority of the Trustees who are not parties to the
Administration Agreement or interested persons (as defined in the 1940 Act) of
any party to the Administration Agreement, by votes cast in person at a meeting
called for such purpose.
The Administration Agreement provides that BISYS shall not be liable for any
error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by it of its
obligations and duties thereunder.
Under the Administration Agreement, BISYS assists in each Fund's administration
and operation, including providing statistical and research data, clerical
services, internal compliance and various other administrative services,
including among other responsibilities, forwarding certain purchase and
redemption requests to the Transfer Agent, participation in the updating of the
prospectus, coordinating the preparation, filing, printing and dissemination of
reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, BISYS may delegate all or any part of its
responsibilities thereunder.
SUB-ADMINISTRATOR.
KAM serves as sub-administrator to the Funds pursuant to a sub-administration
agreement dated October 1, 1997 (the "Sub-Administration Agreement"). As
sub-administrator, KAM assists the Administrator in all aspects of the
operations of the Funds, except those performed by KAM under its Investment
Advisory Agreement.
For services provided under the Sub-Administration Agreement, the Administrator
pays KAM a fee, with respect to each Fund, calculated at the annual rate of up
to five one-hundredths of one percent (.05%) of such Fund's average daily net
assets. Except as otherwise provided in the Administration Agreement, KAM shall
pay all expenses incurred by it in performing its services and duties as
sub-administrator. Unless sooner terminated, the Sub-Administration Agreement
will continue in effect as to each Fund for a period of two years, and for
consecutive one-year terms thereafter, unless written notice not to renew is
given by the non-renewing party.
Under the Sub-Administration Agreement, KAM's duties include maintaining office
facilities, furnishing statistical and research data, compiling data for various
state and federal filings by the Funds, assisting in
35
<PAGE>
mailing and filing the Funds' annual and semi-annual reports to shareholders,
providing support for board meetings, and arranging for the maintenance of books
and records and providing the office facilities necessary to carry out the
duties thereunder.
DISTRIBUTOR.
BISYS serves as distributor (the "Distributor") for the continuous offering of
the shares of the Funds pursuant to a Distribution Agreement between the
Distributor and the Trust. Unless otherwise terminated, the Distribution
Agreement will remain in effect with respect to each Fund for two years, and
thereafter for consecutive one-year terms, provided that it is approved at least
annually (1) by the Trustees or by the vote of a majority of the outstanding
shares of each Fund, and (2) by the vote of a majority of the Trustees of the
Trust who are not parties to the Distribution Agreement or interested persons of
any such party, cast in person at a meeting called for the purpose of voting on
such approval. The Distribution Agreement will terminate in the event of its
assignment, as defined under the 1940 Act.
TRANSFER AGENT.
State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Funds. Boston Financial Data Services, Inc. ("BFDS") serves as the
dividend disbursing agent and servicing agent for the Funds, pursuant to a
Transfer Agency and Service Agreement. Under its agreement with the Trust, State
Street has agreed (1) to issue and redeem shares of the Trust; (2) to address
and mail all communications by the Trust to its shareholders, including reports
to shareholders, dividend and distribution notices, and proxy material for its
meetings of shareholders; (3) to respond to correspondence or inquiries by
shareholders and others relating to its duties; (4) to maintain shareholder
accounts and certain sub-accounts; and (5) to make periodic reports to the
Trustees concerning the Trust's operations.
SHAREHOLDER SERVICING PLAN.
Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser) are for administrative
support services to customers who may from time to time beneficially own shares,
which services may include: (1) aggregating and processing purchase and
redemption requests for shares from customers and transmitting promptly net
purchase and redemption orders to our distributor or transfer agent; (2)
providing customers with a service that invests the assets of their accounts in
shares pursuant to specific or pre-authorized instructions; (3) processing
dividend and distribution payments on behalf of customers; (4) providing
information periodically to customers showing their positions in shares; (5)
arranging for bank wires; (6) responding to customer inquiries; (7) providing
subaccounting with respect to shares beneficially owned by customers or
providing the information to the Funds as necessary for subaccounting; (8) if
required by law, forwarding shareholder communications from us (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to customers; (9) forwarding to customers proxy
statements and proxies containing any proposals which require a shareholder
vote; and (10) providing such other similar services as we may reasonably
request to the extent permitted under applicable statutes, rules or regulations.
OTHER SERVICING PLANS.
In connection with certain servicing plans, the Funds had made certain
commitments that provide: (i) for one or more brokers to accept on the Funds'
behalf, purchase and redemption orders; (ii) authorize such brokers to designate
other intermediaries to accept purchase and redemption orders on the Funds'
behalf; (iii) that the Funds will be deemed to have received a purchase or
redemption order when an authorized broker or, if applicable, a broker's
authorized designee, accepts the order; and (iv) that customer orders will be
priced at the Funds' Net Asset Value next computed after they are accepted by an
authorized broker or the broker's authorized designee.
36
<PAGE>
DISTRIBUTION AND SERVICE PLAN.
The Trust, on behalf of the Funds has adopted a Distribution and Service Plan
(the "Plan") pursuant to Rule 12b-1 under the 1940 Act (the "Rule 12b-1"). Rule
12b-1 provides in substance that a mutual fund may not engage directly or
indirectly in financing any activity that is primarily intended to result in the
sale of shares of such mutual fund except pursuant to a plan adopted by the fund
under Rule 12b-1. The Board has adopted the Plan to allow the Adviser and the
Distributor to incur certain expenses that might be considered to constitute
indirect payment by the Funds of distribution expenses. No separate payments are
authorized to be made by the Funds under the Plan. Under the Plan, if a payment
to the Adviser of management fees or to the Distributor of administrative fees
should be deemed to be indirect financing by the Trust of the distribution of
their shares, such payment is authorized by the Plan.
The Plan specifically recognizes that the Adviser or the Distributor, directly
or through an affiliate, may use its fee revenue, past profits, or other
resources, without limitation, to pay promotional and administrative expenses in
connection with the offer and sale of shares of the Funds. In addition, the Plan
provides that the Adviser and the Distributor may use their respective
resources, including fee revenues, to make payments to third parties that
provide assistance in selling the Funds' shares, or to third parties, including
banks, that render shareholder support services.
The Plan has been approved by the Board. As required by the Rule, the Trustees
carefully considered all pertinent factors relating to the implementation of the
Plan prior to its approval, and have determined that there is a reasonable
likelihood that the Plan will benefit the Funds and their shareholders. In
particular, the Trustees noted that the Plan does not authorize payments by the
Funds other than the advisory and administrative fees authorized under the
investment advisory and administration agreements. To the extent that the Plan
gives the Adviser or the Distributor greater flexibility in connection with the
distribution of shares of the Funds, additional sales of the Funds' shares may
result. Additionally, certain shareholder support services may be provided more
effectively under the Plan by local entities with whom shareholders have other
relationships.
FUND ACCOUNTANT.
BISYS Fund Services Ohio, Inc. ("BISYS, Inc.") serves as fund accountant for the
all of the Funds pursuant to a fund accounting agreement with the Trust dated
May 31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the
Trust, BISYS, Inc. calculates each Fund's net asset value, the dividend and
capital gain distribution, if any, and the yield. BISYS, Inc. also provides a
current security position report, a summary report of transactions and pending
maturities, a current cash position report, and maintains the general ledger
accounting records for the Funds. Under the Fund Accounting Agreement, BISYS,
Inc. is entitled to receive annual fees of .03% of the first $100 million of the
Fund's daily average net assets, .02% of the next $100 million of the Fund's
daily average net assets, and .01% of the Fund's remaining daily average net
assets. These annual fees are subject to a minimum monthly assets charge of
$2,500 per taxable fund, $2,917 per tax-free fund and $3,333 per international
fund and does not include out-of-pocket expenses or multiple class charges of
$833 per month assessed for each class of shares after the first class.
CUSTODIAN.
Cash and securities owned by each of the Victory Portfolios are held by Key
Trust as custodian pursuant to a Custodian Agreement dated August 1, 1996. Under
this Agreement, Key Trust (1) maintains a separate account or accounts in the
name of each respective fund; (2) makes receipts and disbursements of money on
behalf of each Fund; (3) collects and receives all income and other payments and
distributions on account of portfolio securities; (4) responds to correspondence
from security brokers and others relating to its duties; and (5) makes periodic
reports to the Trustees concerning the Trust's operations. Key Trust may, with
the approval of a fund and at the custodian's own expense, open and maintain a
sub-custody account or accounts on behalf of a fund, provided that Key Trust
shall remain liable for the performance of all of its duties under the Custodian
Agreement.
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<PAGE>
INDEPENDENT ACCOUNTANTS.
Coopers & Lybrand L.L.P. serves as the Trust's auditors. Coopers & Lybrand
L.L.P.'s address is 100 East Broad Street, Columbus, Ohio 43215.
LEGAL COUNSEL.
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022 is
the counsel to the Trust.
EXPENSES.
The Funds bear the following expenses relating to its operations: taxes,
interest, brokerage fees and commissions, fees of the Trustees, SEC fees, state
securities qualification fees, costs of preparing and printing prospectuses for
regulatory purposes and for distribution to current shareholders, outside
auditing and legal expenses, advisory and administration fees, fees and
out-of-pocket expenses of the custodian and transfer agent, certain insurance
premiums, costs of maintenance of the fund's existence, costs of shareholders'
reports and meetings, and any extraordinary expenses incurred in the Funds'
operation.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES.
The Trust is a Delaware business trust. The Delaware Trust Instrument authorizes
the Trustees to issue an unlimited number of shares, which are units of
beneficial interest, without par value. The Trust presently has 36 series of
shares, which represent interests in the following funds and their respective
classes, if any:
Balanced Fund
Class A Shares
Class B Shares
Convertible Securities Fund
Diversified Stock Fund
Class A Shares
Class B Shares
Equity Income Fund
Federal Money Market Fund
Select Shares
Investor Shares
Financial Reserves Fund
Fund For Income
Government Mortgage Fund
Growth Fund
Institutional Money Market Fund
Select Shares
Investor Shares
Intermediate Income Fund
International Growth Fund
Class A Shares
Class B Shares
Investment Quality Bond Fund
Lakefront Fund
LifeChoice Conservative Investor Fund
LifeChoice Growth Investor Fund
LifeChoice Moderate Investor Fund
Limited Term Income Fund
Maine Municipal Bond Fund (Short-Term)
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<PAGE>
Maine Municipal Bond Fund (Intermediate)
Michigan Municipal Bond Fund
National Municipal Bond Fund
Class A Shares
Class B Shares
National Municipal Bond Fund (Long)
National Municipal Bond Fund (Short-Intermediate)
New York Tax-Free Fund
Class A Shares
Class B Shares
Ohio Municipal Bond Fund
Ohio Municipal Money Market Fund
Ohio Regional Stock Fund
Class A Shares
Class B Shares
Prime Obligations Fund
Real Estate Investment Fund
Special Growth Fund
Special Value Fund
Class A Shares
Class B Shares
Stock Index Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund
Select Shares
Investor Shares
Value Fund
The Trust's Trust Instrument authorizes the Trustees to divide or redivide any
unissued shares of the Trust into one or more additional series by setting or
changing in any one or more aspects their respective preferences, conversion or
other rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectus and this SAI, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
the Trust, shares of a fund are entitled to receive the assets available for
distribution belonging to the fund, and a proportionate distribution, based upon
the relative asset values of the respective funds, of any general assets not
belonging to any particular fund which are available for distribution.
Shares of the Trust are entitled to one vote per share (with proportional voting
for fractional shares) on such matters as shareholders are entitled to vote.
Shareholders vote as a single class on all matters except (1) when required by
the 1940 Act, shares shall be voted by individual series, and (2) when the
Trustees have determined that the matter affects only the interests of one or
more series, then only shareholders of such series shall be entitled to vote
thereon. There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees have been elected by the shareholders, at which time the Trustees then
in office will call a shareholders' meeting for the election of Trustees. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., persons who have been shareholders for at least six months, and who hold
shares having a net asset value of at least $25,000 or constituting 1% of the
outstanding shares) stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust will provide a list
of shareholders or disseminate appropriate materials (at the expense of the
39
<PAGE>
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each fund of
the Trust affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a fund will be required in
connection with a matter, a fund will be deemed to be affected by a matter
unless it is clear that the interests of each fund in the matter are identical,
or that the matter does not affect any interest of the fund. Under Rule 18f-2,
the approval of an investment advisory agreement or any change in investment
policy would be effectively acted upon with respect to a fund only if approved
by a majority of the outstanding shares of such fund. However, Rule 18f-2 also
provides that the ratification of independent accountants, the approval of
principal underwriting contracts, and the election of Trustees may be
effectively acted upon by shareholders of the Trust voting without regard to
series.
SHAREHOLDER AND TRUSTEE LIABILITY.
The Trust is organized as a Delaware business trust. The Delaware Business Trust
Act provides that a shareholder of a Delaware business trust shall be entitled
to the same limitation of personal liability extended to shareholders of
Delaware corporations, and the Delaware Trust Instrument provides that
shareholders of the Trust shall not be liable for the obligations of the Trust.
The Delaware Trust Instrument also provides for indemnification out of the trust
property of any shareholder held personally liable solely by reason of his or
her being or having been a shareholder. The Delaware Trust Instrument also
provides that the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Trust, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Trust Instrument states further that no Trustee, officer, or agent of the
Trust shall be personally liable in connection with the administration or
preservation of the assets of the funds or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Trust Instrument also
provides that all persons having any claim against the Trustees or the Trust
shall look solely to the assets of the Trust for payment.
MISCELLANEOUS.
As used in the Prospectus and in this SAI, "assets belonging to a fund" (or
"assets belonging to the Fund") means the consideration received by the Trust
upon the issuance or sale of shares of a Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale, exchange, or liquidation of such investments, and
any funds or payments derived from any reinvestment of such proceeds and any
general assets of the Trust, which general liabilities and expenses are not
readily identified as belonging to a particular Fund that are allocated to that
Fund by the Trustees. The Trustees may allocate such general assets in any
manner they deem fair and equitable. It is anticipated that the factor that will
be used by the Trustees in making allocations of general assets to a particular
fund of the Trust will be the relative net asset value of each respective fund
at the time of allocation. Assets belonging to a particular Fund are charged
with the direct liabilities and expenses in respect of that Fund, and with a
share of the general liabilities and expenses of each of the Funds not readily
identified as belonging to a particular Fund, which are allocated to each Fund
in accordance with its proportionate share of the net asset values of the Trust
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Trust to a particular fund will be
determined by the Trustees and will be in accordance with generally accepted
accounting principles. Determinations by the Trustees as to the timing of the
allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular fund are
conclusive.
40
<PAGE>
As used in the Prospectus and in this SAI, a "vote of a majority of the
outstanding shares" of a Fund means the affirmative vote of the lesser of (a)
67% or more of the shares of the Fund present at a meeting at which the holders
of more than 50% of the outstanding shares of the Fund are represented in person
or by proxy, or (b) more than 50% of the outstanding shares of the Fund.
The Trust is registered with the SEC as an open-end management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Trust.
The Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee.
THE PROSPECTUS AND THIS SAI ARE NOT AN OFFERING OF THE SECURITIES DESCRIBED IN
THESE DOCUMENTS IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO
SALESMAN, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THE PROSPECTUS AND THIS SAI.
41
<PAGE>
APPENDIX
DESCRIPTION OF SECURITY RATINGS.
The NRSROs that may be utilized by the Adviser with regard to portfolio
investments for the Funds include Moody's, S&P, Duff & Phelps, Inc. ("Duff"),
Fitch, IBCA Limited and its affiliate, IBCA Inc. (collectively, "IBCA"), and
Thomson BankWatch, Inc. ("TBW"). Set forth below is a description of the
relevant ratings of each such NRSRO. The NRSROs that may be utilized by the
Adviser and the description of each NRSRO's ratings is as of the date of this
SAI, and may subsequently change.
LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements - their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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<PAGE>
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only slightly
more than for risk-free U.S. Treasury debt.
AA+, AA, AA-. High credit quality protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic or financial conditions are unlikely to increase
investment risk significantly.
AA. Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic, or financial conditions may increase investment
risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is strong, although adverse
changes in business, economic or financial conditions may lead to increased
investment risk.
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
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Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- - Leading market positions in well-established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
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Duff 3. Satisfactory liquidity and other protection factors qualify issue as to
investment grade.
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely repayment.
A2. Obligations supported by a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in business, economic or
financial conditions.
SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
SHORT-TERM DEBT RATINGS
TBW ratings are based upon a qualitative and quantitative analysis of all
segments of the organization including, where applicable, holding company and
operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell securities of any
of these companies. Further, TBW does not suggest specific investment criteria
for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
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The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
46
<PAGE>
Registration Statement
of
THE VICTORY PORTFOLIOS
on
Form N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A: None.
Included in Part B: None.
(b) Exhibits:
EX-99.B1 Delaware Trust Instrument dated December 6, 1995, as amended.(9)
EX-99.B2 By-Laws adopted December 6, 1995.(1)
EX-99.B3 None.
EX-99.B4 None.
EX-99.B5(a) Investment Advisory Agreement dated as of March 1, 1997, between
the Registrant and Key Asset Management Inc, with Schedule A
amended as of March 2, 1998.(12)
(b) Investment Advisory Agreement dated March 1, 1997 between the
Registrant and Key Asset Management Inc. regarding Lakefront Fund
and Real Estate Investment Fund.(6)
(c) Investment Sub-Advisory Agreement dated March 1, 1997 between Key
Asset Management Inc. and Lakefront Capital Investors, Inc.
regarding the Lakefront Fund.(6)
(d) Form of Investment Advisory Agreement between the Registrant and
Key Asset Management Inc. regarding the International Growth
Fund.(10)
(e) Portfolio Management Agreement between the Key Asset Management
Inc. and IndoCam International Services, S.A. regarding the
International Growth Fund.(12)
<PAGE>
(f) Form of Investment Advisory Agreement between the Registrant and
Key Asset Management Inc. regarding the Maine Municipal Bond Fund
(Intermediate), Maine Municipal Bond Fund (Short-Term), Michigan
Municipal Bond Fund, Equity Income Fund, National Municipal Bond
Fund (Short-Intermediate) and National Municipal Bond Fund
(Long).(12)
EX-99.B6(a) Distribution Agreement dated June 1, 1996 between the Registrant
and BISYS Fund Services Limited Partnership, with Schedule I
amended as of March 2, 1998.(12)
(b) Form of Broker-Dealer Agreement.(2)
EX-99.B7 None.
EX-99.B8(a) Amended and Restated Mutual Fund Custody Agreement dated August
1, 1996, with Schedule A revised as of March 1998 and Attachment
B revised as of March 2, 1998.(12)
(b) Custody Agreement dated May 31, 1996 between Morgan Stanley Trust
Company and Key Trust Company of Ohio. (3)
EX-99.B9(a) Administration Agreement dated October 1, 1997 between the
Registrant and BISYS Fund Services Limited Partnership, with
Schedule I amended as of March 2, 1998 and Schedule II-B amended
as of March 2, 1998.(12)
(b) Sub-Administration Agreement dated October 1, 1997 between BISYS
Fund Services Limited Partnership d/b/a BISYS Fund Services and
Key Asset Management Inc., with Schedule A amended as of March 2,
1998.(12)
(c) Transfer Agency and Service Agreement dated July 12, 1996 between
the Registrant and State Street Bank and Trust Company, with
Schedule A revised as of August 1, 1996 and March 2, 1998.(12)
(d) Fund Accounting Agreement dated May 31, 1995 between the
Registrant and BISYS Fund Services Ohio, Inc., with Amended
Schedule A as of February 19, 1997 and March 2, 1998 and Schedule
B as of March 2, 1998.(12)
(e) Shareholder Servicing Plan dated June 5, 1995 with Schedule I
amended as of March 2, 1998.(12)
(f) Form of Shareholder Servicing Agreement.(1)
EX-99.B10 Opinion of Counsel was filed with Registrant's Rule 24f-2 Notice
in respect of the period ending October 31, 1996, submitted
electronically on December 23, 1996, accession number
0000950152-96-006841.
EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel. (12)
(b) Consent of Coopers & Lybrand L.L.P.(12)
C-2
<PAGE>
EX-99.B12 None.
EX-99.B13(a) Purchase Agreement dated November 12, 1986 between Registrant and
Physicians Insurance Company of Ohio is incorporated herein by
reference to Exhibit 13 to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A filed on
November 13, 1986.
(b) Purchase Agreement dated October 15, 1989 is incorporated herein
by reference to Exhibit 13(b) to Post-Effective Amendment No. 7
to the Registrant's Registration Statement on Form N-1A filed on
December 1, 1989.
(c) Purchase Agreement is incorporated herein by reference to Exhibit
13(c) to Post- Effective Amendment No. 7 to the Registrant's
Registration Statement on Form N- 1A filed on December 1, 1989.
EX-99.B14 None.
EX-99.B15(a) Distribution and Service Plan dated June 5, 1995 for the Class A
Shares of the Registrant with Schedule I amended as of March 1,
1997 and March 2, 1998.(12)
(b) Distribution Plan dated June 5, 1995 for Class B Shares of the
Registrant with Schedule I amended as of February 1, 1996.(12)
EX-99.B16(a) Forms of computation of performance quotation are incorporated
herein by reference to Exhibit 16 to Post-Effective Amendment No.
19 to the Registrant's Registration Statement on Form N-1A filed
on December 23, 1994.
(b) Forms of computation of performance quotation for the Class B
shares of the Balanced Fund, Diversified Stock Fund,
International Growth Fund, Ohio Regional Stock Fund and Special
Value Fund.(4)
(c) Forms of computation of performance quotation for the Lakefront
Fund and U. S. Government Obligations Fund - Investor Class.(5)
(d) Computation of performance quotation for the Real Estate
Investment Fund.(7)
(e) Computation of performance quotation for U.S. Government
Obligations Fund -Investor Shares.(9)
EX-99.B17 None.
EX-99.B18 Amended and Restated Rule 18f-3 Multi-Class Plan as of December
3, 1997.(11)
C-3
<PAGE>
EX-99.B19(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. (9)
- --------------------------------
(1) Filed as an Exhibit to Post-Effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-1A filed electronically on December 28,
1995, accession number 0000950152-95-003085.
(2) Filed as an Exhibit to Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A filed electronically on January 31,
1996, accession number 0000922423-96-000047.
(3) Filed as an Exhibit to Post-Effective Amendment No. 30 to the Registrant's
Registration Statement on Form N-1A filed electronically on July 30, 1996,
accession number 0000922423-96- 000344.
(4) Filed as an Exhibit to Post-Effective Amendment No. 31 to the Registrant's
Registration Statement on Form N-1A filed electronically on February 7,
1997, accession number 0000922423- 97-000066.
(5) Filed as an Exhibit to Post-Effective Amendment No. 32 to the Registrant's
Registration Statement on Form N-1A filed electronically on June 27, 1997,
accession number 0000922423-97- 000530.
(6) Filed as an Exhibit to Post-Effective Amendment No. 34 to the Registrant's
Registration Statement on Form N-1A filed electronically on December 12,
1997, accession number 0000922423-97- 001015.
(7) Filed as an Exhibit to Post-Effective Amendment No. 35 to the Registrant's
Registration Statement on Form N-1A filed electronically on December 17,
1997, accession number 0000922423-97- 001022.
(8) Filed as an Exhibit to Pre-Effective Amendment No. 2 to the 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. 36 to the Registrant's
Registration Statement on Form N-1A filed electronically on February 26,
1998, accession number 0000922423-98-000264.
(10) Filed as an Exhibit to Post-Effective Amendment No. 38 to the Registrant's
Registration Statement on Form N-1A filed electronically on March 31, 1998,
accession number 0000922423-98-000358.
(11) Filed as an Exhibit to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-14 filed electronically on June 9, 1998,
accession number 0000922423-98-000589.
(12) Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of March 31, 1998 the number of record holders of each Fund of the Registrant
were as follows:
Number of
Title of Fund Record Holders
------------- --------------
Balanced Fund
Class A Shares 1,470
Class B Shares 351
Diversified Stock Fund
Class A Shares 15,108
Class B Shares 4,040
Financial Reserves Fund 139
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<PAGE>
Fund For Income 1,695
Government Mortgage Fund 332
Growth Fund 584
Intermediate Income Fund 367
International Growth Fund
Class A Shares 1,403
Class B Shares 66
Institutional Money Market Fund
Select Class Shares 30
Investor Class Shares 51
Investment Quality Bond Fund 2,568
Lakefront Fund 74
Limited Term Income Fund 617
National Municipal Bond Fund
Class A Shares 1,613
Class B Shares 78
New York Tax-Free Fund
Class A Shares 587
Class B Shares 110
Ohio Municipal Bond Fund 419
Ohio Municipal Money Market Fund 151
Ohio Regional Stock Fund
Class A Shares 1,262
Class B Shares 129
Prime Obligations Fund 1,312
Real Estate Investment Fund 218
Special Growth Fund 763
Special Value Fund
Class A Shares 5,115
Class B Shares 279
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<PAGE>
Stock Index Fund 1,458
Tax Free Money Market Fund 96
U.S. Government Obligations Fund
Select Class Shares 403
Investor Class Shares 128
Value Fund 291
Federal Money Market Fund - Investor 669
Convertible Securities Fund 1,424
LifeChoice Conservative Investor Fund 13
LifeChoice Moderate Investor Fund 18
LifeChoice Growth Investor Fund 26
Maine Municipal Bond Fund (Intermediate) 0
Maine Municipal Bond Fund (Short-Term) 0
Michigan Municipal Bond Fund 0
Equity Income Fund 0
National Municipal Bond Fund (Short-Intermediate) 0
National Municipal Bond Fund (Long) 0
Item 27. Indemnification
Article X, Section 10.02 of the Registrant's Delaware Trust
Instrument, as amended, incorporated herein as Exhibit 99.B1 hereto,
provides for the indemnification of Registrant's Trustees and
officers, as follows:
"SECTION 10.02 INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in
Subsection 10.02(b):
(i) every person who is, or has been, a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust to the fullest extent permitted by law
against liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding
in which he becomes involved as a party
C-6
<PAGE>
or otherwise by virtue of his being or having been a Trustee or
officer and against amounts paid or incurred by him in the
settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while in
office or thereafter, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or
its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office or (B) not to have acted in good faith in the
reasonable belief that his action was in the best interest of the
Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office, (A) by the court
or other body approving the settlement; (B) by at least a majority
of those Trustees who are neither Interested Persons of the Trust
nor are parties to the matter based upon a review of readily
available facts (as opposed to a full trial-type inquiry); or (C) by
written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry).
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable,
shall not be exclusive of or affect any other rights to which any
Covered Person may now or hereafter be entitled, shall continue as
to a person who has ceased to be a Covered Person and shall inure to
the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to
indemnification to which Trust personnel, other than Covered
Persons, and other persons may be entitled by contract or otherwise
under law.
(d) Expenses in connection with the preparation and presentation of
a defense to any claim, action, suit or proceeding of the character
described in Subsection (a) of this Section 10.02 may be paid by the
Trust or Series from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such Covered
Person that such amount will be paid over by him to the Trust or
Series if it is ultimately determined that he is not entitled to
indemnification under this Section 10.02; provided, however, that
either (i) such Covered Person shall have provided appropriate
security for such undertaking, (ii) the Trust is insured against
losses arising out of any such advance payments or (iii) either a
majority of the Trustees who are neither Interested Persons of the
Trust nor parties to the matter, or independent legal counsel in a
written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Section
10.02."
Indemnification of the Fund's principal underwriter, custodian, fund
accountant, and transfer agent is provided for, respectively, in
Section V of the Distribution Agreement incorporated by
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<PAGE>
reference as Exhibit 6(a) hereto, Section 28 of the Custody
Agreement incorporated by reference as Exhibit 8(a) hereto, Section
5 of the Fund Accounting Agreement incorporated by reference as
Exhibit 9(c) hereto, and Section 7 of the Transfer Agency Agreement
incorporated by reference as Exhibit 9(b) hereto. Registrant has
obtained from a major insurance carrier a trustees' and officers'
liability policy covering certain types of errors and omissions. In
no event will Registrant indemnify any of its trustees, officers,
employees or agents against any liability to which such person would
otherwise be subject by reason of his willful misfeasance, bad
faith, or gross negligence in the performance of his duties, or by
reason of his reckless disregard of the duties involved in the
conduct of his office or under his agreement with Registrant.
Registrant will comply with Rule 484 under the Securities Act of
1933 and Release 11330 under the Investment Company Act of 1940 in
connection with any indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers, and
controlling persons or Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Investment Company Act of 1940, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of
Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling
person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of the Investment Adviser
Key Asset Management Inc. ("KAM") is the investment adviser to each
fund of the Victory Portfolios. KAM is a wholly-owned indirect
subsidiary of KeyCorp, a bank holding company which had total assets
of approximately $73 billion as of March 31, 1998. KeyCorp is a
leading financial institution doing business in 13 states from Maine
to Alaska, providing a full array of trust, commercial, and retail
banking services. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card
processing, mortgage and leasing companies. KAM and its affiliates
have over $64 billion in assets under management, and provides a
full range of investment management services to personal and
corporate clients.
Lakefront Capital Investors, Inc. ("Lakefront"), sub-adviser of the
Lakefront Fund, 127 Public Square, 15th Floor, Cleveland, Ohio
44114, was incorporated in 1991.
As of June 1, 1998, Indocam International Investment Services, S.A.
("IIIS"), is the sub- adviser to the International Growth Fund. IIIS
and its advisory affiliates ("Indocam") are the global asset
management component of the Credit Agricole banking and financial
services group. IIIS specializes in global asset management and
offers its clients a full range of asset management services from
offices located in Paris, Hong Kong, Singapore, and Tokyo. As of
December 31, 1997, Indocam managed approximately $124 billion for
its clients. IIIS is a registered investment adviser with the SEC
and also serves as the investment adviser to the France Growth Fund
and as subadviser for the BNY Hamilton International Equity Fund and
the John Hancock European Equity Fund. Indocam has
C-8
<PAGE>
affiliates which are engaged in the brokerage business. The
principal office of IIIS is 9, rue Louis Murat, Paris, France 75008.
To the knowledge of Registrant, none of the directors or officers of
KAM, Lakefront, or IIIS, except those set forth below, is or has
been at any time during the past two calendar years engaged in any
other business, profession, vocation or employment of a substantial
nature, except that certain directors and officers of KAM also hold
positions with KeyCorp or its subsidiaries.
The principal executive officers and directors of KAM are as
follows:
Directors:
William G. Spears, Senior Managing Director, Chairman and Chief
Executive Officer.
Richard J. Buoncore, Senior Managing Director, President and Chief
Operating Officer.
Anthony Aveni, Senior Managing Director. Also Chief Investment
Officer of KAM.
Vincent DeP. Farrell, Senior Managing Director and Chief Investment
Officer. Also Chief Investment Officer, Executive Vice President and
Managing Director of Spears, Benzak,
Salomon & Farrell Division ("SBSF").
Richard E. Salomon, Senior Managing Director. Also President and
Director of Wealth Management, SBSF.
Gary R. Martzolf, Senior Managing Director.
Other Officers:
Charles G. Crane, Senior Managing Director and Chief Market
Strategist.
James D. Kacic, Chief Financial Officer, Chief Administrative
Officer, and Senior Managing Director.
William R. Allen, Managing Director.
Michael Foisel, Assistant Treasurer.
Michael Stearns, Chief Compliance Officer.
William J. Blake, Secretary.
Steven N. Bulloch, Assistant Secretary. Also, Senior Vice President
and Senior Counsel of KeyCorp Management Company.
Kathleen A. Dennis, Senior Managing Director.
C-9
<PAGE>
The business address of each of the foregoing individuals is 127
Public Square, Cleveland, Ohio 44114.
The principal executive officers and directors of Lakefront are as
follows:
Nathaniel E. Carter, President and Chief Investment Officer of
Lakefront.
Kenneth A. Louard, Chief Operating Officer.
The business address of each of the foregoing individuals is 127
Public Square, Cleveland, Ohio 44114.
The principal executive officers and directors of IIIS are as
follows:
Jean-Claude Kaltenbach, Chairman and CEO.
Ian Gerald McEvatt, Director.
Claude Doumic, Director.
Didier Guyot de la Pommeraye, Director.
Charles Vergnot, Director.
Eric Jostrom, Director.
Gerard Sutterlin, Secretary General.
The business address of each of the foregoing individuals is 9, rue
Louis Murat, Paris, France 75008.
Item 29. Principal Underwriter
(a) BISYS Fund Services, the Registrant's administrator, also
acts as the distributor for the following investment
companies as of March 26, 1998.
American Performance Funds
AmSouth Mutual Funds
The ARCH Fund, Inc.
The BB&T Mutual Funds Group
The Coventry Group
The Empire Builder Tax Free Bond Fund
ESC Strategic Funds, Inc.
The Eureka Funds
Fountain Square Funds
Hirtle Callaghan Trust
HSBC Family of Funds
C-10
<PAGE>
The Infinity Mutual Funds, Inc.
INTRUST Funds Trust
The Kent Funds
Magna Funds
Meyers Investment Trust
MMA Praxis Mutual Funds
M.S.D. & T. Funds
Pacific Capital Funds
Parkstone Group of Funds
The Parkstone Advantage Fund
Pegasus Funds
The Republic Funds Trust
The Republic Advisor Funds Trust
The Riverfront Funds, Inc.
SBSF Funds, Inc. dba Key Mutual Funds
Sefton Funds
The Sessions Group
Summit Investment Trust
Variable Insurance Funds
The Victory Variable Funds
Vintage Mutual Funds, Inc.
(b) Directors, officers and partners of BISYS Fund Services,
Inc., the General Partner of BISYS Fund Services, as of
March 30, 1998 were as follows:
Lynn J. Mangum, Chairman and CEO.
Dennis Sheehan, Director, Executive Vice President and
Treasurer.
J. David Huber, President.
Kevin J. Dell, Vice President and Secretary.
Mark Rybarczyk, Senior Vice President.
William Tomko, Senior Vice President.
Michael D. Burns, Vice President.
David Blackmore, Vice President.
Steve Ludwig, Compliance Officer.
Mark Telfer, Compliance Officer.
Robert Tuch, Assistant Secretary.
C-11
<PAGE>
The business address of each of the foregoing individuals is BISYS
Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43215.
Item 30. Location of Accounts and Records
(1) Key Asset Management Inc., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as investment adviser
and sub-administrator).
(2) Lakefront Capital Investors, Inc., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as investment
sub-adviser for the Lakefront Fund only).
(3) Indocam International Investment Services, S.A., 9, rue Louis Murat,
Paris, France 75008 (records relating to its functions as investment
sub-adviser for the International Growth Fund only).
(4) KeyBank National Association, 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as shareholder servicing
agent).
(5) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219 (records
relating to its functions as administrator, distributor and fund
accountant).
(6) State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110- 3875 (records relating to its functions as
transfer agent).
(7) Boston Financial Data Services, Inc. Two Heritage Drive, Quincy,
Massachusetts 02171 (records relating to its functions as dividend
disbursing agent and shareholder servicing agent).
(8) Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as custodian and
securities lending agent).
(9) Morgan Stanley Trust Company, 1585 Broadway, New York, New York 10036
(records relating to its functions as sub-custodian of the Balanced
Fund, Convertible Securities Fund, International Growth Fund,
Lakefront Fund, and Real Estate Investment Fund).
Item 31. Management Services
None.
Item 32. Undertakings
(a) Registrant undertakes to call a meeting of shareholders, at the
request of holders of 10% of the Registrant's outstanding shares, for
the purpose of voting upon the question of removal of a trustee or
trustees and undertakes to assist in communications with other
shareholders as required by Section 16(c) of the Investment Company
Act of 1940.
(b) None.
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<PAGE>
(c) Registrant undertakes to furnish to each person to whom a prospectus
is delivered a copy of the Registrant's latest Annual Report to
Shareholders upon request and without charge.
NOTICE
A copy of the Delaware Trust Instrument of The Victory Portfolios is on file
with the Secretary of State of Delaware and notice is hereby given that this
Post-Effective Amendment to the Registrant's Registration Statement has been
executed on behalf of the Registrant by officers of, and Trustees of, the
Registrant as officers and as Trustees, respectively, and not individually, and
that the obligations of or arising out of this instrument are not binding upon
any of the Trustees, officers or shareholders of The Victory Portfolios
individually but are binding only upon the assets and property of the
Registrant.
C-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of New
York, on the 12th day of June, 1998.
THE VICTORY PORTFOLIOS
By: /s/Leigh A. Wilson
------------------
Leigh A. Wilson, President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 12th day of June, 1998.
/s/ Roger Noall Chairman of the Board and Trustee
- -------------------
Roger Noall
/s/ Leigh A. Wilson President and Trustee
- -------------------
Leigh A. Wilson
/s/Thomas E. Line Treasurer
- -------------------
Thomas E. Line
* Trustee
- -------------------
Edward P. Campbell
* Trustee
- -------------------
Harry Gazelle
* Trustee
- -------------------
Thomas F. Morrissey
* Trustee
- -------------------
H. Patrick Swygert
* Trustee
- -------------------
Frank A. Weil
* Trustee
- -------------------
Eugene J. McDonald
*By: /s/ Carl Frischling
-------------------
Carl Frischling
Attorney-in-Fact
Attorney-in-Fact pursuant to powers of attorney filed with Post-Effective
Amendment No. 36 to Registrant's Registration Statement on Form N-1A on
February 26, 1998 and with Pre-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-14 on February 3, 1998.
C-14
<PAGE>
THE VICTORY PORTFOLIOS
INDEX TO EXHIBITS
Exhibit Number
EX-99.B5(a) Investment Advisory Agreement dated as of March 1, 1997, between
the Registrant and Key Asset Management Inc., as amended March
2, 1998
EX-99.B5(e) Portfolio Management Agreement between the Key Asset Management
Inc. and IndoCam International Services, S.A. regarding the
International Growth Fund
EX-99.B5(f) Form of Investment Advisory Agreement between the Registrant and
Key Asset Management Inc. regarding the Maine Municipal Bond
Fund (Intermediate), Maine Municipal Bond Fund (Short-Term),
Michigan Municipal Bond Fund, Equity Income Fund, National
Municipal Bond Fund (Short-Intermediate) and National Municipal
Bond Fund (Long)
EX-99.B6(a) Distribution Agreement dated June 1, 1996 between the Registrant
and BISYS Fund Services Limited Partnership, as amended March 2,
1998
EX-99.B8(a) Amended and Restated Mutual Fund Custody Agreement dated August
1, 1996, as amended March 2, 1998
EX-99.B9(a) Administration Agreement dated October 1, 1997 between the
Registrant and BISYS Fund Services Limited Partnership, as
amended March 2, 1998
EX-99.B9(b) Sub-Administration Agreement dated October 1, 1997 between BISYS
Fund Services Limited Partnership d/b/a BISYS Fund Services and
Key Asset Management Inc., as amended March 2, 1998
EX-99.B9(c) Transfer Agency and Service Agreement dated July 12, 1996
between the Registrant and State Street Bank and Trust Company,
as amended August 1, 1996 and March 2, 1998
EX-99.B9(d) Fund Accounting Agreement dated May 31, 1995 between the
Registrant and BISYS Fund Services Ohio, Inc., as amended
February 19, 1997 and March 2, 1998
EX-99.B9(e) Shareholder Servicing Plan dated June 5, 1995, as amended March
2, 1998
EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
EX-99.B11(b) Consent of Coopers & Lybrand L.L.P.
EX-99.B15(a) Distribution and Service Plan dated June 5, 1995 for the Class A
Shares of the Registrant, as amended February 19, 1997 and March
2, 1998
EX-99.B15(b) Distribution Plan dated June 5, 1995 for Class B Shares of the
Registrant with Schedule I amended as of February 1, 1996
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE VICTORY PORTFOLIOS
AND
KEY ASSET MANAGEMENT INC.
AGREEMENT made as of the 1st day of March, 1997, by and between The
Victory Portfolios, a Delaware business trust which may issue one or more series
of shares of beneficial interest (the "Company"), and Key Asset Management Inc.,
a New York corporation (the "Adviser").
WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Company desires to retain the Adviser to furnish
investment advisory services to the funds listed on Schedule A (each, a "Fund"
and collectively, the "Funds"), and the Adviser represents that it is willing
and possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
(a) General. The Company hereby appoints the Adviser to act as
investment adviser to the Funds for the period and on the
terms set forth in this Agreement. The Adviser accepts such
appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) Employees of Affiliates. The Adviser may, in its discretion,
provide such services through its own employees or the
employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Company under
applicable laws and are under the control of KeyCorp, the
indirect parent of the Adviser; provided that (i) all persons,
when providing services hereunder, are functioning as part of
an organized group of persons, and (ii) such organized group
of persons is managed at all times by authorized officers of
the Adviser.
(c) Sub-Advisers. It is understood and agreed that the Adviser may
from time to time employ or associate with such other entities
or persons as the Adviser believes appropriate to assist in
the performance of this Agreement with respect to a particular
Fund or Funds (each a "Sub-Adviser"), and that any such
Sub-Adviser shall have all of the rights and powers of the
Adviser set forth in this Agreement; provided that a Fund
shall not pay any additional compensation for any Sub- Adviser
and the Adviser shall be as fully responsible to the Company
for the acts and omissions of the Sub-Adviser as it is for its
own acts and omissions; and provided further that the
retention of any Sub-Adviser shall be approved in
<PAGE>
advance by (i) the Board of Trustees of the Company and (ii)
the shareholders of the relevant Fund if required under any
applicable provisions of the 1940 Act. The Adviser will
review, monitor and report to the Company's Board of Trustees
regarding the performance and investment procedures of any
Sub-Adviser. In the event that the services of any Sub-Adviser
are terminated, the Adviser may provide investment advisory
services pursuant to this Agreement to the Fund without a
Sub-Adviser and without further shareholder approval, to the
extent consistent with the 1940 Act. A Sub-Adviser may be an
affiliate of the Adviser.
2. DELIVERY OF DOCUMENTS. The Company has delivered to the Adviser
copies of each of the following documents along with all amendments thereto
through the date hereof, and will promptly deliver to it all future amendments
and supplements thereto, if any:
(a) the Company's Trust Instrument;
(b) the By-Laws of the Company;
(c) resolutions of the Board of Trustees of the Company
authorizing the execution and delivery of this Agreement;
(d) the most recent Post-Effective Amendment to the Company's
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the
"Commission");
(e) Notification of Registration of the Company under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) the currently effective Prospectuses and Statements of
Additional Information of the Funds.
3. INVESTMENT ADVISORY SERVICES.
(a) Management of the Funds. The Adviser hereby undertakes to act
as investment adviser to the Funds. The Adviser shall
regularly provide investment advice to the Funds and
continuously supervise the investment and reinvestment of
cash, securities and other property composing the assets of
the Funds and, in furtherance thereof, shall:
(i) supervise all aspects of the operations of the
Company and each Fund;
(ii) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the economy
generally, the Funds' investment programs, and the
issuers of securities included in the Funds'
portfolios and the industries in which
<PAGE>
they engage, or which may relate to securities or
other investments which the Adviser may deem
desirable for inclusion in a Fund's portfolio;
(iii) determine which issuers and securities shall be
included in the portfolio of each Fund;
(iv) furnish a continuous investment program for each
Fund;
(v) in its discretion and without prior consultation with
the Company, buy, sell, lend and otherwise trade any
stocks, bonds and other securities and investment
instruments on behalf of each Fund; and
(vi) take, on behalf of each Fund, all actions the Adviser
may deem necessary in order to carry into effect such
investment program and the Adviser's functions as
provided above, including the making of appropriate
periodic reports to the Company's Board of Trustees.
(b) Covenants. The Adviser shall carry out its investment advisory
and supervisory responsibilities in a manner consistent with
the investment objectives, policies, and restrictions provided
in: (i) each Fund's Prospectus and Statement of Additional
Information as revised and in effect from time to time; (ii)
the Company's Trust Instrument, By-Laws or other governing
instruments, as amended from time to time; (iii) the 1940 Act;
(iv) other applicable laws; and (v) such other investment
policies, procedures and/or limitations as may be adopted by
the Company with respect to a Fund and provided to the Adviser
in writing. The Adviser agrees to use reasonable efforts to
manage each Fund so that it will qualify, and continue to
qualify, as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder (the "Code"), except as may be
authorized to the contrary by the Company's Board of Trustees.
The management of the Funds by the Adviser shall at all times
be subject to the review of the Company's Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Adviser
shall keep each Fund's books and records required to be
maintained by, or on behalf of, the Funds with respect to
advisory services rendered hereunder. The Adviser agrees that
all records which it maintains for a Fund are the property of
the Fund and it will promptly surrender any of such records to
the Fund upon the Fund's request. The Adviser further agrees
to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records of the Fund required to be preserved
by such Rule.
(d) Reports, Evaluations and other Services. The Adviser shall
furnish reports, evaluations, information or analyses to the
Company with respect to the Funds and in connection with the
Adviser's services hereunder as the Company's Board of
Trustees may request from time to time or as the Adviser may
otherwise deem to be desirable. The Adviser shall make
recommendations to the Company's
<PAGE>
Board of Trustees with respect to Company policies, and shall
carry out such policies as are adopted by the Board of
Trustees. The Adviser shall, subject to review by the Board of
Trustees, furnish such other services as the Adviser shall
from time to time determine to be necessary or useful to
perform its obligations under this Agreement.
(e) Purchase and Sale of Securities. The Adviser shall place all
orders for the purchase and sale of portfolio securities for
each Fund with brokers or dealers selected by the Adviser,
which may include brokers or dealers affiliated with the
Adviser to the extent permitted by the 1940 Act and the
Company's policies and procedures applicable to the Funds. The
Adviser shall use its best efforts to seek to execute
portfolio transactions at prices which, under the
circumstances, result in total costs or proceeds being the
most favorable to the Funds. In assessing the best overall
terms available for any transaction, the Adviser shall
consider all factors it deems relevant, including the breadth
of the market in the security, the price of the security, the
financial condition and execution capability of the broker or
dealer, research services provided to the Adviser, and the
reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In no event
shall the Adviser be under any duty to obtain the lowest
commission or the best net price for any Fund on any
particular transaction, nor shall the Adviser be under any
duty to execute any order in a fashion either preferential to
any Fund relative to other accounts managed by the Adviser or
otherwise materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers
or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) to the Adviser, the
Funds and/or the other accounts over which the Adviser
exercises investment discretion. The Adviser is authorized to
pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of
commission another broker or dealer would have charged for
effecting that transaction if the Adviser determines in good
faith that the total commission is reasonable in relation to
the value of the brokerage and research services provided by
such broker or dealer, viewed in terms of either that
particular transaction or the overall responsibilities of the
Adviser with respect to accounts over which it exercises
investment discretion. The Adviser shall report to the Board
of Trustees of the Company regarding overall commissions paid
by the Funds and their reasonableness in relation to the
benefits to the Funds.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for a Fund, the Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other Funds or its other clients if, in the
Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic
<PAGE>
benefit to the Fund, taking into consideration the
advantageous selling or purchase price, brokerage commission
and other expenses, and trading requirements, and (ii) is not
inconsistent with the policies set forth in the Company's
registration statement and the Fund's Prospectus and Statement
of Additional Information. In such event, the Adviser will
allocate the securities so purchased or sold, and the expenses
incurred in the transaction, in an equitable manner,
consistent with its fiduciary obligations to the Fund and such
other clients.
4. REPRESENTATIONS AND WARRANTIES.
(a) The Adviser hereby represents and warrants to the Company as
follows:
(i) The Adviser is a corporation duly organized and in
good standing under the laws of the State of New York
and is fully authorized to enter into this Agreement
and carry out its duties and obligations hereunder.
(ii) The Adviser is registered as an investment adviser
with the Commission under the Investment Advisers Act
of 1940, as amended (the "Advisers Act"), and is
registered or licensed as an investment adviser under
the laws of all applicable jurisdictions. The Adviser
shall maintain such registrations or licenses in
effect at all times during the term of this
Agreement.
(iii) The Adviser at all times shall provide its best
judgment and effort to the Company in carrying out
the Adviser's obligations hereunder.
(b) The Company hereby represents and warrants to the Adviser as
follows:
(i) The Company has been duly organized as a business
trust under the laws of the State of Delaware and is
authorized to enter into this Agreement and carry out
its terms.
(ii) The Company is registered as an investment company
with the Commission under the 1940 Act and shares of
each Fund are registered for offer and sale to the
public under the 1933 Act and all applicable state
securities laws where currently sold. Such
registrations will be kept in effect during the term
of this Agreement.
5. COMPENSATION. As compensation for the services which the Adviser is
to provide or cause to be provided pursuant to Paragraph 3, each Fund shall pay
to the Adviser out of Fund assets an annual fee, computed and accrued daily and
paid in arrears on the first business day of every month, at the rate set forth
opposite each Fund's name on Schedule A, which shall be a percentage of the
average daily net assets of the Fund (computed in the manner set forth in the
<PAGE>
Fund's most recent Prospectus and Statement of Additional Information)
determined as of the close of business on each business day throughout the
month. At the request of the Adviser, some or all of such fee shall be paid
directly to a Sub-Adviser. The fee for any partial month under this Agreement
shall be calculated on a proportionate basis. In the event that the total
expenses of a Fund exceed the limits on investment company expenses imposed by
any statute or any regulatory authority of any jurisdiction in which shares of
such Fund are qualified for offer and sale, the Adviser will bear the amount of
such excess, except: (i) the Adviser shall not be required to bear such excess
to an extent greater than the compensation due to the Adviser for the period for
which such expense limitation is required to be calculated unless such statute
or regulatory authority shall so require, and (ii) the Adviser shall not be
required to bear the expenses of the Fund to an extent which would result in the
Fund's or Company's inability to qualify as a regulated investment company under
the provisions of Subchapter M of the Code.
6. INTERESTED PERSONS. It is understood that, to the extent consistent
with applicable laws, the Trustees, officers and shareholders of the Company are
or may be or become interested in the Adviser as directors, officers or
otherwise and that directors, officers and shareholders of the Adviser are or
may be or become similarly interested in the Company.
7. EXPENSES. As between the Adviser and the Funds, the Funds will pay
for all their expenses other than those expressly stated to be payable by the
Adviser hereunder, which expenses payable by the Funds shall include, without
limitation, (i) interest and taxes; (ii) brokerage commissions and other costs
in connection with the purchase or sale of securities and other investment
instruments, which the parties acknowledge might be higher than other brokers
would charge when a Fund utilizes a broker which provides brokerage and research
services to the Adviser as contemplated under Paragraph 3 above; (iii) fees and
expenses of the Company's Trustees that are not employees of the Adviser; (iv)
legal and audit expenses; (v) administrator, custodian, pricing and bookkeeping,
registrar and transfer agent fees and expenses; (vi) fees and expenses related
to the registration and qualification of the Funds' shares for distribution
under state and federal securities laws; (vii) expenses of printing and mailing
reports and notices and proxy material to shareholders, unless otherwise
required; (viii) all other expenses incidental to holding meetings of
shareholders, including proxy solicitations therefor, unless otherwise required;
(ix) expenses of typesetting for printing Prospectuses and Statements of
Additional Information and supplements thereto; (x) expenses of printing and
mailing Prospectuses and Statements of Additional Information and supplements
thereto sent to existing shareholders; (xi) insurance premiums for fidelity
bonds and other coverage to the extent approved by the Company's Board of
Trustees; (xii) association membership dues authorized by the Company's Board of
Trustees; and (xiii) such non-recurring or extraordinary expenses as may arise,
including those relating to actions, suits or proceedings to which the Company
is a party (or to which the Funds' assets are subject) and any legal obligation
for which the Company may have to provide indemnification to the Company's
Trustees and officers.
8. NON-EXCLUSIVE SERVICES; LIMITATION OF ADVISER'S LIABILITY. The
services of the Adviser to the Funds are not to be deemed exclusive and the
Adviser may render similar services to others and engage in other activities.
The Adviser and its affiliates may enter into
<PAGE>
other agreements with the Funds and the Company for providing additional
services to the Funds and the Company which are not covered by this Agreement,
and to receive additional compensation for such services. In the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties hereunder on the part of the Adviser, or a breach of
fiduciary duty with respect to receipt of compensation, neither the Adviser nor
any of its directors, officers, shareholders, agents, or employees shall be
liable or responsible to the Company, the Funds or to any shareholder of the
Funds for any error of judgment or mistake of law or for any act or omission in
the course of, or connected with, rendering services hereunder or for any loss
suffered by the Company, a Fund or any shareholder of a Fund in connection with
the performance of this Agreement.
9. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall
become effective on March 1, 1997, provided that it shall have been approved by
a majority of the outstanding voting securities of each Fund, in accordance with
the requirements of the 1940 Act, or such later date as may be agreed by the
parties following such shareholder approval.
(a) This Agreement shall continue in force until December 31,
1997. Thereafter, this Agreement shall continue in effect as
to each Fund for successive annual periods, provided such
continuance is specifically approved at least annually (i) by
a vote of the majority of the Trustees of the Company who are
not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose
of voting on such approval and (ii) by a vote of the Board of
Trustees of the Company or a majority of the outstanding
voting shares of the Fund.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those
Trustees of the Company who are not interested persons of any
party to this Agreement, cast in person at a meeting called
for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9,
either party hereto may terminate this Agreement at any time
on sixty (60) days' prior written notice to the other, without
payment of any penalty. Such a termination by the Company may
be effected severally as to any particular Fund, and shall be
effected as to any Fund by vote of the Company's Board of
Trustees or by vote of a majority of the outstanding voting
securities of the Fund. This Agreement shall terminate
automatically in the event of its assignment.
10. LIMITATION OF LIABILITY OF TRUSTEES AND SHAREHOLDERS. The Adviser
acknowledges the following limitation of liability:
The terms "The Victory Portfolios" and "Trustees" refer, respectively,
to the trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under the Trust Instrument, to which
reference is hereby made and a copy of which is on file
<PAGE>
at the office of the Secretary of State of the State of Delaware, such reference
being inclusive of any and all amendments thereto so filed or hereafter filed.
The obligations of "The Victory Portfolios" entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities and are not binding upon any of the
Trustees, shareholders or representatives of the Company personally, but bind
only the assets of the Company, and all persons dealing with the Company or a
Fund must look solely to the assets of the Company or Fund for the enforcement
of any claims against the Company or Fund.
11. SERVICE MARK. The service mark of the Company and the name
"Victory" (and derivatives thereof) have been licensed to the Company by
KeyCorp, through its subsidiary Key Trust Company ("Key Trust"), an affiliate of
the Adviser, pursuant to a License Agreement dated June 21, 1993, and their
continued use is subject to the right of Key Trust to withdraw this permission
under the License Agreement in the event the Adviser or another subsidiary of
KeyCorp is not the investment adviser to the Company.
12. CERTAIN DEFINITIONS. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
13. INDEPENDENT CONTRACTOR. The Adviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees of the Company from time
to time, have no authority to act for or represent a Fund in any way or
otherwise be deemed an agent of a Fund.
14. STRUCTURE OF AGREEMENT. The Company is entering into this Agreement
on behalf of the respective Funds severally and not jointly. The
responsibilities and benefits set forth in this Agreement shall refer to each
Fund severally and not jointly. No Fund shall have any responsibility for any
obligation of any other Fund arising out of this Agreement. Without otherwise
limiting the generality of the foregoing:
(a) any breach of any term of this Agreement regarding the Company
with respect to any one Fund shall not create a right or
obligation with respect to any other Fund;
(b) under no circumstances shall the Adviser have the right to set
off claims relating to a Fund by applying property of any
other Fund; and
(c) the business and contractual relationships created by this
Agreement, consideration for entering into this Agreement, and
the consequences of such relationship and consideration relate
solely to the Company and the particular Fund to which such
relationship and consideration applies.
<PAGE>
This Agreement is intended to govern only the relationships between the
Adviser, on the one hand, and the Company and the Funds, on the other hand, and
(except as specifically provided above in this Paragraph 14) is not intended to
and shall not govern (i) the relationship between the Company and any Fund or
(ii) the relationships among the respective Funds.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Ohio, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
16. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
17. NOTICES. Notices of any kind to be given to the Company hereunder
by the Adviser shall be in writing and shall be duly given if mailed or
delivered to 3435 Stelzer Road, Columbus, Ohio 43219-3035, Attention: George O.
Martinez, Esq.; with a copy to Kramer, Levin, Naftalis & Frankel, 919 Third
Avenue, New York, New York, 10022, Attention: Carl Frischling, Esq., or at such
other address or to such individual as shall be so specified by the Company to
the Adviser. Notices of any kind to be given to the Adviser hereunder by the
Company shall be in writing and shall be duly given if mailed or delivered to
the Adviser at 127 Public Square, Cleveland, Ohio 44114-1306, Attention: William
G. Spears with a copy to William J. Blake, Esq., or at such other address or to
such individual as shall be so specified by the Adviser to the Company. Notices
shall be effective upon delivery.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
THE VICTORY PORTFOLIOS KEY ASSET MANAGEMENT INC.
By: /s/Scott A. Englehart By: /s/Kathleen A. Dennis
------------------------ -------------------------------
Name: Scott A. Englehart Name: Kathleen A. Dennis
Title: Secretary Title: Senior Managing Director
<PAGE>
Schedule A
Name of Fund Fee*
1. The Victory Balanced Fund 1.00%
2. The Victory Diversified Stock Fund .65%
3. The Victory Government Mortgage Fund .50%
4. The Victory Growth Fund 1.00%
5. The Victory Intermediate Income Fund .75%
6. The Victory International Growth Fund 1.10%
7. The Victory Investment Quality Bond Fund .75%
8. The Victory Limited Term Income Fund .50%
9. The Victory Ohio Municipal Bond Fund .60%
10. The Victory Ohio Regional Stock Fund .75%
11. The Victory Prime Obligations Fund .35%
12. The Victory Special Value Fund 1.00%
13. The Victory Stock Index Fund .60%
14. The Victory Tax-Free Money Market Fund .35%
15. The Victory U.S. Government Obligations Fund .35%
16. The Victory Value Fund 1.00%
17. The Victory Financial Reserves Fund .50%
18. The Victory Fund for Income .50%
19. The Victory Government Bond Fund .55%
20. The Victory Institutional Money Market Fund .25%
21. The Victory National Municipal Bond Fund .55%
22. The Victory New York Tax-Free Fund .55%
23. The Victory Ohio Municipal Money Market Fund .50%
24. The Victory Special Growth Fund 1.00%
- --------------------
* As a percentage of average daily net assets. Note, however, that the
Adviser shall have the right, but not the obligation, to voluntarily
waive any portion of the advisory fee from time to time. Any such
voluntary waiver will be irrevocable and determined in advance of
rendering investment advisory services by the Adviser, and shall be in
writing and signed by the parties hereto.
<PAGE>
SCHEDULE A
Amended as of March 2, 1998
Name of Fund Fee*
- ------------ ----
1. Victory Balanced Fund 1.00%
2. Victory Diversified Stock Fund .65%
3. Victory Government Mortgage Fund .50%
4. Victory Growth Fund 1.00%
5. Victory Financial Reserves Fund .50%
6. Victory Fund for Income .50%
7. Victory Institutional Money Market Fund .25%
8. Victory Intermediate Income Fund .75%
9. Victory International Growth Fund 1.10%
10. Victory Investment Quality Bond Fund .75%
11. Victory Limited Term Income Fund .50%
12. Victory National Municipal Bond Fund .55%
13. Victory New York Tax-Free Fund .55%
14. Victory Ohio Municipal Bond Fund .60%
15. Victory Ohio Municipal Money Market Fund .50%
16. Victory Ohio Regional Stock Fund .75%
17. Victory Prime Obligations Fund .35%
18. Victory Special Growth Fund 1.00%
19. Victory Special Value Fund 1.00%
20. Victory Stock Index Fund .60%
21. Victory Tax-Free Money Market Fund .35%
22. Victory U.S. Government Obligations Fund .35%
23. Victory Value Fund 1.00%
24. Victory Federal Money Market Fund .25%
25. Victory Convertible Securities Fund .75%
26. Victory LifeChoice Conservative Investor Fund .20%
27. Victory LifeChoice Growth Investor Fund .20%
28. Victory LifeChoice Moderate Investor Fund .20%
- --------------------
* As a percentage of average daily net assets. Note, however, that the
Adviser shall have the right, but not the obligation, to voluntarily
waive any portion of the advisory fee from time to time. Any such
voluntary waiver will be irrevocable and determined in advance of
rendering investment advisory services by the Adviser, and shall be in
writing and signed by the parties hereto.
PORTFOLIO MANAGEMENT AGREEMENT
BETWEEN
KEY ASSET MANAGEMENT INC.
AND
INDOCAM INTERNATIONAL INVESTMENT SERVICES, S.A.
AGREEMENT made as of the 1st day of June, 1998 by and between Key Asset
Management Inc., a New York corporation (the "Adviser"), and IndoCam
International Investment Services, S.A., a corporation organized under the laws
of France (the "Sub-Adviser").
WHEREAS, the Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Adviser provides investment advisory services to the
series of The Victory Portfolios, a Delaware business trust (the "Company"),
which is registered as an open-end, management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), pursuant to an
Investment Advisory Agreement dated June 1, 1998 (the "Advisory Agreement"); and
WHEREAS, the Sub-Adviser is a registered investment adviser under the
Advisers Act; and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish
investment subadvisory services in connection with The Victory International
Growth Fund (the "Fund"), a series of the Company, and the Sub-Adviser
represents that it is willing and possesses legal authority to so furnish such
services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Adviser hereby appoints the Sub-Adviser to act as a
non-exclusive investment sub-adviser to the Fund for the period and on the terms
set forth in this Agreement. The Sub-Adviser accepts such appointment and agrees
to furnish the services herein set forth for the compensation herein provided.
2. DELIVERY OF DOCUMENTS. The Adviser has delivered to the Sub-Adviser
copies of each of the following documents along with all amendments thereto
through the date hereof, and will promptly deliver to it all future amendments
and supplements thereto, if any:
(a) the Company's Trust Instrument;
(b) the By-Laws of the Company;
1
<PAGE>
(c) resolutions of the Board of Trustees of the Company authorizing
the execution and delivery of the Advisory Agreement and this
Agreement;
(d) the most recent Post-Effective Amendment to the Company's
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act, on Form N-1A as filed
with the Securities and Exchange Commission (the "Commission");
(e) Notification of Registration of the Company under the 1940 Act on
Form N-8A as filed with the Commission;
(f) the currently effective Prospectus and Statement of Additional
Information of the Fund; and
(g) a copy of all applicable orders granted to the Company by the
Securities and Exchange Commission or any no-action letter or
similar correspondence concerning the Company or any of its Funds
including an order under section 6(c) of the 1940 Act dated
December 31, 1996 granting the Fund an exemption from (1) the
shareholder voting requirements of Section 15(a) and Rule 18f-2;
and (2) the disclosure requirements under various rules and forms
(the "Manager of Managers Order").
3. INVESTMENT ADVISORY SERVICES.
(a) Management of the Fund. The Sub-Adviser hereby undertakes to act
as investment sub-adviser to the Fund. The Sub-Adviser shall
regularly provide investment advice to the Fund and continuously
supervise the investment and reinvestment of cash, securities and
other property composing the assets of the Fund and, in
furtherance thereof, shall:
(i) obtain and evaluate pertinent economic, statistical and
financial data, as well as other significant events and
developments, which affect the economy generally, the Fund's
investment programs, and the issuers of securities included
in the Fund's portfolios and the industries in which they
engage, or which may relate to securities or other
investments which the Sub-Adviser may deem desirable for
inclusion in a Fund's portfolio;
(ii) determine which issuers and securities shall be included in
the portfolio of the Fund;
(iii) furnish a continuous investment program for the Fund;
2
<PAGE>
(iv) in its discretion, and without prior consultation, buy,
sell, lend and otherwise trade any stocks, bonds and other
securities and investment instruments on behalf of the Fund;
and
(v) take, on behalf of the Fund, all actions the Sub-Adviser may
deem necessary in order to carry into effect such investment
program and the Sub-Adviser's functions as provided above,
including the making of appropriate periodic reports to the
Adviser and the Company's Board of Trustees.
(b) Covenants. The Sub-Adviser shall carry out its investment
subadvisory responsibilities in a manner consistent with the
investment objectives, policies, and restrictions provided in:
(i) the Fund's Prospectus and Statement of Additional Information
as revised and in effect from time to time; (ii) the Company's
Trust Instrument, By-Laws or other governing instruments, as
amended from time to time; (iii) the 1940 Act; (iv) other
applicable laws; and (v) such other investment policies,
procedures and/or limitations as may be adopted by the Company or
the Adviser with respect to the Fund and provided to the
Sub-Adviser in writing. The Sub-Adviser agrees to use reasonable
efforts to manage the Fund so that it will qualify, and continue
to qualify, as a regulated investment company under Sub-chapter M
of the Internal Revenue Code of 1986, as amended, and regulations
issued thereunder (the "Code"), except as may be authorized to
the contrary by the Company's Board of Trustees. The management
of the Fund by the Sub-Adviser shall at all times be subject to
the review of the Adviser and the Company's Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Sub-Adviser
shall keep the Fund's books and records required to be maintained
by, or on behalf of, the Fund with respect to subadvisory
services rendered hereunder. The Sub-Adviser agrees that all
records which it maintains for the Fund are the property of the
Fund and it will promptly surrender any of such records to the
Fund upon the Fund's request. The Sub-Adviser further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940
Act any such records of the Fund required to be preserved by such
Rule.
(d) Reports, Evaluations and other Services. The Sub-Adviser shall
furnish reports, evaluations, information or analyses to the
Adviser and the Company with respect to the Fund and in
connection with the Sub-Adviser's services hereunder as the
Adviser and/or the Company's Board of Trustees may reasonably
request from time to time or as the Sub-Adviser may otherwise
deem to be reasonably necessary. The Sub-Adviser may make
recommendations to the Adviser and the Company's Board of
Trustees with respect to the Fund's policies, and shall carry out
such policies as are adopted by the Board of Trustees. The
Sub-Adviser may, subject to review by the Adviser, furnish such
other services as the Sub-Adviser shall from time to time
determine to be necessary or useful to perform its obligations
under this Agreement.
3
<PAGE>
(e) Purchase and Sale of Securities. The Sub-Adviser shall place all
orders for the purchase and sale of portfolio securities for the
Fund with brokers or dealers selected by the Sub-Adviser, which
may include brokers or dealers affiliated with the Adviser or the
Sub-Adviser to the extent permitted by the 1940 Act and the
Company's policies and procedures applicable to the Fund and
provided to the Sub-Adviser. The Sub-Adviser shall, except as
contemplated below, use its best efforts to seek to execute
portfolio transactions at prices which, under the circumstances,
result in total costs, proceeds and execution being the most
favorable to the Fund. In assessing the best overall terms
available for any transaction, the Sub-Adviser shall consider all
factors it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition
and execution capability of the broker or dealer, research
services provided to the Sub-Adviser, and the reasonableness of
the commission, if any, both for the specific transaction and on
a continuing basis. In no event shall the Sub-Adviser be under
any duty to obtain the lowest commission or the best net price
for the Fund on any particular transaction, nor shall the
Sub-Adviser be under any duty to execute any order in a fashion
either preferential to the Fund relative to other accounts
managed by the Sub-Adviser or otherwise materially adverse to
such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or dealers
qualified to execute a particular transaction, brokers or dealers
may be selected who also provide brokerage and research services
(as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to the Sub-Adviser and/or the other
accounts over which the Sub-Adviser exercises investment
discretion. The Sub-Adviser is authorized to pay a broker or
dealer who provides such brokerage and research services a
commission for executing a portfolio transaction for the Fund
which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if the
Sub-Adviser determines in good faith that the total commission is
reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of
either that particular transaction or the overall
responsibilities of the Sub-Adviser with respect to accounts over
which it exercises investment discretion. The Sub-Adviser shall
report to the Board of Trustees of the Company regarding overall
commissions paid by the Fund and their reasonableness in relation
to their benefits to the Fund. Any transactions for the Fund that
are effected through an affiliated broker-dealer on a national
securities exchange of which such broker-dealer is a member will
be effected in accordance with Section 11(a) of the Securities
Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, including Rule 11a2-2(T). The Fund hereby authorizes
any such broker or dealer to retain commissions for effecting
such transactions and to pay out of such retained commissions any
compensation due to others in connection with effectuating those
transactions.
4
<PAGE>
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for the Fund, the Sub-Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other Funds or its other clients if, in the
Sub-Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Fund, taking into
consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies set
forth in the Company's registration statement and the Fund's
Prospectus and Statement of Additional Information. In such
event, the Sub-Adviser will allocate the securities so purchased
or sold, and the expenses incurred in the transaction, in an
equitable manner, consistent with its fiduciary obligations to
the Fund and such other clients.
4. REPRESENTATIONS AND WARRANTIES.
(a) The Sub-Adviser hereby represents and warrants to the Adviser as
follows:
(i) The Sub-Adviser is a corporation duly organized and in good
standing under the laws of France and is fully authorized to
enter into this Agreement and carry out its duties and
obligations hereunder.
(ii) The Sub-Adviser is registered as an investment adviser with
the Commission under the Advisers Act and is registered or
licensed as an investment adviser under the laws of all
applicable jurisdictions. The Sub-Adviser shall maintain
such registrations or licenses in effect at all times during
the term of this Agreement.
(iii)The Sub-Adviser at all times shall provide its best
judgment and efforts in carrying out the Sub-Adviser's
obligations hereunder.
(b) The Adviser hereby represents and warrants to the Sub-Adviser as
follows:
(i) The Adviser is a corporation duly organized and in good
standing under the laws of the State of New York and is
fully authorized to enter into this Agreement and carry out
its duties and obligations hereunder.
(ii) The Adviser is registered as an investment adviser with the
Commission under the Advisers Act, and is registered or
licensed as an investment adviser under the laws of all
applicable jurisdictions. The Adviser shall maintain such
registrations or licenses in effect at all times during the
term of this Agreement.
(iii)The Company has been duly organized as a business trust
under the laws of the State of Delaware.
5
<PAGE>
(iv) The Company is registered as an investment company with the
Commission under the 1940 Act, and shares of each Fund are
registered for offer and sale to the public under the 1933
Act and all applicable state securities laws where currently
sold. Such registrations will be kept in effect during the
term of this Agreement.
5. COMPENSATION. As compensation for the services which the Sub-Adviser
is to provide or cause to be provided pursuant to Paragraph 3, the Adviser shall
pay to the Sub-Adviser (or cause to be paid by the Company directly to the
Sub-Adviser) an annual fee equal to 0.55% of the Fund's average daily net assets
during the preceding month (computed in the manner set forth in the Fund's most
recent Prospectus and Statement of Additional Information), which shall be
accrued daily and paid in arrears on the first business day of the subsequent
month. Average daily net assets shall be based upon determinations of net assets
made as of the close of business on each business day throughout such month. The
fee for any partial month under this Agreement shall be calculated on a
proportionate basis, based upon average daily net assets for such partial month.
The Sub-Adviser shall have the right, but not the obligation, to voluntarily
waive any portion of the sub-advisory fee from time to time. Any such voluntary
waiver shall be in writing and signed by the parties hereto.
6. INTERESTED PERSONS. It is understood that, to the extent consistent
with applicable laws, the Trustees, officers and shareholders of the Company or
the Adviser are or may be or become interested in the Sub-Adviser as directors,
officers or otherwise and that directors, officers and shareholders of the
Sub-Adviser are or may be or become similarly interested in the Company or the
Adviser.
7. EXPENSES. The Sub-Adviser will pay all expenses incurred by it in
connection with the performance of its services under this Agreement. The
Sub-Adviser shall not be required to pay any expenses that this Agreement does
not expressly state shall be payable by the Sub-Adviser. Without limiting the
generality of the foregoing, the Sub-Adviser shall not pay any Fund expenses or
reimburse the Adviser for any expense the Adviser is required to pay.
8. NON-EXCLUSIVE SERVICES; LIMITATION OF SUB-ADVISER'S LIABILITY. The
services of the Sub-Adviser hereunder are not to be deemed exclusive, and the
Sub-Adviser may render similar services to others and engage in other
activities. The Sub-Adviser and its affiliates may enter into other agreements
with the Fund, the Company or the Adviser for providing additional services to
the Fund, the Company or the Adviser which are not covered by this Agreement,
and to receive additional compensation for such services. In addition, it is
understood by the Sub-Adviser, that the Adviser may retain one or more
additional Sub-Advisers with respect to portions of the Fund's assets. In the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties hereunder on the part of the Sub-Adviser, or
a breach of fiduciary duty with respect to receipt of compensation, neither the
Sub-Adviser nor any of its directors, officers, shareholders, agents, or
employees shall be liable or responsible to the Adviser, the Company, the Fund
or to any shareholder of the Fund for any error of judgment or mistake of law or
for any act or
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<PAGE>
omission in the course of, or connected with, rendering services hereunder or
for any loss suffered by the Adviser, the Company, the Fund, or any shareholder
of the Fund in connection with the performance of this Agreement.
9. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall
become effective as of the date of execution hereof in accordance with the
Manager of Managers Order. The Sub-Adviser understands and agrees that its
receipt of compensation hereunder shall be without the protection accorded by
shareholder approval under Section 36(b) of the 1940 Act.
(a) This initial term of this Agreement shall be for two years.
Thereafter, this Agreement shall continue in effect for
successive annual periods, provided such continuance is
specifically approved at least annually (i) by a vote of the
majority of the Trustees of the Company who are not parties to
this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such
approval, and (ii) by a vote of the Board of Trustees of the
Company or a majority of the outstanding voting securities of the
Fund.
(b) The modification of any of the terms of this Agreement may be
approved by a vote of a majority of those Trustees of the Company
who are not interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on
such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9, The
Adviser of the Company may terminate this Agreement at any time
on 60 days' prior written notice to the Sub-Adviser, without
payment of any penalty. The Sub-Adviser may terminate this
Agreement at any time upon 90 days' prior written notice to the
Adviser, without payment of any penalty. A termination of the
Sub-Adviser may be effected by the Adviser, by a vote of the
Company's Board of Trustees, or by vote of a majority of the
outstanding voting securities of the Fund. This Agreement shall
terminate automatically in the event of its assignment or in the
event of an assignment of the Adviser's Agreement with the Fund.
10. LIMITATION OF LIABILITY OF TRUSTEES AND SHAREHOLDERS. The
Sub-Adviser acknowledges the following limitation of liability:
The terms "The Victory Portfolios" and "Trustees of The Victory
Portfolios" refer, respectively, to the trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under the
Trust Instrument, to which reference is hereby made and a copy of which is on
file at the office of the Secretary of State of the State of Delaware, such
reference being inclusive of any and all amendments thereto so filed or
hereafter filed. The obligations of "The Victory Portfolios" entered into in the
name or on behalf thereof by any of the Trustees, representatives or agents are
made not individually, but in such capacities and are not binding upon any of
the Trustees, shareholders or representatives of the Company personally, but
bind only the
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<PAGE>
assets of the Company, and all persons dealing with the Company or a Fund must
look solely to the assets of the Company or Fund for the enforcement of any
claims against the Company or Fund.
11. CERTAIN DEFINITIONS. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
12. INDEPENDENT CONTRACTOR. The Sub-Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees of the Company
from time to time, have no authority to act for or represent a Fund in any way
or otherwise be deemed an agent of the Fund.
13. STRUCTURE OF AGREEMENT. This Agreement is intended to govern only
the relationship between the Adviser, on the one hand, and the Sub-Adviser, on
the other hand, and is not intended to and shall not govern (i) the relationship
between the Adviser or Sub-Adviser and the Fund or any series of the Company, or
(ii) the relationships among the respective series of the Company.
14. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Ohio, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
15. JURISDICTION. Adviser and Sub-Adviser each consents to the
exclusive jurisdiction of the courts of the State of New York and the Federal
courts of the United States of America located in such state; agrees that any
legal action, suit or proceeding arising out of or relating to this Agreement
may be brought in such courts; and waives, and agrees not to assert, as a
defense in any such action, suit or proceeding that it (i) is not subject
thereto, (ii) that such action, suit or proceeding may not be brought or is not
maintainable in such courts or (iii) that this Agreement may not be enforced in
or by such courts. Final judgment against the Adviser or Sub-Adviser in any
action, suit or proceeding shall be conclusive and may be enforced in any other
jurisdiction by suit on the judgment, a certified copy of which shall be
conclusive evidence of the fact and amount of indebtedness arising from such
judgment.
16. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
17. NOTICES. Notices of any kind to be given to the Adviser hereunder
by the Sub-Adviser shall be in writing and shall be duly given if mailed or
delivered to the Adviser at 127 Public Square, Cleveland, Ohio 44114-1306,
Attention: William G. Spears; with a copy to William J. Blake, Esq., or at such
other address or to such individual as shall be so specified by the Adviser
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<PAGE>
to the Sub-Adviser. Notices of any kind to be given to the Sub-Adviser hereunder
by the Adviser shall be in writing and shall be duly given if mailed or
delivered to the Sub-Adviser at 90 Boulevard Pasteur, 75371 Paris Cedex 08,
France, Attention: Jean-Claude Kaltenbach, or at such other address or to such
individual as shall be so specified by the Sub-Adviser to the Adviser. Notices
shall be effective upon delivery.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
INDOCAM INTERNATIONAL KEY ASSET MANAGEMENT INC.
INVESTMENT SERVICES, S.A.
By: /s/Jean-Cluade Kaltenbach By: /s/Kathleen A. Dennis
------------------------- ---------------------
Name: Jean-Claude Kaltenbach Name: Kathleen A. Dennis
Title: Chairman and C.E.O. Title: Senior Managing Director
9
FORM OF
INVESTMENT ADVISORY AGREEMENT
between
THE VICTORY PORTFOLIOS
and
KEY ASSET MANAGEMENT INC.
AGREEMENT made as of the ___ day of ___, 1998, by and between The
Victory Portfolios, a Delaware business trust which may issue one or more series
of shares of beneficial interest (the "Company"), and Key Asset Management Inc.,
a New York corporation (the "Adviser").
WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Company desires to retain the Adviser to furnish
investment advisory services to the funds listed on Schedule A (each, a "Fund"
and collectively, the "Funds"), and the Adviser represents that it is willing
and possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
(a) General. The Company hereby appoints the Adviser to act as
investment adviser to the Funds for the period and on the
terms set forth in this Agreement. The Adviser accepts such
appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) Employees of Affiliates. The Adviser may, in its discretion,
provide such services through its own employees or the
employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Company under
applicable laws and are under the control of KeyCorp, the
indirect parent of the Adviser; provided that (i) all persons,
when providing services hereunder, are functioning as part of
an organized group of persons, and (ii) such organized group
of persons is managed at all times by authorized officers of
the Adviser.
(c) Sub-Advisers. It is understood and agreed that the Adviser may
from time to time employ or associate with such other entities
or persons as the Adviser believes appropriate to assist in
the performance of this Agreement with respect to a particular
Fund or Funds (each a "Sub-Adviser"), and that any such
Sub-Adviser shall have all of the rights and powers of the
Adviser set forth in this Agreement; provided that a Fund
shall not pay any additional compensation for any Sub- Adviser
and the Adviser shall be as fully responsible to the Company
for the acts and omissions of the Sub-Adviser as it is for its
own acts and omissions; and
<PAGE>
provided further that the retention of any Sub-Adviser shall
be approved in advance by (i) the Board of Trustees of the
Company and (ii) the shareholders of the relevant Fund if
required under any applicable provisions of the 1940 Act or
any exemptive relief granted thereunder. The Adviser will
review, monitor and report to the Company's Board of Trustees
regarding the performance and investment procedures of any
Sub-Adviser. In the event that the services of any Sub-Adviser
are terminated, the Adviser may provide investment advisory
services pursuant to this Agreement to the Fund without a
Sub-Adviser or employ another Sub-Adviser without further
shareholder approval, to the extent consistent with the 1940
Act or any exemptive relief granted thereunder. A Sub-Adviser
may be an affiliate of the Adviser.
2. Delivery of Documents. The Company has delivered to the Adviser
copies of each of the following documents along with all amendments thereto
through the date hereof, and will promptly deliver to it all future amendments
and supplements thereto, if any:
(a) the Company's Trust Instrument;
(b) the By-Laws of the Company;
(c) resolutions of the Board of Trustees of the Company
authorizing the execution and delivery of this Agreement;
(d) the most recent Post-Effective Amendment to the Company's
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the
"Commission");
(e) Notification of Registration of the Company under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) the currently effective Prospectuses and Statements of
Additional Information of the Funds.
3. Investment Advisory Services.
(a) Management of the Funds. The Adviser hereby undertakes to act
as investment adviser to the Funds. The Adviser shall
regularly provide investment advice to the Funds and
continuously supervise the investment and reinvestment of
cash, securities and other property composing the assets of
the Funds and, in furtherance thereof, shall:
(i) supervise all aspects of the operations of the
Company and each Fund;
(ii) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the
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<PAGE>
economy generally, the Funds' investment programs,
and the issuers of securities included in the Funds'
portfolios and the industries in which they engage,
or which may relate to securities or other
investments which the Adviser may deem desirable for
inclusion in a Fund's portfolio;
(iii) determine which issuers and securities shall be
included in the portfolio of each Fund;
(iv) furnish a continuous investment program for each
Fund;
(v) in its discretion and without prior consultation with
the Company, buy, sell, lend and otherwise trade any
stocks, bonds and other securities and investment
instruments on behalf of each Fund; and
(vi) take, on behalf of each Fund, all actions the Adviser
may deem necessary in order to carry into effect such
investment program and the Adviser's functions as
provided above, including the making of appropriate
periodic reports to the Company's Board of Trustees.
(b) Covenants. The Adviser shall carry out its investment advisory
and supervisory responsibilities in a manner consistent with
the investment objectives, policies, and restrictions provided
in: (i) each Fund's Prospectus and Statement of Additional
Information as revised and in effect from time to time; (ii)
the Company's Trust Instrument, By-Laws or other governing
instruments, as amended from time to time; (iii) the 1940 Act;
(iv) other applicable laws; and (v) such other investment
policies, procedures and/or limitations as may be adopted by
the Company with respect to a Fund and provided to the Adviser
in writing. The Adviser agrees to use reasonable efforts to
manage each Fund so that it will qualify, and continue to
qualify, as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder (the "Code"), except as may be
authorized to the contrary by the Company's Board of Trustees.
The management of the Funds by the Adviser shall at all times
be subject to the review of the Company's Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Adviser
shall keep each Fund's books and records required to be
maintained by, or on behalf of, the Funds with respect to
advisory services rendered hereunder. The Adviser agrees that
all records which it maintains for a Fund are the property of
the Fund and it will promptly surrender any of such records to
the Fund upon the Fund's request. The Adviser further agrees
to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records of the Fund required to be preserved
by such Rule.
(d) Reports, Evaluations and other Services. The Adviser shall
furnish reports, evaluations, information or analyses to the
Company with respect to the Funds and in connection with the
Adviser's services hereunder as the Company's Board of
Trustees may request from time to time or as the Adviser may
otherwise deem to
3
<PAGE>
be desirable. The Adviser shall make recommendations to the
Company's Board of Trustees with respect to Company policies,
and shall carry out such policies as are adopted by the Board
of Trustees. The Adviser shall, subject to review by the Board
of Trustees, furnish such other services as the Adviser shall
from time to time determine to be necessary or useful to
perform its obligations under this Agreement.
(e) Purchase and Sale of Securities. The Adviser shall place all
orders for the purchase and sale of portfolio securities for
each Fund with brokers or dealers selected by the Adviser,
which may include brokers or dealers affiliated with the
Adviser to the extent permitted by the 1940 Act and the
Company's policies and procedures applicable to the Funds. The
Adviser shall use its best efforts to seek to execute
portfolio transactions at prices which, under the
circumstances, result in total costs or proceeds being the
most favorable to the Funds. In assessing the best overall
terms available for any transaction, the Adviser shall
consider all factors it deems relevant, including the breadth
of the market in the security, the price of the security, the
financial condition and execution capability of the broker or
dealer, research services provided to the Adviser, and the
reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In no event
shall the Adviser be under any duty to obtain the lowest
commission or the best net price for any Fund on any
particular transaction, nor shall the Adviser be under any
duty to execute any order in a fashion either preferential to
any Fund relative to other accounts managed by the Adviser or
otherwise materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. Selection of Brokers or
Dealers. In selecting brokers or dealers qualified to execute
a particular transaction, brokers or dealers may be selected
who also provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange
Act of 1934) to the Adviser and/or the other accounts over
which the Adviser exercises investment discretion. The Adviser
is authorized to pay a broker or dealer who provides such
brokerage and research services a commission for executing a
portfolio transaction for the Fund which is in excess of the
amount of commission another broker or dealer would have
charged for effecting that transaction if the Adviser
determines in good faith that the total commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall
responsibilities of the Adviser with respect to accounts over
which it exercises investment discretion. The Adviser shall
report to the Board of Trustees of the Company regarding
overall commissions paid by the Fund and their reasonableness
in relation to their benefits to the Fund. Any transactions
for the Fund that are effected through an affiliated
broker-dealer on a national securities exchange of which such
broker- dealer is a member will be effected in accordance with
Section 11(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder, including
Rule 11a2-2(T). The Fund hereby authorizes any such broker or
dealer to retain commissions for effecting such transactions
and to pay
4
<PAGE>
out of such retained commissions any compensation due to
others in connection with effectuating those transactions.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for a Fund, the Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other Funds or its other clients if, in the
Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Fund, taking into
consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies
set forth in the Company's registration statement and the
Fund's Prospectus and Statement of Additional Information. In
such event, the Adviser will allocate the securities so
purchased or sold, and the expenses incurred in the
transaction, in an equitable manner, consistent with its
fiduciary obligations to the Fund and such other clients.
4. Representations and Warranties.
(a) The Adviser hereby represents and warrants to the Company as
follows:
(i) The Adviser is a corporation duly organized and in
good standing under the laws of the State of New York
and is fully authorized to enter into this Agreement
and carry out its duties and obligations hereunder.
(ii) The Adviser is registered as an investment adviser
with the Commission under the Investment Advisers Act
of 1940, as amended (the "Advisers Act"), and is
registered or licensed as an investment adviser under
the laws of all applicable jurisdictions. The Adviser
shall maintain such registrations or licenses in
effect at all times during the term of this
Agreement.
(iii) The Adviser at all times shall provide its best
judgment and effort to the Company in carrying out
the Adviser's obligations hereunder.
(b) The Company hereby represents and warrants to the Adviser as
follows:
(i) The Company has been duly organized as a business
trust under the laws of the State of Delaware and is
authorized to enter into this Agreement and carry out
its terms.
(ii) The Company is registered as an investment company
with the Commission under the 1940 Act and shares of
each Fund are registered for offer and sale to the
public under the 1933 Act and all applicable state
5
<PAGE>
securities laws where currently sold. Such
registrations will be kept in effect during the term
of this Agreement.
5. Compensation. As compensation for the services which the Adviser is
to provide or cause to be provided pursuant to Paragraph 3, each Fund shall pay
to the Adviser out of Fund assets an annual fee, computed and accrued daily and
paid in arrears on the first business day of every month, at the rate set forth
opposite each Fund's name on Schedule A, which shall be a percentage of the
average daily net assets of the Fund (computed in the manner set forth in the
Fund's most recent Prospectus and Statement of Additional Information)
determined as of the close of business on each business day throughout the
month. At the request of the Adviser, some or all of such fee shall be paid
directly to a Sub-Adviser. The fee for any partial month under this Agreement
shall be calculated on a proportionate basis. In the event that the total
expenses of a Fund exceed the limits on investment company expenses imposed by
any statute or any regulatory authority of any jurisdiction in which shares of
such Fund are qualified for offer and sale, the Adviser will bear the amount of
such excess, except: (i) the Adviser shall not be required to bear such excess
to an extent greater than the compensation due to the Adviser for the period for
which such expense limitation is required to be calculated unless such statute
or regulatory authority shall so require, and (ii) the Adviser shall not be
required to bear the expenses of the Fund to an extent which would result in the
Fund's or Company's inability to qualify as a regulated investment company under
the provisions of Subchapter M of the Code.
6. Interested Persons. It is understood that, to the extent consistent
with applicable laws, the Trustees, officers and shareholders of the Company are
or may be or become interested in the Adviser as directors, officers or
otherwise and that directors, officers and shareholders of the Adviser are or
may be or become similarly interested in the Company.
7. Expenses. As between the Adviser and the Funds, the Funds will pay
for all their expenses other than those expressly stated to be payable by the
Adviser hereunder, which expenses payable by the Funds shall include, without
limitation, (i) interest and taxes; (ii) brokerage commissions and other costs
in connection with the purchase or sale of securities and other investment
instruments, which the parties acknowledge might be higher than other brokers
would charge when a Fund utilizes a broker which provides brokerage and research
services to the Adviser as contemplated under Paragraph 3 above; (iii) fees and
expenses of the Company's Trustees that are not employees of the Adviser; (iv)
legal and audit expenses; (v) administrator, custodian, pricing and bookkeeping,
registrar and transfer agent fees and expenses; (vi) fees and expenses related
to the registration and qualification of the Funds' shares for distribution
under state and federal securities laws; (vii) expenses of printing and mailing
reports and notices and proxy material to shareholders, unless otherwise
required; (viii) all other expenses incidental to holding meetings of
shareholders, including proxy solicitations therefor, unless otherwise required;
(ix) expenses of typesetting for printing Prospectuses and Statements of
Additional Information and supplements thereto; (x) expenses of printing and
mailing Prospectuses and Statements of Additional Information and supplements
thereto sent to existing shareholders; (xi) insurance premiums for fidelity
bonds and other coverage to the extent approved by the Company's Board of
Trustees; (xii) association membership dues authorized by the Company's Board of
Trustees;
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<PAGE>
and (xiii) such non-recurring or extraordinary expenses as may arise, including
those relating to actions, suits or proceedings to which the Company is a party
(or to which the Funds' assets are subject) and any legal obligation for which
the Company may have to provide indemnification to the Company's Trustees and
officers.
8. Non-Exclusive Services; Limitation of Adviser's Liability. The
services of the Adviser to the Funds are not to be deemed exclusive and the
Adviser may render similar services to others and engage in other activities.
The Adviser and its affiliates may enter into other agreements with the Funds
and the Company for providing additional services to the Funds and the Company
which are not covered by this Agreement, and to receive additional compensation
for such services. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder on the part
of the Adviser, or a breach of fiduciary duty with respect to receipt of
compensation, neither the Adviser nor any of its directors, officers,
shareholders, agents, or employees shall be liable or responsible to the
Company, the Funds or to any shareholder of the Funds for any error of judgment
or mistake of law or for any act or omission in the course of, or connected
with, rendering services hereunder or for any loss suffered by the Company, a
Fund or any shareholder of a Fund in connection with the performance of this
Agreement.
9. Effective Date; Modifications; Termination. This Agreement shall
become effective as of the date first written above, provided that it shall have
been approved by a majority of the outstanding voting securities of each Fund,
in accordance with the requirements of the 1940 Act, or such later date as may
be agreed by the parties following such shareholder approval.
(a) This Agreement shall continue in force for a period of two
years from the date of this Agreement. Thereafter, this
Agreement shall continue in effect as to each Fund for
successive annual periods, provided such continuance is
specifically approved at least annually (i) by a vote of the
majority of the Trustees of the Company who are not parties to
this Agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on
such approval and (ii) by a vote of the Board of Trustees of
the Company or a majority of the outstanding voting shares of
the Fund.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those
Trustees of the Company who are not interested persons of any
party to this Agreement, cast in person at a meeting called
for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9,
either party hereto may terminate this Agreement at any time
on sixty (60) days' prior written notice to the other, without
payment of any penalty. Such a termination by the Company may
be effected severally as to any particular Fund, and shall be
effected as to any Fund by vote of the Company's Board of
Trustees or by vote of a majority of the
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<PAGE>
outstanding voting securities of the Fund. This Agreement
shall terminate automatically in the event of its assignment.
10. Limitation of Liability of Trustees and Shareholders. The Adviser
acknowledges the following limitation of liability:
The terms "The Victory Portfolios" and "Trustees" refer, respectively,
to the trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under the Trust Instrument, to which
reference is hereby made and a copy of which is on file at the office of the
Secretary of State of the State of Delaware, such reference being inclusive of
any and all amendments thereto so filed or hereafter filed. The obligations of
"The Victory Portfolios" entered into in the name or on behalf thereof by any of
the Trustees, representatives or agents are made not individually, but in such
capacities and are not binding upon any of the Trustees, shareholders or
representatives of the Company personally, but bind only the assets of the
Company, and all persons dealing with the Company or a Fund must look solely to
the assets of the Company or Fund for the enforcement of any claims against the
Company or Fund.
11. Service Mark. The service mark of the Company and the name
"Victory" (and derivatives thereof) have been licensed to the Company by
KeyCorp, through its subsidiary Key Trust Company ("Key Trust"), an affiliate of
the Adviser, pursuant to a License Agreement dated June 21, 1993, and their
continued use is subject to the right of Key Trust to withdraw this permission
under the License Agreement in the event the Adviser or another subsidiary of
KeyCorp is not the investment adviser to the Company.
12. Certain Definitions. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
13. Independent Contractor. The Adviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees of the Company from time
to time, have no authority to act for or represent a Fund in any way or
otherwise be deemed an agent of a Fund.
14. Structure of Agreement. The Company is entering into this Agreement
on behalf of the respective Funds severally and not jointly. The
responsibilities and benefits set forth in this Agreement shall refer to each
Fund severally and not jointly. No Fund shall have any responsibility for any
obligation of any other Fund arising out of this Agreement. Without otherwise
limiting the generality of the foregoing:
(a) any breach of any term of this Agreement regarding the Company
with respect to any one Fund shall not create a right or
obligation with respect to any other Fund;
8
<PAGE>
(b) under no circumstances shall the Adviser have the right to set
off claims relating to a Fund by applying property of any
other Fund; and
(c) the business and contractual relationships created by this
Agreement, consideration for entering into this Agreement, and
the consequences of such relationship and consideration relate
solely to the Company and the particular Fund to which such
relationship and consideration applies.
This Agreement is intended to govern only the relationships between the
Adviser, on the one hand, and the Company and the Funds, on the other hand, and
(except as specifically provided above in this Paragraph 14) is not intended to
and shall not govern (i) the relationship between the Company and any Fund or
(ii) the relationships among the respective Funds.
15. Governing Law. This Agreement shall be governed by the laws of the
State of Ohio, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
16. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
17. Notices. Notices of any kind to be given to the Company hereunder
by the Adviser shall be in writing and shall be duly given if mailed or
delivered to 3435 Stelzer Road, Columbus, Ohio 43219-3035, Attention: Michael J.
Sullivan; with a copy to Kramer, Levin, Naftalis & Frankel, 919 Third Avenue,
New York, New York, 10022, Attention: Carl Frischling, Esq., or at such other
address or to such individual as shall be so specified by the Company to the
Adviser. Notices of any kind to be given to the Adviser hereunder by the Company
shall be in writing and shall be duly given if mailed or delivered to the
Adviser at 127 Public Square, Cleveland, Ohio 44114-1306, Attention: Kathleen A.
Dennis, with a copy to William Blake, Esq., or at such other address or to such
individual as shall be so specified by the Adviser to the Company. Notices shall
be effective upon delivery.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
THE VICTORY PORTFOLIOS KEY ASSET MANAGEMENT INC.
By: _____________________________ By:_____________________________
Name: Michael J. Sullivan Name: Kathleen A. Dennis
Title: Secretary Title: Senior Managing Director
9
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Schedule A
Name of Fund Fee*
- ------------ ----
1. The Maine Municipal Bond Fund (Intermediate) .60%
2. The Maine Municipal Bond Fund (Short-Term) .60%
3. The Michigan Municipal Bond Fund .60%
4. The Equity Income Fund 1.00%
5. The National Municipal Bond Fund (Short-Intermediate) .55%
6. The National Municipal Bond Fund (Long) .60%
- --------------
* As a percentage of average daily net assets. Note, however, that the
Adviser shall have the right, but not the obligation, to voluntarily
waive any portion of the advisory fee from time to time. Any such
voluntary waiver will be irrevocable and determined in advance of
rendering investment advisory services by the Adviser, and shall be in
writing and signed by the parties hereto.
DISTRIBUTION AGREEMENT
This Distribution Agreement is made as of this 1st day of June , 1996
between THE VICTORY PORTFOLIOS, a Delaware business trust (herein called the
"Trust"), and BISYS Fund Services Limited Partnership, a Delaware corporation
(herein called the "Distributor").
WHEREAS, the Trust is an open-end management investment company and is
so registered under the Investment Company Act of 1940; and
WHEREAS, the Trust desires to retain the Distributor as Distributor for
each of the Trust's separate portfolios set forth on Schedule I hereto, as such
Schedule may be revised from time to time (individually known as a "Fund" and
collectively as the "Funds") to provide for the sale and distribution of shares
of beneficial interest without par value of the Funds (herein collectively
called "Shares"), and the Distributor is willing to render such services;
NOW THEREFORE, in consideration of the premises and mutual convenants
set forth herein the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Trust has delivered to the Distributor copies of each of the
following documents and will deliver to it all future amendments and supplements
thereto, if any:
(a) The Trust's Certificate of Trust and all amendments
thereto (such Certificate of Trust, as presently in effect and as it
shall from time to time be amended, herein called the "Trust's
Certificate");
(b) The By-Laws of the Trust (such By-Laws, as presently in
effect and as they shall from time to time be amended, herein called
the "By-Laws");
(c) Resolutions of the Board of Trustees of the Trust
authorizing the execution and delivery of this Agreement;
(d) The Trust's most recent Post-Effective Amendment to its
Registration Statement under the Securities Act of 1933, as amended
(the "1933 Act"), and under the Investment Company Act of 1940, as
amended (the "1940 Act"), on Form N-1A as filed with the Securities and
Exchange Commission (the "Commission") and all subsequent amendments
thereto (said Registration Statement, as presently in effect and as
amended or supplemented from time to time, is herein called the
"Registration Statement");
<PAGE>
(e) Notification of Registration of the Trust under the 1940
Act on Form N-8A as filed with the Commission; and
(f) Prospectuses and Statements of Additional Information of
the Funds (such prospectuses and statements of additional information,
as presently filed with the Securities and Exchange Commission and as
they shall from time to time be amended and supplemented, herein called
individually the "Prospectus" and collectively the "Prospectuses").
II. DISTRIBUTION
1. APPOINTMENT OF DISTRIBUTOR. The Trust hereby appoints the
Distributor as Principal Distributor of the Fund's Shares and the Distributor
hereby accepts such appointment and agrees to render the services and duties set
forth in this Section II.
2. SERVICES AND DUTIES.
(a) The Trust agrees to sell through the Distributor, as
agent, from time to time during the term of this Agreement, Shares of
the Funds (whether authorized but unissued or treasury shares, in the
Trust's sole discretion) upon the terms and at the current offering
price as described in the applicable Prospectus. The Distributor will
act only in its own behalf as principal in making agreements with
selected dealers or others for the sale and redemption of Shares, and
shall sell Shares only at the offering price thereof as set forth in
the applicable Prospectus. The Distributor shall devote its best
efforts to effect sales of Shares of each of the Funds, but shall not
be obligated to sell any certain number of Shares. Each Fund reserves
the right to issue Shares in connection with any merger or
consolidation of the Trust or any Fund with any other investment
company or personal holding company or in connection with offers of
exchange exempted from Section 11(a) of the 1940 Act.
(b) In all matters relating to the sale and redemption of
Shares, the Distributor will act in conformity with the Trust's
Certificate, By-Laws, and Prospectuses and with the instructions and
directions of the Board of Trustees of the Trust and will conform to
and comply with the requirements of the 1933 Act, the 1940 Act, the
regulations of the National Association of Securities Dealers, Inc. and
all other applicable federal or state laws and regulations. In
connection with such sales, the Distributor acknowledges and agrees
that it is not authorized to provide any information or make any
representations other than as contained in the Trust's Registration
Statement and Prospectuses and any sales literature specifically
approved by the Trust. The Trust shall not be responsible in any way
for any information, statements or representations given or made by
2
<PAGE>
the Distributor or its representatives or agents other than such
information, statements or representations contained in the
Prospectuses or other financial statements of the Trust or in any sales
literature or advertisements specifically approved by the Trust.
(c) The Distributor will bear the cost of (i) printing and
distributing any Prospectus (including any supplement thereto) to
persons who are not either shareholders or counsel, independent
accountants or other persons providing similar services to the Trust,
and (ii) preparing, printing and distributing any literature,
advertisement or material which is primarily intended to result in the
sale of the Shares; provided, however, that the Distributor shall not
be obligated to bear the expenses incurred by the Trust in connection
with the preparation and printing of any amendment to any Registration
Statement or Prospectus necessary for the continued effective
registration of the Shares under the 1933 Act; and provided further,
that each Fund will bear the expenses incurred and other payments made
in accordance with the provisions of this Agreement and any plan now in
existence or hereafter adopted with respect to such Fund, or any class
or classes of shares of such Fund, pursuant to Rule 12b-1 under the
1940 Act (collectively, the "Plans").
(d) The Distributor agrees to be responsible for implementing
and/or operating the Plans in accordance with the terms thereof.
(e) All Shares of the Funds offered for sale by the
Distributor shall be offered for sale to the public at a price per
Share (the "offering price") equal to (i) their net asset value
(determined in the manner set forth in the Trust's Certificate and then
current Prospectuses) plus (ii) a sales charge (if any) which shall be
the percentage of the offering price of such Shares as set forth in the
Trust's then current Prospectuses. The offering price, if not an exact
multiple of one cent, shall be adjusted to the nearest cent. If a sales
charge is in effect, the Distributor shall have the right to pay a
portion of the sales charge to broker-dealers and other persons who
have sold Shares of the Funds. Concessions by the Distributor to
broker-dealers and other persons shall be set forth in either the
selling agreements between the Distributor and such broker-dealers and
persons or, if such concessions are described in the then current
Prospectuses, shall be as so set forth. No broker-dealer or other
person who enters into a selling agreement with the Distributor shall
be authorized to act as agent for the Trust in connection with the
offering or sale of its Shares to the public or otherwise.
(f) If any Shares sold by the Distributor under the terms of
this Agreement are redeemed or repurchased by the
3
<PAGE>
Trust or by the Distributor as agent or are tendered for redemption
within seven business days after the date of confirmation of the
original purchase of said Shares, the Distributor shall forfeit the
amount (if any) of the net asset value received by it in respect of
such Shares, provided that the portion, if any, of such amount (if any)
re-allowed by the Distributor to broker-dealers or other persons shall
be repayable to the Trust only to the extent recovered by the
Distributor from the broker-dealer or other person concerned. The
Distributor shall include in the forms of agreement with such
broker-dealers and other persons a corresponding provision for the
forfeiture by them of their concession with respect to Shares sold by
them or their principals and redeemed or repurchased by the Trust or by
the Distributor as agent (or tendered for redemption) within seven
business days after the date of confirmation of such initial purchases.
3. SALES AND REDEMPTIONS.
(a) The Trust shall pay all costs and expenses in connection
with the registration of the Shares under the 1933 Act, and all
expenses in connection with maintaining facilities for the issue and
transfer of the Shares and for supplying information, prices and other
data to be furnished by the Trust hereunder, and all expenses in
connection with preparing, printing and distributing the Prospectus
except as set forth in subsection 2(c) of Section II hereof.
(b) The Trust shall execute all documents, furnish all
information and otherwise take all actions which may be reasonably
necessary in the discretion of the Trust's officers in connection with
the qualification of the Shares for sale in such states as the
Distributor may designate to the Trust and the Trust may approve, and
the Trust shall pay all filing fees which may be incurred in connection
with such qualification. The Distributor shall pay all expenses
connected with its qualification as a dealer under state or federal
laws and, except as otherwise specifically provided in this Agreement,
all other expenses incurred by the Distributor in connection with the
sale of the Shares as contemplated in this Agreement. It is understood
that certain advertising, marketing, shareholder servicing,
administration and/or distribution expenses to be incurred in
connection with the Shares will be paid by the Funds as provided in
this Agreement and in the Plans relating thereto.
(c) The Trust shall have the right to suspend the sale of
Shares of any Fund at any time in response to conditions in the
securities markets or otherwise, and to suspend the redemption of
Shares of any Fund at any time permitted by the 1940 Act or the rules
of the Commission ("Rules").
4
<PAGE>
(d) The Trust reserves the right to reject any order for
Shares.
III. LIMITATION OF LIABILITY
The Distributor shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust or any Fund in connection
with the matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or negligence on its part in the performance of
its duties or from reckless disregard by it of its obligations and duties under
this Agreement.
IV. CONFIDENTIALITY
The Distributor will treat confidentially and as proprietary
information of the Trust all records and other information relative to the
Trust, to the Trust's prior or present shareholders and to those persons or
entities who respond to the Distributor's inquiries concerning investment in the
Trust, and except as provided below, will not use such records and information
for any purpose other than the performance of its responsibilities and duties
hereunder or the performance of its responsibilities and duties with regard to
sales of the shares of any Fund which may be added to the Trust in the future.
Any other use by the Distributor of the information and records referred to
above may be made only after prior notification to and approval in writing by
the Trust. Such approval shall not be unreasonably withheld and may not be
withheld where (i) the Distributor may be exposed to civil or criminal contempt
proceedings for failure to divulge such information; (ii) the Distributor is
requested to divulge such information by duly constituted authorities; or (iii)
the Distributor is so requested by the Trust.
V. INDEMNIFICATION
1. TRUST REPRESENTATIONS. The Trust represents and warrants to the
Distributor that at all times the Registration Statement and Prospectuses will
in all material respects conform to the applicable requirements of the 1933 Act
and the Rules and will 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, except that no representation or warranty in this
subsection shall apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Trust by or on behalf of
and with respect to the Distributor expressly for use in the Registration
Statement or Prospectuses.
2. DISTRIBUTOR REPRESENTATIONS. The Distributor represents and warrants
to the Trust that it is duly organized as a Delaware corporation and is and at
all times will remain duly authorized and licensed to carry out its services as
contemplated herein.
5
<PAGE>
3. TRUST INDEMNIFICATION. The Trust will indemnify, defend and hold
harmless the Distributor, its several officers and directors, and any person who
controls the Distributor within the meaning of Section 15 of the 1933 Act, from
and against any losses, claims, damages or liabilities, joint or several, to
which any of them may become subject under the 1933 Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of, or are based upon, any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, the Prospectuses or in any application or other document executed by
or on behalf of the Trust, or arise out of, or are based upon, information
furnished by or on behalf of the Trust filed in any state in order to qualify
the Shares under the securities or blue sky laws thereof ("Blue Sky
Application"), or arise out of, or are based upon, the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Distributor, its several officers and directors, and any person who controls the
Distributor within the meaning of Section 15 of the 1933 Act, for any legal or
other expenses reasonably incurred by any of them in investigating, defending,
or preparing to defend any such action, proceeding or claim; provided, however,
that the Trust shall not be liable in any case to the extent that such loss,
claim, damage or liability arises out of, or is based upon, any untrue
statement, alleged untrue statement, or omission or alleged omission made in the
Registration Statement, the Prospectuses, any Blue Sky Application or any
application or other document executed by or on behalf of the Trust in reliance
upon and in conformity with written information furnished to the Trust by or on
behalf of and with respect to the Distributor specifically for inclusion
therein.
The Trust shall not indemnify any person pursuant to this subsection 3
unless the court or other body before which the proceeding was brought has
rendered a final decision on the merits that such person was not liable by
reason of his willful misfeasance, bad faith or negligence in the performance of
his duties, or his reckless disregard of obligations and duties, under this
Agreement ("disabling conduct") or, in the absence of such a decision, a
reasonable determination (based upon a review of the facts) that such person was
not liable by reason of disabling conduct has been made by the vote of a
majority of a quorum of trustees of the Trust who are neither "interested
persons" of the Trust (as defined in the 1940 Act) nor parties to the
proceeding, or by an independent legal counsel in a written opinion.
Each Fund shall advance attorney's fees and other expenses incurred by
any person in defending any claim, demand, action or suit which is the subject
of a claim for indemnification pursuant to this subsection 3, so long as: (i)
such person shall undertake to repay all such advances unless it is ultimately
determined
6
<PAGE>
that he is entitled to indemnification hereunder; and (ii) such person shall
provide security for such undertaking, or the Fund shall be insured against
losses arising by reason of any lawful advances, or a majority of a quorum of
the disinterested, nonparty trustees of the Trust (or an independent legal
counsel in a written opinion) shall determine based on a review of readily
available facts (as opposed to a full trial-type inquiry) that there is reason
to believe that such person ultimately will be found entitled to indemnification
hereunder.
4. DISTRIBUTOR INDEMNIFICATION. The Distributor will indemnify, defend
and hold harmless the Trust, the Trust's several officers and trustees and any
person who controls the Trust within the meaning of Section 15 of the 1933 Act,
from and against any losses, claims, damages or liabilities, joint or several,
to which any of them may become subject under the 1933 Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings in
respect hereof) arise out of, or are based upon, any breach of its
representations and warranties in subsection 2 hereof or its agreements in
subsection 2 of Section II hereof, or which arise out of, or are based upon, any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, the Prospectuses, any Blue Sky Application or any
application or other document executed by or on behalf of the Trust, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, which
statement or omission or alleged statement or alleged omission was made in
reliance upon or in conformity with information furnished in writing to the
Trust or any of its several officers and trustees by or on behalf of and with
respect to the Distributor specifically for inclusion therein, and will
reimburse the Trust, the Trust's several officers and trustees, and any person
who controls the Trust within the meaning of Section 15 of the 1933 Act, for any
legal or other expenses reasonably incurred by any of them in investigating,
defending or preparing to defend any such action, proceeding or claim.
5. GENERAL INDEMNITY PROVISIONS. No indemnifying party shall be liable
under its indemnity agreement contained in subsection 3 or 4 hereof with respect
to any claim made against such indemnifying party unless the indemnified party
shall have notified the indemnifying party in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the indemnified party (or after the
indemnified party shall have received notice of such service on any designated
agent), but failure to notify the indemnifying party of any such claim shall not
relieve it from any liability which it may otherwise have to the indemnified
party. The indemnifying party will be entitled to participate at its own expense
in the defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, and if the indemnifying party elects
7
<PAGE>
to assume the defense, such defense shall be conducted by counsel chosen by it
and reasonably satisfactory to the indemnified party. In the event the
indemnifying party elects to assume the defense of any such suit and retain such
counsel, the indemnified party shall bear the fees and expenses of any
additional counsel retained by the indemnified party.
VI. DURATION AND TERMINATION
This Agreement shall become effective as of the date first above
written, and, unless sooner terminated as provided herein, shall continue until
May 31, 1998. Thereafter, if not terminated, this Agreement shall continue
automatically for successive terms of one year, provided that such continuance
is specifically approved at least annually (a) by a majority of those members of
the Board of Trustees of the Trust who are not parties to this Agreement or
"interested persons" of any such party (the "Disinterested Trustees"), pursuant
to a vote cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Trustees of the Trust or by vote of a
"majority of the outstanding voting securities" of the Trust. Notwithstanding
anything to the contrary contained in this Section VI, this Agreement may be
terminated by the Trust at any time with respect to any Fund, without the
payment of any penalty, by vote of a majority of the Disinterested Trustees or
by vote of a "majority of the outstanding voting securities" of such Fund on 60
days' written notice to the Distributor, or by the Distributor at any time,
without the payment of any penalty, on 60 days' written notice to the Trust.
This Agreement will automatically terminate in the event of its "assignment."
(As used in this Agreement, the terms "majority of the outstanding voting
securities," "interested person" and "assignment" shall have the same meanings
as such terms have in the 1940 Act.)
VII. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated except by an instrument in writing signed by the party against which
an enforcement of the change, waiver, discharge or termination is sought.
VIII. NOTICES
Notices of any kind to be given to the Trust hereunder by the
Distributor shall be in writing and shall be duly given if mailed or delivered
to the Trust c/o Mutual Fund Products, KeyCorp Management Company, 127 Public
Square, Cleveland, Ohio 44114, with a copy to Kramer, Levin, Naftalis & Frankel,
919 Third Avenue, New York, New, York 10022, Attention: Carl Frischling,
Esquire, or at such other address or to such individual as shall be so specified
by the Trust to the Distributor. Notices of any kind to be given to the
Distributor hereunder by the Trust shall be in writing and shall be duly given
if mailed or delivered to the Distributor at 3534 Stelzer
8
<PAGE>
Road, Columbus, Ohio 43219, Attention: Stephen G. Mintos, Chief Executive
Officer, or at such other address or to such individual as shall be so specified
by the Distributor to the Trust.
IX. COMPENSATION
The Distributor shall not receive compensation with respect to the
provision of distribution services under this Agreement; provided, however, that
the Distributor shall be entitled to receive payments, if any, under the Plans
in accordance with the terms thereof and payments, if any, of sales charges as
set forth in the Trust's Prospectuses. The Trust is entering into this Agreement
on behalf of the Funds listed on Schedule I severally and not jointly. The
responsibilities and benefits set forth in this Agreement shall refer to each
Fund severally and not jointly. No individual Fund shall have any responsibility
for any obligation, if any, with respect to any other Fund arising out of this
Agreement.
X. MISCELLANEOUS
1. CONSTRUCTION. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Section VI hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by New York law; provided,
however, that nothing herein shall be construed in a manner inconsistent with
the Investment Company Act of 1940 or any rule or regulation of the Commission
thereunder.
2. NAMES. The names "The Victory Portfolios" and "Trustees of The
Victory Portfolios" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Certificate of Trust filed December 21, 1995,at the office of the Secretary of
State of the State of Delaware which is hereby referred to and is also on file
at the principal office of the Trust. The obligations of The Victory Portfolios
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, shareholders or representatives of the
Trust personally, but bind only the Trust property, and all persons dealing with
any class of shares of the Trust must look solely to the Trust property
belonging to such class for the enforcement of any claims against the Trust.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE VICTORY PORTFOLIOS
By:/s/J. David Huber
-----------------
Vice President
Attest:/s/Scott A. Englehart
---------------------
Secretary
BISYS FUND SERVICES LIMITED
PARTNERSHIP, d/b/a
BISYS FUND SERVICES
By:/s/J. David Huber
-----------------
Executive Vice President
Attest:/s/George O. Martinez
---------------------
Senior Vice President
10
<PAGE>
SCHEDULE I
As Amended as of June 1, 1996
Name of Fund Class
- ------------ -----
1. The Victory Balanced Fund A/B
2. The Victory Diversified Stock Fund A/B
3. The Victory Government Mortgage Fund A
4. The Victory Growth Fund A
5. The Victory Intermediate Income Fund A
6. The Victory International Growth Fund A/B
7. The Victory Investment Quality Bond Fund A
8. The Victory Limited Term Income Fund A
9. The Victory Ohio Municipal Bond Fund A
10. The Victory Ohio Regional Stock Fund A/B
11. The Victory Prime Obligations Fund A
12. The Victory Special Growth Fund A
13. The Victory Special Value Fund A/B
14. The Victory Stock Index Fund A
15. The Victory Tax-Free Money Market Fund A
16. The Victory U.S. Government Obligations Fund Investor/Select
17. The Victory Value Fund A
18. The Victory Financial Reserves Fund A
19. The Victory Fund for Income A
20. The Victory Government Bond Fund A/B
21. The Victory Institutional Money Market Fund Investor/Select
22. The Victory National Municipal Bond Fund A/B
23. The Victory New York Tax-Free Fund A/B
24. The Victory Ohio Municipal Money Market Fund A
11
<PAGE>
SCHEDULE I
As Amended as of March 1, 1997
Name of Fund Class
- ------------ -----
1. The Victory Balanced Fund A/B
2. The Victory Diversified Stock Fund A/B
3. The Victory Government Mortgage Fund A
4. The Victory Growth Fund A
5. The Victory Intermediate Income Fund A
6. The Victory International Growth Fund A/B
7. The Victory Investment Quality Bond Fund A
8. The Victory Limited Term Income Fund A
9. The Victory Ohio Municipal Bond Fund A
10. The Victory Ohio Regional Stock Fund A/B
11. The Victory Prime Obligations Fund A
12. The Victory Special Growth Fund A
13. The Victory Special Value Fund A/B
14. The Victory Stock Index Fund A
15. The Victory Tax-Free Money Market Fund A
16. The Victory U.S. Government Obligations Fund Investor/Select
17. The Victory Value Fund A
18. The Victory Financial Reserves Fund A
19. The Victory Fund for Income A
20. The Victory Government Bond Fund A/B
21. The Victory Institutional Money Market Fund Investor/Select
22. The Victory National Municipal Bond Fund A/B
23. The Victory New York Tax-Free Fund A/B
24. The Victory Ohio Municipal Money Market Fund A
25. The Victory Lakefront Fund A
26. The Victory Real Estate Investment Fund A
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<PAGE>
SCHEDULE I
Amended as of March 2, 1998
- --------------------------------------------------------------------------------
1. Victory Balanced Fund 26. Victory Federal Money Market Fund
Class A Shares Investor Shares
Class B Shares Select Shares
Key Shares 27. Victory Convertible Securities Fund
2. Victory Diversified Stock Fund 28. Victory LifeChoice Conservative
Class A Shares Investor Fund
Class B Shares 29. Victory LifeChoice Growth
3. Victory Government Mortgage Fund Investor Fund
4. Victory Growth Fund 30. Victory LifeChoice Moderate
5. Victory Financial Reserves Fund Investor Fund
6. Victory Fund for Income
7. Victory Institutional Money Market Fund
Investor Shares
Select Shares
8. Victory Intermediate Income Fund
9. Victory International Growth Fund
Class A Shares
Class B Shares
10. Victory Investment Quality Bond Fund
11. Victory Lakefront Fund
12. Victory Limited Term Income Fund
13. Victory National Municipal Bond Fund
Class A Shares
Class B Shares
14. Victory New York Tax-Free Fund
Class A Shares
Class B Shares
15. Victory Ohio Municipal Bond Fund
16. Victory Ohio Municipal Money Market Fund
17. Victory Ohio Regional Stock Fund
Class A Shares
Class B Shares
18. Victory Prime Obligations Fund
19. Victory Real Estate Investment Fund
20. Victory Special Growth Fund
21. Victory Special Value Fund
Class A Shares
Class B Shares
22. Victory Stock Index Fund
23. Victory Tax-Free Money Market Fund
24. Victory U.S. Government Obligations Fund
Investor Shares
Select Shares
25.Victory Value Fund
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
MUTUAL FUND CUSTODY AGREEMENT
THIS AGREEMENT is made as of August 1, 1996, by and between
The Victory Portfolios, a Delaware business trust (the "Trust"), which may issue
one or series of shares of beneficial interest (each a "Fund"), and Key Trust
Company of Ohio, N.A., a bank chartered under the laws of the United States,
having its principal office at 127 Public Square, Cleveland, Ohio 44114-1306
(the "Custodian").
W I T N E S S E T H:
WHEREAS, the Trust is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
1940 Act"); and
WHEREAS, the Trust desires to retain the Custodian to serve as
the Trust's custodian and the Custodian is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust, on behalf of each Fund, separately
and not jointly, hereby appoints the Custodian to act as custodian of the
securities, cash and other property of each Fund listed on Attachment A hereto,
as it may be amended from time to time, on the terms set forth in this
Agreement. The Custodian accepts such appointment and agrees to furnish the
services herein set forth in return for the compensation as provided in
Paragraph 27 of this Agreement.
2. Delivery of Documents. The Trust has furnished The
Custodian with copies properly certified or authenticated of each of the
following:
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(a) Resolutions of the Trust's Board of Trustees authorizing
the appointment of the Custodian as custodian of the securities, cash and other
property of each Fund of the Trust and approving this Agreement;
(b) Incumbency and signature certificates identifying and
containing the signatures of the Trust's officers and/or the persons authorized
to sign Proper Instructions, as hereinafter defined, on behalf of the Trust;
(c) The Trust's Certificate of Trust filed with the Secretary
of State of the State of Delaware and the Trust's Trust Instrument is filed with
the Secretary of the Trust (such Certificate of Trust and Trust Instrument, as
currently in effect and as they shall from time to time be amended, are herein
together called the "Certificate");
(d) The Trust's By-Laws and all amendments thereto (such
By-Laws, as currently in effect and as they shall from time to time be amended,
are herein called the "ByLaws");
(e) Resolutions of the Trust's Board of Trustees and/or the
Trust's shareholders approving the Investment Advisory Agreements between the
Trust on behalf of various Funds and Key Mutual Fund Advisers, Inc. dated as of
January 1, 1996
(f) The Administration Agreement between The Trust and BISYS
Fund Services Limited Partnership dated as of June 1, 1996;
(g) The Distribution Agreement between the Trust and BISYS
Fund Services Limited Partnership dated as of June 1, 1996;
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(h) The Trust's current Registration Statement on Form N-1A
under the 1940 Act and the Securities Act of 1933, as amended ("the 1933 Act")
as filed with the Securities and Exchange Commission ("SEC"); and
(i) The Trust's most recent prospectuses including all
amendments and supplements thereto (the "Prospectus").
The Trust will furnish the Custodian from time to time with
copies of all amendments of or supplements to the foregoing, if any. The Trust
will also furnish the Custodian with a copy of the opinion of counsel for the
Trust with respect to the validity of the statements issued by the Trust
("Shares") and the status of such Shares under the Act of 1933 filed with the
SEC, and any other applicable federal law or regulation.
3. Definitions.
(a) "Authorized Person". As used in this Agreement, the term
"Authorized Person" means the Trust's President, Vice-President, Treasurer and
any other person, whether or not any such person is an officer or employee of
the Trust, duly authorized by Trustees of the Trust to give Proper Instructions
on behalf of the Trust and the Funds listed on Attachment A which may be amended
from time to time.
(b) "Book-Entry System". As used in this Agreement, the term
"Book- Entry System" means the Federal Reserve/Treasury book-entry system for
United States and federal agency securities, its successor or successors and its
nominee or nominees.
(c) "Investment Adviser" means each investment adviser of
Funds of the Trust.
(d) "Property". The term "Property", as used in this
Agreement, means:
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(i) any and all securities, cash, and other property of
the Trust which the Trust may from time to time deposit, or cause to be
deposited, with the Custodian or which the Custodian may from time to
time hold for the Trust;
(ii) all income, dividends, or distributions of any kind
in respect of any other such securities or other property;
(iii) all proceeds of the sales, repurchase, redemptions
(or otherwise)of any of such securities or other property; and
(iv) all proceeds of the sale of securities issued by
the Trust, which are received by the Custodian from time to time from
or on behalf of the Trust.
(e) "Securities Depository". As used in this Agreement, the
term "Securities Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the SEC or its successor or successors and its
nominee or nominees; and shall also mean any other registered clearing agency,
its successor or successors specifically identified in a certified copy of a
resolution of the Trust's Board of Trustees delivered to the Custodian and
specifically approving deposits by the Custodian therein.
(f) "Proper Instructions". Means instructions
(i) delivered by mail; telegram,;, cable; telex;
facsimile sending device; DTC "ID" or "IID" system or any similar
system; and any Trade Order Entry System acceptable to the parties; and
received by the Mutual Funds Custody Division of the Custodian, signed
by two Authorized Persons or by persons reasonably believed by the
Custodian to be Authorized Persons; or
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(ii) transmitted electronically through the Custodian
Asset Management System or any similar electronic instruction system
acceptable to the Custodian; or
(iii) previously agreed to in writing by the Trust and
the Custodian or provided orally by the Trust in form satisfactory to
the Custodian and promptly followed by written instructions signed by
an Authorized Person.
4. Warranties and Representations.
(a) The Trust warrants and represents that:
(i) It is a business trust organized under the laws of
the Commonwealth of Massachusetts;
(ii) It is registered as an investment company under the
Investment Company Act of 1940, as amended; and
(iii) It is duly authorized to enter into this Agreement
and the Agreement is a valid and binding obligation of the Trust.
(b) the Custodian warrants and represents that:
(i) It is a national bank duly organized under the laws
of the United States;
(ii) It is duly authorized to enter into this Agreement
and the Agreement is a valid and binding obligation of the Bank; and
(iii) It is under no regulatory restriction that would
materially affect its ability to carry out its obligations under this
Agreement.
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<PAGE>
5. Delivery and Registration of the Property. (a) The Trust
will deliver or cause to be delivered to the Custodian all Property owned by it,
at any time during the period of this Agreement, except for securities and
monies to be delivered to any Subcustodian appointed pursuant to Paragraph 11
hereof. The Custodian will not be responsible for such securities and such
monies until actually received by it. All securities delivered to the Custodian
or to any such subcustodian (other than in bearer form) shall be registered in
the name of the Trust or in the name of a nominee of the Trust or in the name of
the Custodian or any nominee of the Custodian (with or without indication of
fiduciary status) or in the name of any subcustodian or any nominee of such
subcustodian appointed pursuant to Paragraph 11 hereof or shall be properly
endorsed and in form for transfer satisfactory to the Custodian.
(b) The Custodian shall at all times hold securities of the
Trust either: (i) by physical possession of the share certificates or other
instruments representing such securities in registered or bearer form; or (ii)
in the Book-Entry System, or (iii) in a Securities Depository or (iv) a
Sub-Custodian (as herein defined) of the Custodian.
(c) The Custodian shall at all times hold securities of the
Trust in the name of the Custodian, the Trust or any nominee of either of them,
unless otherwise directed by Proper Instructions; provided that, in any event,
all securities and other assets of the Trust shall be held in an account of the
Custodian containing only the securities and assets of the Trust, or only
securities and assets held by the Custodian as a fiduciary or custodian for
customers, and provided further, that the records of the Custodian shall
indicate at all times
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the Trust or other customer for which such securities and other assets are held
in such account and the respective interests therein.
6. Voting Rights. It is the Custodian's responsibility to
deliver to the Trust or the Investment Adviser of the relevant Fund, via
overnight mail if necessary, all forms of proxies, all notices of meetings, and
any other notices or announcements materially affecting or relating to
securities owned by the Trust that are received by the Custodian, any
Subcustodian (as hereinafter defined), or any nominee of either of them, and
upon receipt of Proper Instructions, the Custodian shall execute and deliver, or
use its best efforts to cause such Subcustodian or nominee to execute and
deliver, such proxies or other authorizations as may be required. Where
warrants, options, tenders or other securities have fixed expiration dates, the
Trust understands that in order for the Custodian to act, the Custodian must
receive the instructions of the Trust or the Investment Adviser at its offices
in Cleveland, addressed as the Custodian may from time to time request, by no
later than noon (Eastern time) at least one business day prior to the last
scheduled date to act with respect thereto (or such earlier date or time as the
Custodian may reasonably notify the Trust). Absent the Custodian's timely
receipt of such instructions, such instruments will expire without liability to
the Custodian.
7. Exercise of Rights; Tender Offers. Upon receipt of Proper
Instructions, the Custodian shall: (a) deliver warrants, puts, calls, rights or
similar securities to the issuer or trustee thereof, or to the agent of such
issuer or trustee, for the purpose of exercise or sale; and (b) deposit
securities upon invitations for tenders thereof, provided that the consideration
for such securities is to be paid or delivered to the Custodian, or the tendered
securities
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<PAGE>
included in the Proper Instructions that are received in exchange for the
tendered securities are to be returned to the Custodian. Notwithstanding any
provision of this Agreement to the contrary, the Custodian shall take all action
as directed in Proper Instructions to comply with the terms of all mandatory or
compulsory exchanges, calls, tenders, redemptions, or similar rights of security
ownership, and shall promptly notify the Trust or the Investment Adviser of such
action in writing by facsimile transmission or in such manner as the Trust may
designate in writing.
8. Options. Upon receipt of Proper Instructions, the Custodian
shall: (a) receive and retain confirmations or other documents, if any,
evidencing the purchase or writing of an option on a security or securities
index by the Trust; (b) deposit and maintain in a segregated account, securities
(either physically or by book entry in a Securities Depository), cash or other
assets; and/or (c) pay, release and/or transfer such securities, cash, or other
assets in accordance with notices or other communications evidencing the
expiration, termination or exercise of such options furnished by the Options
Clearing Corporation, the securities or options exchange on which such options
are traded or such other organization as may be responsible for handling such
option transactions. The Trust and the broker-dealer shall be responsible for
the sufficiency of assets held in any segregated account established in
compliance with applicable margin maintenance requirements and the performance
of other terms of any option contract, and shall promptly upon notice from the
Custodian bring such accounts into compliance with such terms or requirements.
9. Futures Contracts. Upon receipt of Proper Instructions, the
Custodian shall: (a) receive and retain confirmation, if any, evidencing the
purchase or sale of a futures
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<PAGE>
contract or an option on a futures contract by a Fund; (b) deposit and maintain
in a segregated account, cash, securities and other assets designated as
initial, maintenance or variation "margin" deposits intended to secure the
Trust's performance of its obligations under any futures contracts purchased or
sold or any options on futures contracts written by the Trust, regarding such
margin deposits; and (c) release assets from and/or transfer assets into such
margin accounts only in accordance with any such Proper Instructions. The Trust
shall be responsible for the sufficiency of assets held in the segregated
account in compliance with applicable margin maintenance requirements and the
performance of any futures contract or option on a futures contract in
accordance with its terms, and shall promptly upon notice act to bring such
accounts into compliance with such terms or requirements.
10. Receipt and Disbursement of Money.
(a) The Custodian shall open and maintain a custody
account for the Trust, and shall hold in such account, subject to the provisions
hereof, all cash received by it from or for the Trust. The Custodian shall make
payments of cash to, or for the account of, the Trust from such cash only (i)
for the purchase of securities for the Trust as provided in paragraph 16 hereof;
(ii) upon receipt of Proper Instructions, for the payment of dividends or for
the payment of interest, taxes, administration, distribution or advisory fees or
expenses which are to be borne by the Trust under the terms of this Agreement,
any advisory agreement, any distribution agreement, or any administration
agreement; (iii) upon receipt of Proper Instructions for payments in connection
with the conversion, exchange or surrender of securities owned or subscribed to
by the Trust and held by or to be delivered to the
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<PAGE>
Custodian; (iv) to a subcustodian pursuant to Paragraph 11 hereof; or (v) upon
receipt of Proper Instructions for other corporate purposes.
(b) The Custodian is hereby authorized to endorse and collect
all checks, drafts or other orders for the payment of money received as
custodian for the Trust.
11. Receipt of Securities.
(a) Except as provided by Paragraph 12 hereof, the Custodian
shall hold all securities and non-cash Property received by it for the Trust.
All such securities and non-cash Property are to be held or disposed of by the
Custodian for the Trust pursuant to the terms of this Agreement. In the absence
of Proper Instructions, the Custodian shall have no power or authority to
withdraw, deliver, assign, hypothecate, pledge or otherwise dispose of any such
securities and non-cash Property, except in accordance with the express terms
provided for in this Agreement. In no case may any trustee, officer, employee or
agent of the Trust, acting as individuals, withdraw any securities or non-cash
Property.
12. Subcustodian Agreements. In connection with its duties
under this Agreement, the Custodian may, at its own expense, enter into
subcustodian agreements with other banks or trust companies for the receipt of
certain securities and cash to be held by the Custodian for the account of the
Trust pursuant to this Agreement; provided that each such bank or trust company
has an aggregate capital, surplus and undivided profits, as shown by its last
published report, of not less then twenty million dollars ($20,000,000) and that
such bank or trust company agrees with the Custodian to comply with all relevant
provisions of the 1940 Act and applicable rules and regulations thereunder. The
Custodian will be liable for acts or omissions of any such subcustodian.
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<PAGE>
(a) Promptly after the close of business on each day the
Custodian shall furnish the Trust with system access to review a summary of all
transfers to or from the account of the Trust during said day. Where securities
are transferred to the account of the Trust established at a Securities
Depository or the Book Entry System pursuant to Paragraph 13 hereof, the
Custodian shall use the Securities Depository or Book Entry System to identity
as belonging to such Trust the securities in a commingled group of securities
registered in the name of the Custodian (or its nominee) or shown in the
Custodian's account on the books of a Securities Depository or the Book-Entry
System. At least monthly and from time to time, the Custodian shall furnish the
Trust with a detailed statement of the Property held for the Trust under this
Agreement.
(b) Notwithstanding any other provision of this agreement, no
provision of this Section 12, and no provision of this agreement relating to
subcustodians, shall apply to any agreement entered into by the Custodian for
the purpose of facilitating repurchase transactions by the Fund ("Tri-party
Agreements"), except that (i) the indemnification obligations owed to the
Custodian by the Fund and set forth in Sections 28(a) and (b) shall apply to
such Tri-party Agreements without qualification; and (ii) the Fund's rights
contained in Section 30 of this Agreement shall apply to such Tri-party
Agreements. All actions taken by the Custodian in connection with such Tri-party
Agreements shall be taken solely for the purpose of providing and accepting
instructions at the Fund's request and on the Fund's behalf.
13. Use of Securities Depository or the Book-Entry System. The
Trust shall deliver to the Custodian a certified resolution of the Board of
Trustees of the Trust
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<PAGE>
approving, authorizing and instructing the Custodian on a continuous and ongoing
basis until instructed to the contrary by Proper Instructions actually received
by the Custodian (i) to deposit in a Securities Depository or the Book-Entry
System all securities of the Trust eligible for deposit therein and (ii) to
utilize a Securities Depository or the Book-Entry System to the extent possible
in connection with the performance of its duties hereunder, including without
limitation settlements of purchases and sales of securities by the Trust, and
deliveries and returns of securities collateral in connection with borrowings.
Without limiting the generality of such use, it is agreed that the following
provisions shall apply thereto:
(a) Securities and any cash of the Trust deposited in a
Securities Depository or the Book-Entry System will at all times be segregated
from any assets and cash controlled by the Custodian in other than a fiduciary
or custodial capacity but may be commingled with other assets held in such
capacities. The Custodian will effect payment for securities, in the place where
the transaction is settled, unless the Trust has given the Custodian Proper
Instructions to the contrary.
(b) All Books and records maintained by the Custodian which
relate to the Trust participation in a Securities Depository or the Book-Entry
System will at all times during the Custodian's regular business hours be open
to the inspection of the Trust's duly authorized employees or agents, and the
Trust will be furnished with all information in respect of the services rendered
to it as it may require.
14. Instructions Consistent With The Certificate, etc. The
Custodian shall act only upon Proper Instructions. The Custodian may assume that
any Proper Instructions received hereunder are not in any way inconsistent with
any provision of
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<PAGE>
the Certificate or By-Laws of the Trust or any vote or resolution of the Trust's
Board of Trustees, or any committee thereof. The Custodian shall be entitled to
rely upon any Proper Instructions actually received by the Custodian pursuant to
this Agreement. The Trust agrees that the Custodian shall incur no liability in
acting upon Proper Instructions given to the Custodian. In accordance with
instructions from the Trust, advances of cash or other Property made by the
Custodian, arising from the purchase, sale, redemption, transfer or other
disposition of Property of the Trust, or in connection with the disbursement of
trusts to any party, or in payment of fees, expenses, claims or liabilities owed
to the Custodian by the Trust, or to any other party which has secured judgment
in a court of law against the Trust which creates an overdraft in the accounts
or over-delivery of Property shall be deemed a loan by the Custodian to the
Trust, to the extent permitted under applicable law. Such loans shall be payable
on demand, bearing interest at such rate customarily charged by the Custodian
for similar loans or such other rate agreed to by the parties. The Trust agrees
that test arrangements, authentication methods or other security devices to be
used with respect to instructions which the Trust may give by telephone, telex,
TWX, facsimile transmission, bank wire or through an electronic instruction
system, shall be processed in accordance with terms and conditions for the use
of such arrangements, methods or devices as the Custodian may put into effect
and modify from time to time. The Trust shall safeguard any test keys,
identification codes or other security devices which the Custodian makes
available to the Trust and agrees that the Trust shall be responsible for any
loss, liability or damage incurred by the Custodian or by the Trust as a result
of the Custodian's acting in accordance with instructions from any unauthorized
person using the proper security device unless such loss, liability or
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<PAGE>
damage was incurred as a result of the Custodian's negligence or willful
misconduct. The Custodian may electronically record, but shall not be obligated
to so record, any instructions given by telephone and any other telephone
discussions with respect to the Account. In the event that the Trust uses the
Custodian's Asset Management System, the Trust agrees that the Custodian is not
responsible for the consequences of the failure of that system to perform for
any reason, beyond the reasonable control of the Custodian, or the failure of
any communications carrier, utility, or communications network. In the event
that system is inoperable, the Trust agrees that it will accept the
communication of transaction instructions by telephone, facsimile transmission
on equipment compatible to the Custodian's facsimile receiving equipment or by
letter, at no additional charge to the Trust.
15. Transactions Not Requiring Instructions. The Custodian is
authorized to take the following action without Proper Instructions:
(a) Collection of Income and Other Payments. The Custodian
shall:
(i) collect and receive for the account of the Trust,
all income and other payments and distributions, including
(without limitation) stock dividends, rights, warrants and
similar items, included or to be included in the Property of
the Trust, and promptly advise the Trust of such receipt and
shall credit such income, as collected, to the Trust. From
time to time, the Custodian may elect to credit, but shall not
be so obligated, the account with interest, dividends or
principal payments on payable or contractual settlement date,
in anticipation of receiving same from a payor, central
depository, broker or other agent employed by the Trust or the
Custodian. Any such crediting and posting shall be at the
Trust's sole risk, and the Custodian shall be
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authorized to reverse any such advance posting after making
every reasonable attempt to collect, in the event it does not
receive good funds from any such payor, central depository,
broker or agent of the Customer.
(ii) with respect to securities of foreign issue,
effect collection of dividends, interest and other income, and
to notify the Trust of any call for redemption, offer of
exchange, right of subscription, reorganization, or other
proceedings materially affecting such securities, or any
default in payments due thereon. It is understood, however,
that the Custodian shall be under no responsibility for any
failure or dealing in effecting such collections or giving
such notice with respect to securities of foreign issue,
regardless of whether or not the relevant information is
published in any financial service available to it unless such
failure or delay is due to its negligence or willful
misconduct; however, this sub-paragraph (ii) shall not be
construed as creating any such responsibility with respect to
securities of non-foreign issue. Collections of income in
foreign currency are, to the extent possible, to be converted
into United States dollars unless otherwise instructed by
Proper Instructions, and in effecting such conversion the
Custodian may use such methods or agencies as it may see fit.
All risk and expenses incident to such collection and
conversion is for the account of the Trust and the Custodian
shall have no responsibility for fluctuations in exchange
rates affecting any such conversion.
(iii) endorse and deposit for collection in the name
of the Trust, checks, drafts, or other orders for the payment
of money on the same day as received;
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(iv) receive and hold for the account of the Trust
all securities received by the Trust as a result of a stock
dividend, share split-up or reorganization, recapitalization,
readjustment or other rearrangement or distribution of rights
or similar securities issued with respect to any portfolio
securities of the Trust held by the Custodian hereunder;
(v) present for payment and collect the amount
payable upon all securities which may mature or be called,
redeemed or retired, or otherwise become payable on the date
such securities become payable;
(vi) take any action which in the opinion of the
Custodian may be necessary and proper in connection with the
collection and receipt of such income and other payments and
the endorsements for collection of checks, drafts and other
negotiable instruments;
(vii) with respect to domestic securities, to
exchange securities in temporary form for securities in
definitive form, to effect an exchange of the shares where the
par value of stock is changed, and to surrender securities at
maturity or when advised of earlier call for redemption,
against payment therefor in accordance with accepted industry
practice. The Trust understands that the Custodian subscribes
to one or more nationally recognized services that provide
information with respect to calls for redemption of bonds or
other corporate actions. The Custodian shall not be liable for
failure to redeem any called bond or take other action if
notice of such call or action was not provided by any service
to which it subscribes provided that the Custodian shall have
acted in good faith without negligence or willful misconduct.
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The Custodian shall have no duty to notify the Trust of any
rights, duties, limitations, conditions or other information
set forth in any security (including mandatory or optional
put, call and similar provisions), but the Custodian shall
forward to the Trust or the appropriate Investment Adviser any
notices or other documents subsequently received in regard to
any such security. When fractional shares of stock of a
declaring corporation are received as a stock distribution,
unless specifically instructed to the contrary in writing, the
Custodian is authorized to sell the fraction received and
credit the Trust's account. Unless specifically instructed to
the contrary in writing, the Custodian is authorized to
exchange securities in bearer form for securities in
registered form. If any Property registered in the name of a
nominee of the Custodian is called for partial redemption by
the issue of such Property, the Custodian is authorized to
allot the called portion to the respective beneficial holders
of the Property in such manner deemed to be fair and equitable
by the Custodian in its sole discretion.
(b) Deposits of Proceeds of Issuance of Shares. The Custodian
shall collect and receive for the account of the Fund all payments received in
payment for shares of such Fund issued by the Trust.
(c) Redemptions. Upon receipt of notice by the Fund's transfer
agent stating that such transfer agent is required to redeem shares and
specifying the number and class of shares which such transfer agent is required
to redeem and the date and time the request or requests for redemption were
received by the Fund's distributor, the Custodian shall either (i) pay to such
transfer agent, for distribution to the redeeming shareholder, the amount
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payable to such shareholder upon the redemption of such shares as determined in
the manner described in the then current Prospectus, or (ii) arrange for the
direct payment of such redemption proceeds by the Custodian to the redeeming
shareholder in accordance with such procedures and controls as are mutually
agreed upon from time to time by and among the Custodian, the Trust and the
Trust's transfer agent.
(d) Miscellaneous Transactions. The Custodian is authorized to
deliver or cause to be delivered Property against payment or other consideration
or written receipt therefor in the following cases:
(i) for examination by a broker selling for the
account of the Trust;
(ii) for the exchange of interim receipts or
temporary securities for definitive securities;
(iii) for transfer of securities into the name of the
Trust or the Custodian or a nominee of either, or for exchange
of securities for a different number of bonds, certificates,
or other evidence, representing the same aggregate face amount
or number of units bearing the same interest rate, maturity
date and call provisions, if any; provided that, in any such
case, the new securities are to be delivered to the Custodian.
16. Transactions Requiring Instructions. Upon receipt of
Proper Instructions and not otherwise, the Custodian, directly or through the
use of a Securities Depository or the Book-Entry System, shall:
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(a) Execute and deliver to such persons as may be designated
in such Proper Instructions, proxies, consents, authorizations, and any other
instruments whereby the authority of the Trust as owner of any securities may be
exercised;
(b) Deliver any securities held for the Trust against receipt
of other securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege;
(c) Deliver any securities held for the Trust to any
protective committee, reorganization committee or other person in connection
with the reorganization, refinancing, merger, consolidation, recapitalization or
sale of assets of any corporation, against receipt of such certificates or
deposit, interim receipts or other instruments or documents as may be issued to
it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the
Trust and take such other steps as shall be stated in said instructions to be
for the purpose of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Trust;
(e) Release securities belonging to the Trust to any bank or
trust company for the purpose of pledge or hypothecation to secure any loan
incurred by the Trust; and pay such loan upon redelivery to it of the securities
pledged or hypothecated therefore and upon surrender of the note or notes
evidencing the loan;
(f) Deliver any securities held for the Trust upon the
exercise of a covered call option written by the Trust on such securities; and
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(g) Deliver securities held for the Trust pursuant to separate
security lending agreements.
(h) Regarding dividends and distributions, the Trust shall
furnish the Custodian with appropriate evidence of action by the Trust's Board
of Trustees declaring and authorizing the payment of any dividends and
distributions to the shareholders of the particular Fund. Upon receipt by the
Custodian of Proper Instructions with respect to dividends and distributions
declared by the Trust's Board of Trustees and payable to the shareholders of the
Fund who have elected in the proper manner to receive their distributions and/or
dividends in cash, and in conformance with procedures mutually agreed upon by
the Custodian, the Trust, and the Trust's transfer agent, the Custodian shall
pay to the Trust's transfer agent, as agent for the shareholders, an amount
equal to the amount indicated in said Proper Instructions as payable by the
Trust to such shareholders for distribution in cash by the transfer agent to
such shareholders. In lieu of paying the Trust's transfer agent cash dividends
and distributions, the Custodian may arrange for the direct payment of cash
dividends and distributions to shareholders by the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time by
and among the Trust, the Custodian and the Trust's transfer agent.
17. Purchase of Securities. Promptly after each purchase of
securities, the Trust or the appropriate Investment Adviser shall deliver to the
Custodian (as Custodian) Proper Instructions specifying with respect to each
such purchase: (a) the name of the issuer and the title of the securities, (b)
the number of shares of the principal amount purchased and accrued interest, if
any, (c) the dates of purchase and settlement, (d) the purchase price per
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<PAGE>
unit, (e) the total amount payable upon such purchase, (f) the name of the
person from whom or the broker through whom the purchase was made and (g) the
Fund for which the purchase was made. The Custodian shall upon receipt of
securities purchased by or for the Trust pay out of the moneys held for the
account of such Trust the total amount payable to the person from whom or the
broker through whom the purchase was made, if and only if the same conforms to
the total amount payable as set forth in such Proper Instructions.
18. Sales of Securities. Promptly after each sale of
securities, the Trust or the appropriate Investment Adviser shall deliver to the
Custodian Proper Instructions, specifying with respect to each such sale: (a)
the name of the issuer and the title of the security, (b) the number of shares
or principal amount sold, and accrued interest, if any, (c) the date of sale,
(d) the sale price per unit, (e) the total amount payable to the Trust upon such
sale, (f) the name of the broker through whom or the person to whom the sale was
made and (g) the Fund for which the sale was made. The Custodian shall deliver
the securities upon receipt of the total amount payable to the Trust upon such
sale, if and only if the same conforms to the total amount payable as set forth
in such Proper Instructions.
19. Records. The books and records pertaining to the Trust
which are in the possession of the Custodian shall be the property of the Trust.
Such books and records shall be prepared and maintained as required by the 1940
Act, as amended; other applicable federal and state securities laws and rules
and regulations; and, any state or federal regulatory body having appropriate
jurisdiction. The Trust, or the Trust's authorized representative, shall have
access to such books and records at all times during the Custodian's normal
business hours, and such books and records shall be surrendered to the Trust
promptly upon request.
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<PAGE>
Upon reasonable request of the Trust, copies of any such books and records shall
be provided by the Custodian to the Trust or the Trust's authorized
representative.
20. Reports. The Custodian shall furnish the Trust the
following reports:
(a) such periodic and special reports as the Trustees may
reasonably request;
(b) a monthly statement summarizing all transactions and
entries for the account of each Fund;
(c) a monthly report of Fund securities belonging to each Fund
showing the adjusted amortized cost of the issues and the market value at the
end of the month;
(d) a monthly report of the cash account of each Fund showing
disbursements; and
(e) such other information as may be agreed upon from time to
time between the Trustees and the Custodian.
21. Compliance with Rule 17f-2. The Custodian shall comply
with the requirements of Rule 17f-2 under the 1940 Act and will permit access to
the Fund's securities only in compliance with the requirements of Rule 17f-2.
22. Cooperation with Accountants. The Custodian shall
cooperate with the Trust's independent certified public accountants and shall
take all reasonable action in the performance of its obligations under this
Agreement to assure that the necessary information is made available to such
accountants for the expression of their unqualified opinion, including but not
limited to the opinion included in the Trust's semiannual report on the Trust's
Form N-SAR.
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<PAGE>
23. Confidentiality. The Custodian agrees on behalf of itself
and its employees to treat confidentially and as the proprietary information of
the Trust all records and other information relative to the Trust and its prior,
present or potential Shareholders and relative to the advisors and its prior,
present or potential customers, and not to use such records and information for
any purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld where the
Custodian may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust. Nothing contained herein,
however, shall prohibit the Custodian from advertising or soliciting the public
generally with respect to other products or services, regardless of whether such
advertisement or solicitation may include prior, present or potential
Shareholders of the Trust provided that, in no event, will any information
obtained as custodian be used in any such solicitation or advertisement.
24. Equipment Failures. In the event of the failure of certain
equipment including but not limited to data processing equipment,
telecommunications equipment, or power generators located at the Custodian, at a
designated Subcustodian or nominee, or at a third party contracted to for
certain securities processing services, the Custodian shall, at no additional
expense to the Trust, take reasonable steps to minimize service interruptions
but shall not have liability with respect thereto. The Custodian shall enter
into and shall maintain in effect with appropriate parties one or more
agreements making reasonable provision for
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<PAGE>
backup emergency use of electronic data processing equipment to the extent
appropriate equipment is available.
25. Right to Receive Advice.
(a) Advice of Trust. If the Custodian shall be in doubt as to
any action to be taken or omitted by it, it may request, and shall promptly
receive, clarification or advice from the Trust.
(b) Advice of Counsel. If the Custodian shall be in doubt as
to any question of law involved in any action to be taken or omitted by the
Custodian, it may request advice at its own cost from counsel of its own
choosing (who may be counsel for the Trust or the Custodian, at the option of
the Custodian).
(c) Conflicting Advice. In case of conflict between directions
or advice received by the Custodian pursuant to subparagraph (a) of this
paragraph and advice received by the Custodian pursuant to subparagraph (b) of
this paragraph, the Custodian shall be entitled to rely on and follow the advice
received pursuant to the latter provision alone.
(d) Protection of the Custodian. The Custodian shall be
protected in any action or inaction which it takes or omits to take in reliance
on any directions or advice received pursuant to subparagraph (a) of this
section. However, nothing in this paragraph shall be construed as imposing upon
the Custodian any obligation (i) to seek such directions or advice, or (ii) to
act in accordance with such directions or advice when received. Nothing in this
subparagraph shall excuse the Custodian when an action or omission on the part
of the Custodian constitutes willful misfeasance or negligence by the Custodian
of its duties under this Agreement.
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<PAGE>
26. Compliance with Governmental Rules and Regulations. The
Trust assumes full responsibility for insuring that the contents of each
Prospectus of the Trust complies with all applicable requirements of the 1933
Act, the 1940 Act, and any laws, rules and regulations of governmental
authorities having jurisdiction.
27. Compensation. As compensation for the services described
within this agreement and rendered by the Custodian during the term of this
Agreement, the Trust shall pay to the Custodian the fees provided on Attachment
B hereto, as it may be amended from time to time. In addition, the Trust agrees
to reimburse the Custodian for any out-of-pocket expenses described in
Attachment B to this Agreement, incurred in providing the services contained
within this Agreement.
28. Indemnification. (a) The Trust, on behalf of each Fund
individually and not jointly, as sole owner of the Property, agrees, to the
extent permitted by applicable law, to indemnify and hold harmless the Custodian
and its nominees from all taxes, charges, expenses, assessments, claims, and
liabilities (including, without limitation, liabilities arising under the 1933
Act, the Securities Exchange Act of 1934, the 1940 Act, and any state and
foreign securities and blue sky laws, all as or to be amended from time to time)
and expenses, including (without limitation) reasonable attorney's fees and
disbursements, arising directly or indirectly (a) from the fact that securities
included in the Property are registered in the name of any such nominee or (b)
without limiting the generality of the foregoing clause (a) from any action or
thing which the Custodian takes or does or omits to take or do (i) at the
request or on the direction of or in reliance on the advice of the Trust given
in accordance with the terms of this Agreement, or (ii) upon Proper
Instructions, provided, that neither the Custodian
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<PAGE>
nor any of its nominees or subcustodian shall be indemnified against any
liability to the Trust or to its Shareholders (or any expenses incident to such
liability) (x) arising out of the Custodian's or such nominee's or
subcustodian's own willful misfeasance or negligence of its duties under this
Agreement or any agreement between the Custodian and any nominee or
subcustodian, or (y) constituting any incidental or consequential damages. In
the event of any advance of cash for any purpose made by the Custodian resulting
from Proper Instructions of the Trust, or in the event that the Custodian or its
nominee or subcustodian shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Agreement, except such as may arise from its or its nominee's or subcustodian's
own negligence or willful misfeasance, the Trust shall promptly reimburse the
Custodian for such advance of cash or such taxes, charges, expenses,
assessments, claims or liabilities.
(b) Subject to the limitations set forth in this Agreement,
the Trust, on behalf of each Fund individually, and not jointly, agrees to
indemnify and hold harmless the Custodian and its nominees from all loss, damage
and expense (including reasonable attorney's fees) suffered or incurred by the
Custodian or its nominee caused by or arising from actions taken by the
Custodian in reliance upon Proper Instructions; provided, however, that such
indemnity shall not apply to (x) loss, damage or expense occasioned by or
resulting from the negligence or willful misfeasance of the Custodian or its
nominee or any material breach of this Agreement by the Custodian or its nominee
or (y) incidental or consequential damages. In addition, the Trust agrees to
indemnify the Custodian against any liability incurred by reason of taxes
assessed to the Custodian, or other loss, damage or expenses
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<PAGE>
incurred by such person, resulting solely from the fact that securities and
other property of the Trust is registered in the name of such person; provided,
however, that in no event shall such indemnification be applicable to income,
franchise or similar taxes which may be imposed or assessed against the
Custodian.
29. Notice of Litigation, Right to Prosecute. The Custodian
shall promptly inform the Trust in writing of the commencement of any litigation
or proceeding in respect of which indemnity may be sought under the above
paragraph 28. The Trust shall be entitled to participate in any such litigation
or proceeding and, after written notice from the Trust to the Custodian, the
Trust may assume the defense of such litigation or proceeding with counsel of
its choice at its own expense. The Custodian shall not consent to the entry of
any judgement or enter into any settlement in any such litigation or proceeding
without providing the Trust with adequate notice of any such settlement or
judgement. The Custodian shall submit written evidence to the Trust with respect
to any cost or expense for which it is seeking indemnification in such form and
detail as the Trust may reasonably request.
30. Trust's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Trust shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian or Securities Depository for loss, damage or expense caused the
Custodian or the Trust by such Subcustodian or Securities Depository and shall
be entitled to enforce the rights of the Custodian with respect to any claim
against such Subcustodian or Securities Depository which the Custodian may have
as a consequence of such loss, damage or expense, if and to the extent that the
Trust has not been made whole for
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<PAGE>
any such loss or damage. The Custodian agrees to cooperate with the Trust and
take all actions reasonably requested by the Trust in connection with the
Trust's enforcement of any rights of the Custodian. The Trust agrees to
reimburse the Custodian for all reasonable out-of-pocket expenses incurred by
the Custodian in connection with the fulfillment of its obligations as long as
the Custodian has not otherwise breached the terms of this Agreement.
31. Responsibility of the Custodian. The Custodian shall not
be required to take any action except as specifically set forth herein. The
Custodian shall be responsible for its own negligent failure or that of any
subcustodian it shall appoint to perform its duties under this Agreement.
Without limiting the generality of the foregoing or of any other provision of
this Agreement, the Custodian in connection with its duties under this Agreement
shall not be under any duty or obligation to inquire into and shall not be
liable for or in respect of (a) the validity or invalidity or authority or lack
thereof of any advice, direction, notice or other instrument which conforms to
the applicable requirements of this Agreement, if any, and which the Custodian
believes to be genuine, (b) the validity of the issue of any securities
purchased or sold by the Trust, the legality of the purchase or sale thereof or
the propriety of the amount paid or received therefore, (c) the legality of the
issue or sale of any Shares, or the sufficiency of the amount to be received
therefor, (d) the legality of the redemption of any Shares, or the propriety of
the amount to be paid therefore, (e) the legality of the declaration or payment
of any dividend or distribution on Shares, or (f) delays or errors or loss of
data occurring by reason of circumstances beyond the Custodian's control,
including acts of civil or military authority, national emergencies, labor
difficulties, fire, mechanical breakdown (except as provided in Paragraph 24),
flood or catastrophe, acts of God,
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<PAGE>
insurrection, war, riots, or failure of the mail, transportation, communication
or power supply. In no event will the Custodian be liable for special, indirect
or consequential damages or lost profits or loss of business, which may be
suffered by the Trust or any third party, even if previously informed of the
possibility of such damages.
32. Collection. All collections of monies or other property in
respect, or which are to become part, of the Property (but not the safekeeping
thereof upon receipt by the Custodian) shall be at the sole risk of the Trust.
In any case in which the Custodian does not receive any payment due the Trust
within a reasonable time after the Custodian has made proper demands for the
same, it shall so notify the Trust in writing, including copies of all demand
letters, any written responses thereto, and memoranda of all oral responses
thereto, and to telephonic demands, and await instructions from the Trust. the
Custodian shall not be obliged to take legal action for collection unless and
until reasonably indemnified to its satisfaction. The Custodian shall also
notify the Trust as soon as reasonably practicable whenever income due on
securities is not collected in due course.
33. Duration and Termination. This Agreement shall be
effective as of the date hereof and shall continue until termination by the
Trust or by the Custodian on 60 day's written notice. Upon any termination of
this Agreement, pending appointment of a successor to the Custodian or a vote of
the Shareholders of the Trust to dissolve or to function without a custodian of
its cash, securities or other property, the Custodian shall not deliver cash,
securities or other property of the Trust to the Trust, but may deliver them to
a bank or trust company designated by the Trust or, failing that, to a bank or
trust company of the Custodian's selection, having aggregate capital, surplus
and undivided profits, as shown by its
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<PAGE>
last published report of not less than twenty million dollars ($20,000,000) as a
successor custodian for the Trust to be held under terms similar to those of
this Agreement, provided, however, that the Custodian shall not be required to
make any such delivery or payment until full payment shall have been made by the
Trust of all liabilities constituting a charge on or against the properties then
held by the Custodian or on or against the Custodian and until full payment
shall have been made to the Custodian of all of its fee, compensation, costs and
expenses, subject to the provisions of Paragraph 26 of this Agreement. The
termination by the Trust of a particular Series or Fund within the Trust that
does not result in the closure of the Trust does not constitute termination of
this Agreement.
34. Notices. Notices shall be addressed,
If to the Trust: The Victory Portfolios
c/o BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219-3035
Attention: President
With a copy to: Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Jay G. Baris
If to the Custodian: Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, Ohio 44114 -1306
Attention: Division Head
Master Trust Division
or, if the address is to neither of the foregoing, at such other address as
shall have been notified to the sender of any such Notice or other
communication. If the location of the sender of a Notice and the address of the
addressee thereof are, at the time of sending, more than 100 miles apart, the
Notice may be sent by first-class mail, in which case it shall be
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<PAGE>
deemed to have been given three days after it is sent, or if sent by confirming
telegram, cable, telex or facsimile sending device, it shall be deemed to have
been given immediately, and, if the location of the sender of a Notice and the
address of the addressee thereof are, at the time of sending, not more than 100
miles apart, the Notice may be sent by first-class mail, in which case it shall
be deemed to have been given two days after it is sent, or if sent by messenger,
it shall be deemed to have been given on the day it is delivered, or if sent by
confirming telegram, cable, telex or facsimile sending device, it shall be
deemed to have been given immediately. All postage, cable, telegram, telex and
facsimile sending device charges arising from the sending of a Notice hereunder
shall be paid by the sender.
35. Applicability of Agreement to Funds Individually, not
Jointly. The Trust has entered into this Agreement on behalf of each Fund listed
on Attachment A individually, and not jointly. The rights and obligations of the
Trust described in this Agreement apply to each individual Fund. No Fund shall
have any liability for any costs or expenses incurred by any other Fund. In
seeking to enforce a claim against any Fund, the Custodian shall look to the
assets only of that Fund and not to the assets of any other Fund.
36. Further Actions. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.
37. Amendments. This Agreement or any part hereof may be
changed or waived only by an instrument in writing signed by the party against
which enforcement of such change or waiver is sought.
38. Liability of Trustees and Shareholders. A copy of the
Certificate of Trust of the Fund is on file with the Secretary of The
Commonwealth of Massachusetts, and notice
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<PAGE>
is hereby given that this instrument is executed on behalf of the trustees of
the Fund as trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Fund.
39. Miscellaneous. This Agreement embodies the entire
Agreement and understanding between the parties hereto, and supersedes all prior
agreements and understandings relating to the parties hereto. The captions in
this Agreement are included for convenience of reference only and in no way
define or delimit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement shall be deemed to be a contract made in
New York and governed by New York law. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby. This Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers designated below as of the day and
year first above written.
and: /s/
----------------- KEY TRUST COMPANY OF OHIO, N.A.
Vice President
Attest: /s/ Meg H. Halloran By: /s/ Kathryn Kaesberg
-------------------- --------------------
Name: Meg H. Halloran Name: Kathryn Kaesberg
Title: Trust Officer Title: Vice President
THE VICTORY PORTFOLIOS, on behalf of each
Fund listed on Attachment A, individually
and not jointly
Attest: /s/ George O. Martinez By: /s/ Scott A. Englehart
---------------------- ----------------------
Name: George O. Martinez Name: Scott A. Englehart
Title: Assistant Secretary Title: Secretary
- 33 -
<PAGE>
ATTACHMENT A
NAME OF FUND
1. The Victory Balanced Fund
2. The Victory Diversified Stock Fund
3. The Victory Financial Reserves Fund
4. The Victory Fund for Income
5. The Victory Government Bond Fund
6. The Victory Government Mortgage Fund
7. The Victory Growth Fund
8. The Victory Institutional Money Market Fund
9. The Victory Intermediate Income Fund
10. The Victory International Growth Fund
11. The Victory Investment Quality Bond Fund
12. The Victory Limited Term Income Fund
13. The Victory National Municipal Bond Fund
14. The Victory New York Tax-Free Fun
15. The Victory Ohio Municipal Bond Fund
16. The Victory Ohio Municipal Money Market Fund
17. The Victory Ohio Regional Stock Fund
18. The Victory Prime Obligations Fund
19. The Victory Special Growth Fund
20. The Victory Special Value Fund
21. The Victory Stock Index Fund
22. The Victory Tax-Free Money Market Fund
23. The Victory U.S. Government Obligations Fund
24. The Victory Value Fund
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<PAGE>
ATTACHMENT A
AMENDED AS OF MARCH 1, 1997
NAME OF FUND
1. The Victory Balanced Fund
2. The Victory Diversified Stock Fund
3. The Victory Financial Reserves Fund
4. The Victory Fund for Income
5. The Victory Government Bond Fund
6. The Victory Government Mortgage Fund
7. The Victory Growth Fund
8. The Victory Institutional Money Market Fund
9. The Victory Intermediate Income Fund
10. The Victory International Growth Fund
11. The Victory Investment Quality Bond Fund
12. The Victory Limited Term Income Fund
13. The Victory National Municipal Bond Fund
14. The Victory New York Tax-Free Fun
15. The Victory Ohio Municipal Bond Fund
16. The Victory Ohio Municipal Money Market Fund
17. The Victory Ohio Regional Stock Fund
18. The Victory Prime Obligations Fund
19. The Victory Special Growth Fund
20. The Victory Special Value Fund
21. The Victory Stock Index Fund
22. The Victory Tax-Free Money Market Fund
23. The Victory U.S. Government Obligations Fund
24. The Victory Value Fund
25. The Victory Lakefront Fund
26. The Victory Real Estate Investment Fund
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<PAGE>
SCHEDULE A
VICTORY FUNDS
1. Victory U.S. Government Obligations Fund
2. Victory Prime Obligations Fund
3. Victory Tax-Free Money Market Fund
4. Victory Limited Term Income Fund
5. Victory Government Mortgage Fund
6. Victory Intermediate Income Fund
7. Victory Investment Quality Bond Fund
8. Victory Ohio Municipal Bond Fund
9. Victory Balanced Fund
10. Victory Stock Index Fund
11. Victory Value Fund
12. Victory Diversified Stock Fund
13. Victory Growth Fund
14. Victory Special Value Fund
15. Victory Special Growth Fund
16. Victory Ohio Regional Stock Fund
17. Victory International Growth Fund
18. Victory Financial Reserves Fund
19. Victory Fund for Income
20. Victory Institutional Money Market Fund
21. Victory National Municipal Bond Fund
22. Victory New York Tax-Free Fund
23. Victory Ohio Municipal Money Market Fund
24. Victory Lakefront Fund
25. Victory Real Estate Investment Fund
26. Victory Federal Money Market Fund
27. Victory Convertible Securities Fund
28. Victory LifeChoice Growth Investor Fund
29. Victory LifeChoice Moderate Investor Fund
30. Victory LifeChoice Conservative Investor Fund
Revised March 1998
<PAGE>
ATTACHMENT B
CUSTODY SERVICE FEES
For the services as described in this Agreement, each Fund of the Trust listed
on Attachment A hereto shall pay a custody safekeeping fee and custody
transaction fees as follows:
DOMESTIC CUSTODY SAFEKEEPING FEES
.018% (1.8 Basis Points) on the assets of the Funds
DOMESTIC CUSTODY TRANSACTION FEES
$15.00 per DTC or Fed Book Entry transaction $25.00 per
physical transaction $40.00 per future or option wire $15.00
per Government Paydown $ 8.00 per wire transfer
GLOBAL CUSTODY SAFEKEEPING FEES
.15% on first $250,000,00 in assets per Fund
.12% on assets in excess of $250,000,000 per Fund
GLOBAL CUSTODY TRANSACTION FEES (BY COUNTRY)
GROUP I GROUP II
Austria Australia
Belgium Canada
Denmark France
Finland Hong Kong
Germany Italy
Japan Netherlands
Norway Singapore/Malaysia
Sweden Spain
Switzerland United Kingdom
CEDEL/Euroclear Eligible Other Fixed Income
Fixed Income
$40.00 PER TRANSACTION $80.00 PER TRANSACTION
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<PAGE>
MARCH 2, 1998
ATTACHMENT B (CONT.)
VICTORY FUNDS EXCEPTIONS
Victory Growth Investor Fund
Victory Moderate Investor Fund
Victory Conservative Investor Fund
No Custody Charge Applies.
Transaction Charges Apply Per Domestic and Foreign Schedules on Page 1.
- 38 -
ADMINISTRATION AGREEMENT
This Administration Agreement is made as of this 1st day of October,
1997 between THE VICTORY PORTFOLIOS, a Delaware business trust (herein called
the "Trust"), and BISYS Fund Services Limited Partnership, an Ohio limited
partnership (herein called "BISYS").
WHEREAS, the Trust is an open-end, management investment company
registered under the Investment Company Act of 1940, as amended, and consisting
of the investment portfolios set forth on Schedule I hereto, as such Schedule
may be revised from time to time (individually, a "Fund" and collectively, the
"Funds");
WHEREAS, the Trust offers for sale shares of beneficial interest
without par value of the Funds (herein collectively called "Shares"); and
WHEREAS, the Trust desires to retain BISYS as its Administrator to
provide it with certain administrative services with respect to each of the
Funds and their respective Shares, and BISYS is willing to render such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
I. DELIVERY OF DOCUMENTS
The Trust has delivered to BISYS copies of each of the following
documents and will deliver to it all future amendments and supplements thereto,
if any:
(a) The Trust's Certificate of Trust and all amendments
thereto (such Certificate of Trust, as presently in effect and as it
shall from time to time be amended, herein called the "Trust's
Certificate");
(b) The By-Laws of the Trust (such By-Laws as presently in
effect and as they shall from time to time be amended, herein called
the "By-Laws");
(c) Resolutions of the Board of Trustees of the Trust
authorizing the execution and delivery of this Agreement;
(d) The Trust's most recent Post-Effective Amendment to its
Registration Statement(s) under the Securities Act of 1933, as amended
(the "1933 Act"), and under the Investment Company Act of 1940, as
amended (the "1940 Act"), on Form N-1A as filed with the Securities and
Exchange Commission (the "Commission") relating to the Shares and any
further amendment thereto;
<PAGE>
(e) Notification of registration of the Trust under the 1940
Act on Form N-8A as filed with the Commission; and
(f) Prospectuses and Statements of Additional Information of
the Trust with respect to the Funds (such prospectuses and statements
of additional information, as presently in effect and as they shall
from time to time be amended and supplemented, herein called
individually the "Prospectus" and collectively the "Prospectuses").
II. ADMINISTRATION
1. APPOINTMENT OF ADMINISTRATOR. The Trust hereby appoints BISYS as its
Administrator for each of the Funds on the terms and for the period set forth in
this Agreement and BISYS hereby accepts such appointment and agrees to perform
the services and duties set forth in this Section II for the compensation
provided in this Section II. The Trust understands that BISYS now acts and will
continue to act as administrator of various investment companies, and the Trust
has no objection to BISYS' so acting. In addition, it is understood that the
persons employed by BISYS to assist in the performance of its duties hereunder,
will not devote their full time to such services and nothing herein contained
shall be deemed to limit or restrict the right of BISYS or any affiliate of
BISYS to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
2. SERVICES AND DUTIES.
(a) As Administrator, and subject to the supervision and
control of the Trust's Board of Trustees, BISYS will provide
facilities, equipment, statistical and research data, clerical
services, internal compliance services relating to legal matters, and
personnel to carry out all administrative services required for
operation of the business and affairs of the Trust, other than those
investment advisory functions which are to be performed by the Trust's
investment advisers, the services of BISYS as Distributor pursuant to
the Distribution Agreement, those services to be performed by the
Trust's custodian, transfer agent and fund accounting agent, and those
services normally performed by the Trust's counsel and auditors. BISYS'
responsibilities include without limitation the following services:
(1) Providing a facility to receive purchase and
redemption orders via toll-free IN-WATTS telephone lines or
via electronic transmission;
(2) Providing for the preparing, supervising and
mailing of confirmations for wire, telephone and electronic
purchase and redemption orders;
(3) Providing and supervising the operation of an
automated data processing system to process purchase and
redemption orders received by BISYS (BISYS
2
<PAGE>
assumes responsibility for the accuracy of the data
transmitted for processing or storage);
(4) Overseeing the performance of the Trust's
custodian and transfer agent;
(5) Making available information concerning each Fund
to its shareholders; distributing written communications to
each Fund's shareholders of record such as periodic listings
of each Fund's securities, annual and semi-annual reports, and
Prospectuses and supplements thereto; and handling shareholder
problems and calls relating to administrative matters; and
(6) Providing and supervising the services of
employees whose principal responsibility and function shall be
to preserve and strengthen each Fund's relationships with its
shareholders.
(b) BISYS shall assure that persons are available to transmit
wire, telephone or electronic redemption requests to the Trust's
transfer agent as promptly as practicable.
(c) BISYS shall assure that persons are available to transmit
wire, telephone or electronic orders accepted for the purchase of
Shares to the Trust's transfer agent as promptly as practicable.
(d) BISYS shall participate in the periodic updating of the
Prospectuses and shall coordinate (i) the filing, printing and
dissemination of reports to each Fund's shareholders and the
Commission, including but not limited to annual reports and semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2, (ii) the
preparation, filing, printing and dissemination of proxy materials, and
(iii) the preparation and filing of post-effective amendments to the
Trust's Registration Statement on Form N-1A relating to the updating of
financial information and other routine matters.
(e) BISYS shall pay all costs and expenses of maintaining the
offices of the Trust, wherever located, and shall arrange for payment
by the Trust of all expenses payable by the Trust.
(f) BISYS, after consultation with legal counsel for the
Trust, shall determine the jurisdictions in which the Shares shall be
registered or qualified for sale and, in connection therewith, shall be
responsible for the maintenance of the registration or qualification of
the Shares for sale under the securities laws of any state. Payment of
share registration fees and any fees for qualifying or continuing the
qualification of the Funds shall be made by the Funds.
3
<PAGE>
(g) BISYS shall provide the services of certain persons who
may be appointed as officers of the Trust by the Trust's Board of
Trustees.
(h) BISYS shall oversee the maintenance by the Trust's
custodian and transfer agent of the books and records required under
the 1940 Act in connection with the performance of the Trust's
agreements with such entities, and shall maintain, or provide for the
maintenance of, such other books and records (other than those required
to be maintained by the Trust's investment advisers and fund accounting
agent) as may be required by law or may be required for the proper
operation of the business and affairs of the Trust and each Fund. In
compliance with the requirements of Rule 31a-3 under the 1940 Act,
BISYS agrees that all such books and records which it maintains, or is
responsible for maintaining, for the Funds are the property of the
Trust and further agrees to surrender promptly to the Trust any of such
books and records upon the Trust's request. BISYS further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
said books and records required to be maintained by Rule 31a-1 under
said Act.
(i) BISYS shall coordinate the preparation of the Funds'
federal, state and local income tax returns.
(j) BISYS shall prepare such other reports relating to the
business and affairs of the Trust and each Fund (not otherwise
appropriately prepared by the Trust's investment adviser, transfer
agent, fund accounting agent or the Trust's counsel or auditors) as the
officers and Trustees of the Trust may from time to time reasonably
request in connection with the performance of their duties.
(k) In performing its duties as Administrator of the Trust,
BISYS will act in conformity with the Trust's Certificate, By-Laws and
Prospectuses and with the instructions and directions of the Board of
Trustees of the Trust and will conform to and comply with the
requirements of the 1940 Act and all other applicable federal or state
laws and regulations.
3. SUBCONTRACTORS. It is understood that BISYS may from time to time
employ or associate with itself such person or persons reasonably acceptable to
the Trust as BISYS may believe to be particularly fitted to assist in the
performance of this Agreement; provided, however, that the compensation of such
persons shall be paid by BISYS and that BISYS shall be as fully responsible to
the Trust for the acts and omissions of any subcontractor as it is for its own
acts and omissions.
4. EXPENSES ASSUMED AS ADMINISTRATOR. Except as otherwise stated in
this subsection 4, BISYS shall pay all expenses incurred by it in performing its
services and duties as Administrator, including the cost of providing office
facilities, equipment and personnel related to such services and duties. Other
expenses incurred in the operation of the Trust (other than those borne by the
Trust's investment adviser) including taxes, interest, brokerage fees and
commissions, if any, fees of trustees who are not officers, directors, partners,
employees or holders of 5 percent or more of the
4
<PAGE>
outstanding voting securities of the Trust's investment advisers or BISYS or any
of their affiliates, Securities and Exchange Commission fees and state blue sky
registration or qualification fees, advisory fees, charges of custodians,
transfer and dividend disbursing agents' fees, fund accounting agents' fees,
fidelity bond and trustees' and officers' errors and omissions insurance
premiums, outside auditing and legal expenses, costs of maintaining corporate
existence, costs attributable to shareholder services, including without
limitation telephone and personnel expenses, costs of preparing and printing
Prospectuses for regulatory purposes and for distribution to existing
shareholders, costs of shareholders' reports and Trust meetings and any
extraordinary expenses will be borne by the Trust.
5. COMPENSATION. For the services provided and the expenses assumed as
Administrator pursuant to this Article II, the Trust will pay BISYS a fee,
computed daily and payable monthly, at the annual rate set forth in Schedule II
hereto. Such fee as is attributable to each Fund shall be a separate (and not
joint or joint and several) obligation of each such Fund. No individual Fund
shall have any responsibility for any obligation, if any, with respect to any
other Fund arising out of this Agreement.
III. CONFIDENTIALITY
BISYS will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust and the Funds and
their prior or present shareholders or those persons or entities who respond to
BISYS' inquiries concerning investment in the Trust, and except as provided
below, will not use such records and information for any purpose other than
performance of its responsibilities and duties hereunder, or the performance of
its responsibilities and duties with regard to any other investment portfolio
which may be added to the Trust in the future. Any other use by BISYS of the
information and records referred to above may be made only after prior
notification to and approval in writing by the Trust. Such approval shall not be
unreasonably withheld and may not be withheld where (i) BISYS may be exposed to
civil or criminal contempt proceedings for failure to divulge such information;
(ii) BISYS is requested to divulge such information by duly constituted
authorities; or (iii) BISYS is so requested by the Trust.
IV. LIMITATION OF LIABILITY
BISYS shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Trust in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or negligence on its part in the performance of its duties or from its
reckless disregard of its obligations and duties under this Agreement. Any
person, even though also an officer, director, partner, employee or agent of
BISYS, who may be or become an officer, trustee, employee or agent of the Trust,
shall be deemed, when rendering services to the Trust, or acting on any business
of the Trust (other than services or business in connection with BISYS' duties
hereunder) to be rendering such services to or acting solely for the Trust and
not as an officer,
5
<PAGE>
director, partner, employee or agent or one under the control or direction of
BISYS even though paid by BISYS.
V. DURATION AND TERMINATION
This Agreement shall become effective as of the date first above
written, and, unless sooner terminated as provided herein, shall continue until
September 30, 1999. Thereafter, if not terminated, this Agreement shall continue
automatically as to a particular Fund for successive terms of two years,
provided that such continuance is specifically approved (a) by a vote of a
majority of those members of the Board of Trustees of the Trust who are not
parties to this Agreement or "interested persons" of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Trustees of the Trust or by vote of a "majority of the
outstanding voting securities" of such Fund. This Agreement may be terminated
without penalty (i) by provision of a notice of nonrenewal in the manner set
forth below, (ii) by mutual agreement of the parties or (iii) for "cause," as
defined below, upon the provision of 60 days advance written notice by the party
alleging cause. Written notice of nonrenewal must be provided at least 60 days
prior to the end of the then-current term.
For purposes of this Agreement, "cause" shall mean (a) a material
breach that has not been cured within thirty (30) days following written notice
of such breach from the non-breaching party; (b) a final, unappealable judicial,
regulatory or administrative ruling or order in which the party to be terminated
has been found guilty of criminal or unethical behavior in the conduct of its
business; (c) financial difficulties on the part of the party to be terminated
which are evidenced by the authorization or commencement of, or involvement by
way of pleading, answer, consent or acquiescence in, a voluntary or involuntary
case under Title 11 of the United States Code, as from time to time is in
effect, or any applicable law, other than said Title 11, of any jurisdiction
relating to the liquidation or reorganization of debtors or to the modification
or alteration of the rights of creditors; or (d) any circumstance which
substantially impairs the performance of the obligations and duties of the party
to be terminated, or the ability to perform those obligations and duties, as
contemplated herein.
The parties acknowledge that, in the event of a change of control (as
defined in the 1940 Act) of BISYS or of Key Asset Management Inc., BISYS may be
replaced as administrator for the Trust prior to the expiration of the initial
two-year term or any subsequent two-year term. In that connection, the parties
agree that, notwithstanding the replacement of BISYS as referenced above, the
Trust shall remain responsible for the payment of fees to BISYS hereunder for
the remainder of the then-current contract term.
Compensation due BISYS and unpaid by the Trust upon termination of this
Agreement shall be immediately due and payable upon and notwithstanding such
termination. BISYS shall be entitled to collect from the Trust in addition to
the compensation described in Schedule II hereto, the amount of all its cash
disbursements for services in connection with its activities in effecting such
6
<PAGE>
termination, including without limitation, the delivery to the Trust and/or its
designees of the Trust's property, records, instruments and documents or any
copies thereof. Subsequent to such termination, for a reasonable fee, BISYS will
provide the Trust with reasonable access to any Trust documents or records
remaining in its possession.
VI. AMENDMENT OF THIS AGREEMENT
No provisions of this Agreement may be changed, waived, discharged or
terminated, except by an instrument in writing signed by the party against whom
an enforcement of the change, waiver, discharge or termination is sought.
VII. NOTICES
Notices of any kind to be given to the Trust hereunder by BISYS shall
be in writing and shall be duly given if mailed or delivered to the Trust c/o
Mutual Fund Products, KeyCorp Management Company, 127 Public Square, Cleveland,
Ohio 44114, with a copy to Kramer, Levin, Naftalis & Frankel, 919 Third Avenue,
New York, New York 10019, Attention: Carl Frischling, Esquire, or at such other
address or to such individual as shall be so specified by the Trust to BISYS.
Notices of any kind to be given to BISYS hereunder by the Trust shall be in
writing and shall be duly given if mailed or delivered to BISYS at 3435 Stelzer
Road, Columbus, Ohio 43219, Attention: George O. Martinez, Esq., or at such
other address or to such individual as BISYS shall specify to the Trust.
VIII. MISCELLANEOUS
1. CONSTRUCTION. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Article V hereof, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by Ohio law; provided,
however, that nothing herein shall be construed in a manner inconsistent with
the 1940 Act or any rule or regulation of the Commission thereunder.
2. NAMES. The names "The Victory Portfolios" and "Trustees of The
Victory Portfolios" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Certificate of Trust filed on December 21, 1995 at the office of the Secretary
of State of the State of Delaware which is hereby referred to and is also on
file at the principal office of the Trust. The obligations of The Victory
Portfolios entered into in the name or
7
<PAGE>
on behalf thereof by any of its trustees, representatives or agents are made not
individually, but in such capacities and are not binding upon any of the
trustees, shareholders or representatives of the Trust personally but bind only
the Trust property, and all persons dealing with any class of shares of the
Trust must look solely to the Trust property belonging to such class for the
enforcement of any claims against the Trust.
3. ASSIGNMENT. This Agreement and the rights and duties hereunder shall
not be assignable by either party without the written consent of the other
party. This paragraph shall not limit or in any way affect BISYS' right to
appoint a Sub-Administrator pursuant to Article II, paragraph 3 hereof.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE VICTORY PORTFOLIOS
By: /s/ J. David Huber
-------------------------------------
Attest: /s/ Thomas E. Line
-----------------------
BISYS FUND SERVICES LIMITED
PARTNERSHIP, d/b/a
BISYS FUND SERVICES
By: BISYS FUND SERVICES, INC.
General Partner
Attest: /s/ Thomas E. Line
-----------------------
By: /s/ George O. Martinez
----------------------------
Senior Vice President
8
<PAGE>
SCHEDULE I
Amended as of October 1, 1997
Name of Fund Class
- ------------ -----
1. The Victory Balanced Fund A/B
2. The Victory Diversified Stock Fund A/B
3. The Victory Government Mortgage Fund A
4. The Victory Growth Fund A
5. The Victory Intermediate Income Fund A
6. The Victory International Growth Fund A/B
7. The Victory Investment Quality Bond Fund A
8. The Victory Limited Term Income Fund A
9. The Victory Ohio Municipal Bond Fund A
10. The Victory Ohio Regional Stock Fund A/B
11. The Victory Prime Obligations Fund A
12. The Victory Special Growth Fund A
13. The Victory Special Value Fund A/B
14. The Victory Stock Index Fund A
15. The Victory Tax-Free Money Market Fund A
16. The Victory U.S. Government Obligations Fund Investor/Select
17. The Victory Value Fund A
18. The Victory Financial Reserves Fund A
19. The Victory Fund for Income A
20. The Victory Institutional Money Market Fund Investor/Select
21. The Victory National Municipal Bond Fund A/B
22. The Victory New York Tax-Free Fund A/B
23. The Victory Ohio Municipal Money Market Fund A
24. The Victory Lakefront Fund A
25. The Victory Real Estate Investment Fund A
<PAGE>
SCHEDULE I
Amended as of March 2, 1998
- --------------------------------------------------------------------------------
1. Victory Balanced Fund 26. Victory Federal Money Market Fund
Class A Shares Investor Shares
Class B Shares Select Shares
Key Shares 27. Victory Convertible Securities Fund
2. Victory Diversified Stock Fund 28. Victory LifeChoice Conservative
Class A Shares Investor Fund
Class B Shares 29. Victory LifeChoice Growth
3. Victory Government Mortgage Fund Investor Fund
4. Victory Growth Fund 30. Victory LifeChoice Moderate
5. Victory Financial Reserves Fund Investor Fund
6. Victory Fund for Income
7. Victory Institutional Money Market Fund
Investor Shares
Select Shares
8. Victory Intermediate Income Fund
9. Victory International Growth Fund
Class A Shares
Class B Shares
10. Victory Investment Quality Bond Fund
11. Victory Lakefront Fund
12. Victory Limited Term Income Fund
13. Victory National Municipal Bond Fund
Class A Shares
Class B Shares
14. Victory New York Tax-Free Fund
Class A Shares
Class B Shares
15. Victory Ohio Municipal Bond Fund
16. Victory Ohio Municipal Money Market Fund
17. Victory Ohio Regional Stock Fund
Class A Shares
Class B Shares
18. Victory Prime Obligations Fund
19. Victory Real Estate Investment Fund
20. Victory Special Growth Fund
21. Victory Special Value Fund
Class A Shares
Class B Shares
22. Victory Stock Index Fund
23. Victory Tax-Free Money Market Fund
24. Victory U.S. Government Obligations Fund
Investor Shares
Select Shares
25.Victory Value Fund
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE II
FEES
Pursuant to ARTICLE II, Section 5 of the Agreement, BISYS shall be
entitled to receive a fee based upon the annual rate set forth below:
Average Daily Net
Assets of each Fund Fee Amount
First $300 million Fifteen one-hundredths of one percent
(.15%) of such Fund's average daily
net assets
Next $300 million Twelve one-hundredths of one percent
(.12%) of such Fund's average daily
net assets
All assets exceeding $600 million Ten one-hundredths of one percent
(.10%) of such Fund's average daily
net assets
<PAGE>
SCHEDULE II
Pursuant to ARTICLE II, Section 5 of the Agreement, BISYS shall be
entitled to receive a fee based upon the annual rate set forth below for the
LifeChoice Funds only:
Fee Amount
----------
One-hundredths of one-percent (.01%) of each Fund's average
daily net assets or $12,000 per Fund per year, whichever is greater.
Such fee as is attributable to each Fund shall be a separate
(and not joint or joint and several) obligation of each such Fund. No
individual shall have any responsibility for any obligation, if any,
with respect to any other Fund arising out of this Agreement.
SUB-ADMINISTRATION AGREEMENT
AGREEMENT made this 1st day of October, 1997, between BISYS Fund
Services Limited Partnership d/b/a BISYS Fund Services (the "Administrator"), an
Ohio limited partnership having its principal place of business at 3435 Stelzer
Road, Columbus, Ohio 43219, and Key Asset Management Inc. (the
"Sub-Administrator"), a New York corporation having its principal place of
business at 127 Public Square, Cleveland, Ohio 44114.
WHEREAS, the Administrator has entered into a Management and
Administration Agreement, dated October 1, 1997 ("Administration Agreement"),
with The Victory Portfolios (the "Trust"), a Delaware business trust, concerning
the provision of management and administrative services for the investment
portfolios of the Trust identified on Schedule A hereto, as such Schedule shall
be amended from time to time (individually referred to herein as a "Fund" and
collectively as the "Funds"); and
WHEREAS, the Administrator desires to retain the Sub-Administrator to
assist it in performing administrative services with respect to each Fund and
the Sub-Administrator is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Sub-Administrator. As provided herein, the
Sub-Administrator will perform the following duties:
(a) assist the Trust in the supervision of all aspects of
the operations of the Funds except those performed by
the investment adviser for the Funds under its
Investment Advisory Agreement;
(b) maintain office facilities (which may be in the
office of Sub-Administrator or an affiliate);
(c) furnish statistical and research data, clerical and
internal compliance services relating to legal
matters, except for those services provided pursuant
to the terms of the Fund Accounting Agreement;
(d) assist the Administrator in the preparation of the
periodic reports to the Securities and Exchange
Commission on Form N -SAR or any replacement forms
thereto;
<PAGE>
(e) assist the Administrator in compiling data for (after
review by the Trust's auditors) the Funds' federal
and state tax returns and required tax filings other
than those required to be made by the Trust's
Custodian and Transfer Agent;
(f) assist the Administrator in preparing and filing
compliance filings pursuant to state securities laws
with the advice of the Trust's counsel and coordinate
with the transfer agent to monitor the sale of the
Funds' shares;
(g) assist the Trust in the preparation, mailing and
filing of the Trust's Annual and Semi-Annual Reports
to Shareholders and its Registration Statements;
(h) assist the Administrator in preparing and filing
timely Notices to the Securities and Exchange
Commission required pursuant to Rule 24f-2 under the
Investment Company Act of 1940 (the "1940 Act")
(i) assist the Administrator in preparing and filing with
the Securities and Exchange Commission all
Registration Statements on Form N-1A and all
amendments thereto with the advice of Trust's
counsel;
(j) assist the Administrator in preparing and filing with
the Securities and Exchange Commission Proxy
Statements and related documents with the advice of
Trust's counsel and coordinate the distribution of
such documents; and
(k) provide Trustee Board meeting support, including
assisting in the preparation of documents related
thereto.
The Sub-Administrator will keep and maintain all books and
records relating to its services in accordance with Rule 31a-1 under the 1940
Act.
2. Compensation; Expenses Assumed as Sub-Administrator. The
Administrator will pay the Sub-Administrator for the services provided under
this Agreement a fee with respect to each Fund calculated at the annual rate of
up to five one-hundredths of one percent (.05%) of such Fund's average daily net
assets. Except for the expenses that shall be borne by the Trust, as set forth
in Article II, Section 4 of the Administration Agreement, the Sub-Administrator
shall pay all expenses incurred by it in performing its services and duties as
Sub-Administrator, including the cost of providing office facilities, equipment
and personnel related to such services and duties. The fee payable hereunder
shall be calculated and paid on a monthly basis. The fee for the period from the
day of the month this Agreement is entered into until the end of that month
shall be prorated according to the proportion which such period bears the full
monthly period. Upon any termination of this Agreement before the end of any
month, the fee for such part of a month shall be prorated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement.
2
<PAGE>
For the purpose of determining fees payable to the Sub-Administrator,
the value of the net assets of a particular Fund shall be computed in the manner
described in the Trust's Agreement and Declaration of Trust or in the prospectus
or Statement of Additional Information respecting the Fund as from time to time
in effect for the computation of the value of such net assets in connection with
the determination of the liquidating value of the shares of such Fund.
3. Effective Date. This Agreement shall become effective with respect
to a Fund as of the date first written above (or, if a particular Fund is not in
existence on that date, on the date specified in the amendment to Schedule A to
this Agreement relating to such Fund or, if no date is specified, the date on
which such amendment is executed).
4. Term. This Agreement shall continue in effect with respect to a
Fund, unless earlier terminated by either party hereto as provided hereunder,
until September 30, 1999, and thereafter shall be renewed automatically for
successive one-year terms unless written notice not to renew is given by the
non-renewing party to the other party at least 60 days prior to the expiration
of the then-current term; provided, however, that after such termination for so
long as the Sub-Administrator, with the written consent of the Administrator, in
fact continues to perform any one or more of the services contemplated by this
Agreement or any schedule or exhibit hereto, the provisions of this Agreement,
including without limitation the provisions dealing with indemnification, shall
continue in full force and effect. This Agreement shall terminate automatically
upon termination of the Administration Agreement. In addition, either party to
this Agreement may terminate such Agreement prior to the expiration of the
initial term set forth above by providing the other party with written notice of
such termination at least 60 days prior to the date upon which such termination
shall become effective. Compensation due the Sub-Administrator and unpaid by the
Administrator upon such termination shall be immediately due and payable upon
and notwithstanding such termination. The Sub-Administrator shall be entitled to
collect from the Administrator, in addition to the compensation described under
paragraph 2 hereof, the amount of all the Sub-Administrator's cash disbursements
for services in connection with the Sub-Administrator's activities in effecting
such termination, including without limitation, the delivery to the
Administrator, the Trust, and/or their respective designees, of the Trust's
property, records, instruments and documents, or any copies thereof. Subsequent
to such termination for a reasonable fee to be paid by the Administrator, the
Sub-Administrator will provide the Administrator and/or the Trust with
reasonable access to any Trust documents or records remaining in its possession.
5. Standard of Care; Reliance on Records and Instructions;
Indemnification. The Sub- Administrator shall use reasonable efforts to ensure
the accuracy of all services performed under this Agreement, but shall not be
liable to the Administrator or the trust for any action taken or omitted by the
Sub-Administrator in the absence of bad faith, willful misfeasance, negligence
or from reckless disregard by it of its obligations and duties. The
Administrator agrees to indemnify and hold harmless the Sub-Administrator, its
affiliates, employees, agents, directors, officers and nominees from and against
any and all claims, demands, actions and suits, whether groundless or otherwise,
and from and against any and all judgements, liabilities, losses, damages,
costs, charges, counsel fees and other reasonable expenses of every nature and
character arising out of or in any way relating to
3
<PAGE>
the Sub-Administrator's actions taken or nonactions with respect to the
performance of services under this Agreement with respect to a Fund or based, if
applicable, upon reasonable reliance on information, records, instructions or
requests with respect to such Fund given or made to the Sub- Administrator by
the Administrator; provided that this indemnification shall not apply to actions
or omissions of the Sub-Administrator in cases of its own bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties, and further provided that prior to confessing any claim against it which
may be the subject of this indemnification, the Sub- Administrator shall give
the Administrator written notice of and reasonable opportunity to defend against
said claim in its own name or in the name of the Sub-Administrator.
The Sub-Administrator agrees to indemnify and hold harmless the
Administrator, its employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgements, liabilities, losses,
damages, costs, charges, counsel fees and other reasonable expenses of every
nature and character arising out of or in any way relating to the
Sub-Administrator's bad faith, willful misfeasance, negligence or from reckless
disregard by it of its obligations and duties, with respect to the performance
of services under this Agreement, provided that prior to confessing any claim
against it which may be the subject of this indemnification, the Administrator
shall give the Sub- Administrator written notice of and reasonable opportunity
to defend against said claim in its own name or in the name of the
Administrator.
6. Record Retention and Confidentiality. The Sub-Administrator shall
keep and maintain on behalf of the Trust all books and records that the Trust
and the Sub-Administrator are, or may be, required to keep and maintain in
connection with the services to be provided hereunder pursuant to any applicable
statutes, rules and regulations, including without limitation Rules 31a-1 and
31a-2 under the Investment Company Act of 1940, as amended. The
Sub-Administrator further agrees that all such books and records shall be the
property of the Trust and to make such books and records available for
inspection by the Trust, by the Administrator, or by the Securities and Exchange
Commission at reasonable times.
7. Uncontrollable Events. The Sub-Administrator assumes no
responsibility hereunder, and shall not be liable, for any damage, loss of data,
delay or any other loss whatsoever caused by events beyond its reasonable
control.
8. Rights of Ownership. All computer programs and procedures developed
to perform the services to be provided by the Sub-Administrator under this
Agreement are the property of the Sub-Administrator. All records and other data
except such computer programs and procedures are the exclusive property of the
Trust and all such other records and data will be furnished to the Administrator
and/or the Trust in appropriate form as soon as practicable after termination of
this Agreement for any reason.
4
<PAGE>
9. Return of Records. The Sub-Administrator may at its option at any
time, and shall promptly upon the demand of the Administrator and/or the Trust,
turn over to the Administrator and/or the Trust and cease to retain the
Sub-Administrator's files, records and documents created and maintained by the
Sub-Administrator pursuant to this Agreement which are no longer needed by the
Sub-Administrator in the performance of its services or for its legal
protection. If not so turned over to the Administrator and/or the Trust, such
documents and records will be retained by the Sub- Administrator for six years
from the year of creation. At the end of such six-year period, such records and
documents will be turned over to the Administrator and/or the Trust unless the
Trust authorizes in writing the destruction of such records and documents.
10. Notices. Any notice provided hereunder shall be sufficiently given
when sent by registered or certified mail to the address set forth above, or at
such other address as either party may from time to time specify in writing to
the other party pursuant to this Section.
11. Headings. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
12. Assignment. This agreement and the rights and duties hereunder
shall not be assignable with respect to a Fund by either of the parties hereto
except by the specific written consent of the other party and with the specific
written consent of the Trust.
13. Governing Law. This Agreement shall be governed by and provisions
shall be construed in accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
BISYS FUND SERVICES KEY ASSET MANAGEMENT INC.
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By: /s/ George O. Martinez By: /s/ Kathleen A. Dennis
------------------------------- -------------------------------
Title: Senior Vice President Title: Senior Managing Director
---------------------------- ----------------------------
Date: 11/4/97 Date: 11/3/97
----------------------------- -----------------------------
5
<PAGE>
SCHEDULE A
TO THE
SUB-ADMINISTRATION AGREEMENT
BETWEEN
BISYS FUND SERVICES LIMITED PARTNERSHIP
AND
KEY ASSET MANAGEMENT INC.
Funds
Balanced Fund Financial Reserves Fund
Diversified Stock Fund Fund for Income
Government Mortgage Fund Institutional Money Market Fund
Growth Fund National Municipal Bond Fund
Intermediate Income Fund New York Tax-Free Fund
International Growth Fund Ohio Municipal Money Market Fund
Investment Quality Bond Fund Lakefront Fund
Limited Term Income Fund Real Estate Investment Fund
Ohio Municipal Bond Fund
Ohio Regional Stock Fund
Prime Obligations Fund
Special Growth Fund
Special Value Fund
Stock Index Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund
Value Fund
BISYS FUND SERVICES KEY ASSET MANAGEMENT INC.
LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc.,
General Partner
By: /s/ George O. Martinez By: /s/ Kathleen A. Dennis
----------------------------- -------------------------------
Title: Senior Vice President Title: Senior Managing Director
-------------------------- --------------------------
Date: 11/4/97 Date: 11/3/97
--------------------------- ---------------------------
6
<PAGE>
SCHEDULE A
TO THE
SUB-ADMINISTRATION AGREEMENT
BETWEEN
BISYS FUND SERVICES LIMITED PARTNERSHIP
AND
KEY ASSET MANAGEMENT INC.
Amended as of March 2, 1998
Funds
1. Balanced Fund 18. Financial Reserves Fund
2. Diversified Stock Fund 19. Fund for Income
3. Government Mortgage Fund 20. Institutional Money Market Fund
4. Growth Fund 21. National Municipal Bond Fund
5. Intermediate Income Fund 22. New York Tax-Free Fund
6. International Growth Fund 23. Ohio Municipal Money Market Fund
7. Investment Quality Bond Fund 24. Lakefront Fund
8. Limited Term Income Fund 25. Real Estate Investment Fund
9. Ohio Municipal Bond Fund 26. Federal Money Market Fund
10. Ohio Regional Stock Fund 27. Convertible Securities Fund
11. Prime Obligations Fund
12. Special Growth Fund
13. Special Value Fund
14. Stock Index Fund
15. Tax-Free Money Market Fund
16. U.S. Government Obligations Fund
17. Value Fund
TRANSFER AGENCY AND SERVICE AGREEMENT
between
The Victory Portfolios
on Behalf of Various Funds
Listed on Schedule A
Individually and Not Jointly
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
----
Article 1 Terms of Appointment; Duties of the Bank......................
Article 2 Fees and Expenses.............................................
Article 3 Representations and Warranties of the Bank....................
Article 4 Representations and Warranties of the Company.................
Article 5 Data Access and Proprietary Information.......................
Article 6 Indemnification...............................................
Article 7 Standard of Care..............................................
Article 8 Covenants of the Company and the Bank.........................
Article 9 Termination of Agreement......................................
Article 10 Assignment....................................................
Article 11 Amendment.....................................................
Article 12 Massachusetts Law to Apply....................................
Article 13 Force Majeure.................................................
Article 14 Consequential Damages.........................................
Article 15 Merger of Agreement...........................................
Article 16 Counterparts..................................................
Article 17 Multiple Funds................................................
Article 18 Limitation of Liability.......................................
Article 19 Arbitration...................................................
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 12th day of July, 1996 by and between THE VICTORY
PORTFOLIOS, a Delaware business trust, having its principal office and place of
business at 3435 Stelzer Road, Columbus, Ohio (the "Company"), on behalf of the
individual Funds listed on Schedule A, individually and not jointly, (each a
"Fund" and collectively, the "Funds"), and STATE STREET BANK AND TRUST COMPANY,
a Massachusetts trust company having its principal office and place of business
at 225 Franklin Street, Boston, Massachusetts 02110 ("the Bank").
WHEREAS, the Company is a series Fund registered as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund desires to appoint the Bank as its transfer agent,
dividend disbursing agent, custodian of certain retirement plans and agent in
connection with certain other activities, and the Bank desires to accept such
appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of the Bank
----------------------------------------
1.01 Subject to the terms and conditions set forth in this Agreement,
the Company, on behalf of each Fund, individually
- 1 -
<PAGE>
and not jointly, hereby employs and appoints the Bank to act as, and the Bank
agrees to act as its transfer agent for the Fund's authorized and issued shares
of beneficial interest, (the "Shares"), dividend disbursing agent, custodian of
certain retirement plans and agent in connection with any accumulation,
open-account or similar plans provided to the shareholders of each Fund (the
"Shareholders") and set out in the currently effective prospectus and statement
of additional information ("prospectus") of each Fund, including without
limitation any periodic investment plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Company and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation
thereof to the Custodian of each Fund authorized pursuant to
the Trust Instrument of the Company (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
- 2 -
<PAGE>
(iii) Receive for acceptance redemption requests and redemp tion
directions and deliver the appropriate documentation thereof
to the Custodian;
(iv) In respect to the transactions in items (i), (ii) and (iii)
above, the Bank shall execute transactions directly with
broker-dealers authorized by each Fund who shall thereby be
deemed to be acting on behalf of the Fund;
(v) At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay
over or cause to be paid over in the appropriate manner such
monies as instructed by the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends and
distributions declared by each Fund;
(viii) Issue replacement certificates for those certificates
alleged to have been lost, stolen or destroyed upon receipt
by the Bank of indemnification satisfactory to the Bank and
protecting the Bank and the Funds, and the Bank at its
option, may issue replacement certificates in place of
mutilated stock certificates upon presentation thereof and
without such indemnity;
(ix) Maintain records of account for and advise each Fund and its
shareholders as to the foregoing; and
- 3 -
<PAGE>
(x) Record the issuance of shares of each Fund and maintain
pursuant to SEC Rule 17Ad-10(e) a record of the total number
of shares of the Funds that are authorized, based upon data
provided to it by the Funds, and issued and outstanding. The
Bank shall also provide each Fund on a regular basis with
the total number of shares which are authorized and issued
and outstanding and shall have no obligation, when recording
the issuance of shares, to monitor the issuance of such
shares or to take cognizance of any laws relating to the
issue or sale of such shares, which functions shall be the
sole responsibility of the Funds.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall: (i) perform the
customary services of a transfer agent, dividend disbursing agent, custodian of
certain retirement plans and, as relevant, agent in connection with
accumulation, openaccount or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), including but not
limited to: maintaining all Shareholder accounts, preparing Shareholder meeting
lists, mailing proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders, preparing and mailing
- 4 -
<PAGE>
confirmation forms and statements of account to Shareholders for all purchases
and redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders, and
providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each State.
(c) In addition, the Funds shall (i) identify to the Bank in writing
those transactions and assets to be treated as exempt from blue sky reporting
for each State and (ii) verify the establishment of transactions for each State
on the system prior to activation and thereafter monitor the daily activity for
each State.
(d) Procedures as to who shall provide certain of these services in
Article 1 may be established from time to time by agreement between the Company
and the Bank per the attached service responsibility schedule, established and
amended from time to time by written agreement between the Company, on behalf of
each affected Fund, and the Bank. By agreement, the Bank may at times perform
only a portion of these services and the Funds or their agent may perform these
services on the Funds' behalf.
(e) The Bank shall provide additional services on behalf of each Fund
(i.e., escheatment services) that may be agreed upon in writing between the
Company and the Bank.
(f) The Bank will not accept third-party checks in payment of the
Shares.
- 5 -
<PAGE>
Article 2 Fees and Expenses
-----------------
2.01 For the performance by the Bank pursuant to this Agreement, each
Fund agrees to pay the Bank an annual maintenance fee for each shareholder
account as set out in the initial fee schedule attached hereto. Such fees and
out-of-pocket expenses and advances identified under Section 2.02 below may be
changed from time to time subject to mutual written agreement between the
Company and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, each Fund
agrees to reimburse the Bank for out-of-pocket expenses, including but not
limited to confirmation production, postage, forms, telephone, microfilm,
microfiche, tabulation proxies, records storage, or advances incurred by the
Bank for the items set out in the fee schedule attached hereto. In addition, any
other expenses incurred by the Bank at the request or with the consent of the
Company will be reimbursed by the affected Fund. The parties agree that the
initial fee schedule attached hereto will remain in effect for at least two
years from the effective date of this Agreement.
2.03 Each Fund agrees to pay all fees and reimbursable expenses within
30 days following the receipt of the respective billing notice. Postage for
mailing of dividends, proxies, Fund reports and other mailings to all
shareholder accounts shall be advanced to the Bank by the Fund at least seven
(7) days prior to the mailing date of such materials.
- 6 -
<PAGE>
Article 3 Representations and Warranties of the Bank
------------------------------------------
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the Commonwealth
of Massachusetts.
3.03 It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05 It and any sub-transfer agent has and will continue to have access
to the necessary facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
3.06 It and any sub-transfer agent has and will continue to be
registered as a transfer agent with the appropriate regulatory agency and to the
extent necessary with any appropriate state regulator.
- 7 -
<PAGE>
Article 4 Representations and Warranties of the Company
---------------------------------------------
The Company represents and warrants to the Bank that:
4.01 It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
4.02 It is empowered under applicable laws and by its Trust Instrument
and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by the Trust Instrument and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is an open-end, management investment company registered under
the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of 1933, as
amended is currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made, with respect
to all Shares of each Fund being offered for sale.
Article 5 Data Access and Proprietary Information
---------------------------------------
5.01 Each Fund acknowledges that the data bases, computer programs,
screen formats, report formats, interactive design techniques, and documentation
manuals furnished to each Fund by the
- 8 -
<PAGE>
Bank as part of the Funds' ability to access certain Fund-related data
("Customer Data") maintained by the Bank on data bases under the control and
ownership of the Bank or other third party ("Data Access Services") constitute
copyrighted, trade secret, or other proprietary information
(collectively,"Proprietary Information") of substantial value to the Bank or
other third party. In no event shall Proprietary Information be deemed Customer
Data. Each Fund agrees to treat all Proprietary Information as proprietary to
the Bank and further agrees that it shall not divulge any Proprietary
Information to any person or organization except as may be provided hereunder.
Without limiting the foregoing, each Fund agrees for itself and its employees
and agents:
(a) to access Customer Data solely from locations as may be designated
in writing by the Bank and solely in accordance with the Bank's applicable user
documentation;
(b) to refrain from copying or duplicating in any way the Proprietary
Information;
(c) to refrain from obtaining unauthorized access to any portion of the
Proprietary Information, and if such access is inadvertently obtained, to inform
in a timely manner of such fact and dispose of such information in accordance
with the Bank's instructions;
(d) to refrain from causing or allowing third-party
- 9 -
<PAGE>
data acquired hereunder from being retransmitted to any other computer facility
or other location, except with the prior written consent of the Bank;
(e) that each Fund shall have access only to those authorized
transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the Bank in Proprietary Information
at common law, under federal copyright law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this Article 5. The obligations of this Article
shall survive any earlier termination of this Agreement.
5.02 If the Company notifies the Bank that any of the Data Access
Services do not operate in material compliance with the most recently issued
user documentation for such services, the Bank shall endeavor in a timely manner
to correct such failure. Organizations from which the Bank may obtain certain
data included in the Data Access Services are solely responsible for the
contents of such data and each Fund agrees to make no claim against the Bank
arising out of the contents of such third-party data, including, but not limited
to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND
SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH
- 10 -
<PAGE>
ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL
WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO,
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.03 If the transactions available to the Funds include the ability to
originate electronic instructions to the Bank in order to (i) effect the
transfer or movement of cash or Shares or (ii) transmit Shareholder information
or other information (such transactions constituting a "COEFI"), then in such
event the Bank shall be entitled to rely on the validity and authenticity of
such instruction without undertaking any further inquiry as long as such
instruction is undertaken in conformity with security procedures established by
the Bank from time to time.
Article 6 Indemnification
---------------
6.01 The Bank shall not be responsible for, and each Fund, individually
and not jointly, shall indemnify and hold the Bank harmless from and against,
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
- 11 -
<PAGE>
(b) The Fund's lack of good faith, negligence or willful misconduct
which arise out of the breach of any representation or warranty of the Fund
hereunder.
(c) The reliance on or use by the Bank or its agents or subcontractors
of information, records, documents or services which (i) are received by the
Bank or its agents or subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other person or firm on behalf of the Fund
including but not limited to any previous transfer agent or registrar.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or regulations
of any state that such Shares be registered in such state or in violation of any
stop order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such Shares in such state.
6.02 At any time the Bank may apply to any officer of the Company for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be
- 12 -
<PAGE>
indemnified by each Fund, individually and not jointly, for any action taken or
omitted by it in reliance upon such instructions or upon the opinion of such
counsel. The Bank, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document furnished by or on behalf of a
Fund, reasonably believed to be genuine and to have been signed by the proper
person or persons, or upon any instruction information, data, records or
documents provided the Bank or its agents or subcontractors by machine readable
input, telex, CRT data entry or other similar means authorized by the Fund, and
shall not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Company, and the proper
countersignature of any former transfer agent or former registrar, or of a
co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained in this
Article 6 shall apply, upon the assertion of a claim for which a Fund may be
required to indemnify the Bank, the Bank shall promptly notify the Fund of such
assertion, and shall keep the Fund advised with respect to all developments
concerning such claim. The Fund shall have the option to participate with the
Bank in the defense of such claim or to defend against said claim in its own
name or in the name of the Bank. The Bank shall in no case confess any claim or
make any compromise in any case in which a Fund
- 13 -
<PAGE>
may be required to indemnify the Bank except with the Fund's prior written
consent.
Article 7 Standard of Care
----------------
7.01 The Bank shall at all times act in good faith and agrees to use
its best efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement, but assumes no responsibility and shall not be
liable for loss or damage due to errors unless said errors are caused by its
negligence, bad faith, or willful misconduct of that of its employees.
Article 8 Covenants of the Company and the Bank
-------------------------------------
8.01 The Company shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of Trustees of the
Company authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the Trust Instrument and By-Laws of the Fund and all
amendments thereto.
8.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile
- 14 -
<PAGE>
signature imprinting devices, if any; and for the preparation or use, and for
keeping account of, such certificates, forms and devices.
8.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 17A of the Securities Exchange Act of 1934, as
amended, Section 31 of the 1940 Act, and the Rules thereunder, the Bank agrees
that all such records prepared or maintained by the Bank relating to the
services to be performed by the Bank hereunder are the property of each Fund and
will be preserved, maintained and made available in accordance with such
Sections and Rules, and will be surrendered promptly to the Funds on and in
accordance with their request.
8.04 The Bank and the Company agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
8.05 In case of any requests or demands for the inspection of the
Shareholder records of a Fund, the Bank will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Company as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to
- 15 -
<PAGE>
any person whenever it is advised by its counsel that it may be held liable for
the failure to exhibit the Shareholder records to such person.
Article 9 Termination of Agreement
------------------------
9.01 During the initial two year term of this Agreement, this Agreement
may be terminated by either party only for "cause" upon one hundred twenty (120)
days written notice to the other.
9.02 After the initial two year term of this Agreement, either party
may terminate this Agreement upon 120 days notice for any reason or for no
reason.
9.03 Should the Company exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material with
respect to each Fund will be borne by each Fund individually and not jointly.
Additionally, the Bank reserves the right to charge for any other reasonable
expenses associated with such termination and/or a charge equivalent to the
average of three (3) months' fees, provided that the Agreement has not been
terminated by the Company for "cause" (as defined in section 9.04 below).
9.04 For purposes of this Agreement, "cause" shall mean (a) a material
breach of the terms of this Agreement; (b) the failure of the Bank to meet the
performance standards set forth on the attached schedule; (c) the material
breach of a warranty,
- 16 -
<PAGE>
representation or covenant contained in this Agreement; (d) the failure to meet
the standard of care set forth in Article 7 of this Agreement; (e) an
"assignment" (as defined in the 1940 Act) of this Agreement by the Bank. For
purposes of this Section 9.04 and Section 10.01 below, an "assignment" of the
Sub-Transfer Agent Agreement (as defined below) will considered an assignment of
this Agreement.
Article 10 Assignment
----------
10.01 Neither this Agreement nor any rights or obligations hereunder
may be "assigned" (as defined in the 1940 Act) or delegated by either party
without the written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
10.03 The Bank will, without further consent on the part of the
Company, enter into an agreement for the performance of the some or all of the
Bank's obligations set forth in this Agreement (the "Sub-Transfer Agent
Agreement") with Boston Financial Data Services, Inc. ("BFDS"), a Massachusetts
Corporation Agreement"), which is duly registered as a transfer agent pursuant
to Section 17A(c)(2) of the Securities Exchange Act of 1934, as amended
("Section 17A(c)(2)"); provided, however, that the Bank will
- 17 -
<PAGE>
be as fully responsible to the Company for the acts and omissions of BFDS as it
is for its own acts and omissions.
Article 11 Amendment
---------
11.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Trustees of the Company.
Article 12 Massachusetts Law to Apply
--------------------------
12.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Article 13 Force Majeure
-------------
13.01 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes. The Bank warrants and represents that it has disaster recovery
facilities that are designed to reasonably assure that its operations with
respect to the Company and its shareholders will continue uninterrupted. The
Bank further warrants and represents
- 18 -
<PAGE>
that it has in place disaster recovery procedures and that such procedures are
periodically reviewed and tested.
Article 14 Consequential Damages
---------------------
14.01 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
Article 15 Merger of Agreement
-------------------
15.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
Article 16 Counterparts
------------
16.01 This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
Article 17 Multiple Funds
--------------
17.01 Every reference to a Fund shall be deemed a reference solely to
the particular Fund of the Company (as set forth in Schedule A, as may be
amended from time to time). Under no circumstances shall the rights, obligations
or remedies with respect to a particular Fund constitute a right, obligation or
remedy applicable to any other Fund. In particular, and without otherwise
- 19 -
<PAGE>
limiting the scope of this paragraph, the Bank shall have no right to set off
claims of a Fund by applying property of any other Fund.
Article 18 Limitation on Liability
-----------------------
Copies of the Trust Instrument, as amended, establishing the Company
are on file with the Secretary of the Trust, and notice is hereby given that
this Agreement is executed on behalf of the Company by officers of the Company
as officers and not individually and that the obligations of or arising out of
this Agreement are not binding upon any of the Trustees, officers, shareholders,
employees or agents of the Company but are binding only upon the assets and
property of the various Funds of the Company, severally and not jointly.
Article 19 Arbitration
-----------
19.01 Any controversy, claim, or dispute arising out of or relating to
this Agreement or the Sub-Transfer Agent Agreement, or any breach thereof,
including without limitation any dispute concerning the scope of this Article
19, will be settled by arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association as supplemented herein, and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
19.02 There will be three arbitrators, including at least one
practicing attorney and one certified public accountant.
- 20 -
<PAGE>
Pending final award, arbitrator compensation and expenses will be advanced
equally by both parties.
19.03 The AAA will hold an administrative conference with counsel for
the parties within 20 days after the filing of the demand for arbitration. The
parties and the AAA will thereafter cooperate in order to complete the
appointment of three arbitrators as quickly as possible. Within 15 days after
all three arbitrators have been appointed, an initial meeting among the
arbitrators and counsel for the parties will be held for the purpose of
establishing a plan for administration of the arbitration, including:
(a) defining the issues;
(b) scope, timing, and types of discovery, which may at the discretion
of the arbitrators include production of documents in the possession of the
parties, but may not without consent of all particles include depositions;
(c) exchange of documents and filing of detailed statement of claim and
prehearing memoranda;
(d) schedule and place of hearings; and
(e) any other matters that may promote the efficient, expeditious, and
cost-effective conduct of the proceeding.
19.04 The arbitration will take place in the State of Ohio.
19.05 The final award will include pre-award interest at a rate of
interest determined by the arbitrators to approximate
- 21 -
<PAGE>
the cost to he prevailing party of borrowing money during the relevant period.
19.06 The final award may grant such other, further and different
relief as authorized by the American Arbitration Association Commercial
Arbitration Rules, which may not include punitive damages.
- 22 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
THE VICTORY PORTFOLIOS, on behalf of
each of the Funds listed on Schedule
A, individually and not jointly
By:/s/William B. Blundin
----------------------
Vice President
ATTEST:
/s/Scott A. Englehart
- -----------------------------
Secretary
STATE STREET BANK AND TRUST COMPANY
BY:/s/Ronald E. Logue
------------------
Executive Vice President
ATTEST:
/s/Stephen Cesso
- -----------------------------
Vice President
- 23 -
<PAGE>
SCHEDULE I
Amended as of March 2, 1998
- --------------------------------------------------------------------------------
1. Victory Balanced Fund 26. Victory Federal Money Market Fund
Class A Shares Investor Shares
Class B Shares Select Shares
Key Shares 27. Victory Convertible Securities Fund
2. Victory Diversified Stock Fund 28. Victory LifeChoice Conservative
Class A Shares Investor Fund
Class B Shares 29. Victory LifeChoice Growth
3. Victory Government Mortgage Fund Investor Fund
4. Victory Growth Fund 30. Victory LifeChoice Moderate
5. Victory Financial Reserves Fund Investor Fund
6. Victory Fund for Income
7. Victory Institutional Money Market Fund
Investor Shares
Select Shares
8. Victory Intermediate Income Fund
9. Victory International Growth Fund
Class A Shares
Class B Shares
10. Victory Investment Quality Bond Fund
11. Victory Lakefront Fund
12. Victory Limited Term Income Fund
13. Victory National Municipal Bond Fund
Class A Shares
Class B Shares
14. Victory New York Tax-Free Fund
Class A Shares
Class B Shares
15. Victory Ohio Municipal Bond Fund
16. Victory Ohio Municipal Money Market Fund
17. Victory Ohio Regional Stock Fund
Class A Shares
Class B Shares
18. Victory Prime Obligations Fund
19. Victory Real Estate Investment Fund
20. Victory Special Growth Fund
21. Victory Special Value Fund
Class A Shares
Class B Shares
22. Victory Stock Index Fund
23. Victory Tax-Free Money Market Fund
24. Victory U.S. Government Obligations Fund
Investor Shares
Select Shares
25.Victory Value Fund
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE A
Amended as of March 1, 1997
1. Victory Balanced Fund
Class A Shares
Class B Shares
Key Shares
2. Victory Diversified Stock Fund
Class A Shares
Class B Shares
3. Victory Government Mortgage Fund
4. Victory Growth Fund
5. Victory Financial Reserves Fund
6. Victory Fund For Income
7. Victory Government Bond Fund
Class A Shares
Class B Shares
8. Victory Institutional Money Market Fund
Investor Shares
Select Shares
9. Victory Intermediate Income Fund
10. Victory International Growth Fund
Class A Shares
Class B Shares
11. Victory Investment Quality Bond Fund
12. Victory Limited Term Income Fund
13. Victory National Municipal Bond Fund
Class A Shares
Class B Shares
14. Victory New York Tax-Free Fund
Class A Shares
Class B Shares
15. Victory Ohio Municipal Bond Fund
16. Victory Ohio Municipal Money Market Fund
17. Victory Ohio Regional Stock Fund
Class A Shares
Class B Shares
18. Victory Prime Obligations Fund
19. Victory Special Growth Fund
20. Victory Special Value Fund
Class A Shares
Class B Shares
21. Victory Stock Index Fund
22. Victory Tax-Free Money Market
23. Victory U.S. Government Obligations Fund
Investor Class Shares
Select Class Shares
24. Victory Value Fund
25. Victory Lakefront Fund
26. Victory Real Estate Investment Fund
<PAGE>
SCHEDULE A
1. Victory Balanced Fund
Class A Shares
Class B Shares
Key Shares
2. Victory Diversified Stock Fund
Class A Shares
Class B Shares
3. Victory Government Mortgage Fund
4. Victory Growth Fund
5. Victory Financial Reserves Fund
6. Victory Fund For Income
7. Victory Government Bond Fund
Class A Shares
Class B Shares
8. Victory Institutional Money Market Fund
Investor Shares
Select Shares
9. Victory Intermediate Income Fund
10. Victory International Growth Fund
Class A Shares
Class B Shares
11. Victory Investment Quality Bond Fund
12. Victory Limited Term Income Fund
13. Victory National Municipal Bond Fund
Class A Shares
Class B Shares
14. Victory New York Tax-Free Fund
Class A Shares
Class B Shares
15. Victory Ohio Municipal Bond Fund
16. Victory Ohio Municipal Money Market Fund
17. Victory Ohio Regional Stock Fund
Class A Shares
Class B Shares
18. Victory Prime Obligations Fund
19. Victory Special Growth Fund
20. Victory Special Value Fund
Class A Shares
Class B Shares
21. Victory Stock Index Fund
22. Victory Tax-Free Money Market
23. Victory U.S. Government Obligations Fund
Investor Class Shares
Select Class Shares
24. Victory Value Fund
<PAGE>
STATE STREET BANK AND TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
1. Receives orders for the purchase X X+
of Shares.
2. Issue shares and hold Shares in X
Shareholders accounts.
3. Receive redemption requests. X X+
4. Effect transactions 1-3 above X X+
directly with broker-dealers.
5. Pay over monies to redeeming X X+
Shareholders.
6. Effect transfers of Shares. X X+
7. Prepare and transmit dividends X X+
distributions.
8. Issue Replacement Certificates. X
9. Reporting of abandoned property. X
10. Maintain records of account. X
11. Maintain and keep a current and X
accurate control book for each
issue of securities
12. Mail proxies. X
13. Mail shareholder reports. X
14. Mail prospectuses to current X
Shareholders.
15. Withhold taxes on U.S. resident X
and non-resident alien accounts.
16. Prepare and file U.S. Treasury X
Department forms.
17. Prepare and mail account and X X+
confirmation statements for
Shareholders.
- 25 -
<PAGE>
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
18. Provide Shareholder account X
information.
19. Blue sky reporting. X
* Such services are more fully described in Article 1.02 (a), (b)
and (c) of the Agreement.
+ Shared responsibility with each KeyCorp division responsible
for their customers represented by onmnibus accounts
THE VICTORY PORTFOLIOS, on behalf of
each of the Funds listed on Schedule
A, individually and not jointly
By:/s/William B. Blundin
----------------------
Vice President
ATTEST:
/s/Scott A. Englehart
- -----------------------------
Secretary
STATE STREET BANK AND TRUST COMPANY
BY:/s/Ronald E. Logue
------------------
Executive Vice President
ATTEST:
/s/Stephen Cesso
- -----------------------------
Vice President
- 26 -
<PAGE>
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
THE VICTORY PORTFOLIOS
- --------------------------------------------------------------------------------
Annual Account Service Fees
- ---------------------------
Account Fee $13.25
Complex Base Fee* $600,000
Closed Account Fee $ 1.50
Each class is considered a fund and will be billed accordingly.
Fees are billable on a monthly basis at the rate of 1/12 of the annual fee. A
charge is made for an account in the month that an account opens or closes.
Activity Based Fees
- -------------------
New Account Set-up $5.00/each
Manual Transactions $1.50/each
Telephone Calls $1.50/each
Correspondence $2.50/each
IRA Custodial Fees (If Applicable)
- ----------------------------------
Annual Maintenance $10.00/account
Conversion Fee
- --------------
One Time Fee $30,000
Out-of-Pocket Expenses Billed as incurred
Out-of-Pocket expenses include but are not limited to: confirmation statements,
postage, forms, audio response, telephone, records retention, transcripts,
microfilm, microfiche, and expenses incurred at the specific direction of the
fund.
*This complex base fee may be allocated across the Funds at the discretion of
KeyCorp. The complex base fee is applicable up to 50 Cusips.
THE VICTORY PORTFOLIOS, on behalf of
each of the Funds listed on Schedule A,
individually and not jointly STATE STREET BANK AND TRUST CO.
By /s/William B. Blundin By /s/Ronald E. Logue
--------------------- ------------------
Title Vice President Title Executive Vice President
Date July 22, 1996 Date July 26, 1996
- 27 -
FUND ACCOUNTING AGREEMENT
AGREEMENT made this 31st day of May, 1995 between THE VICTORY
PORTFOLIOS (the "Trust"), a Massachusetts business trust having its principal
place of business at 1900 East Dublin- Granville Road, Columbus, Ohio 43229, and
BISYS FUND SERVICES OHIO, INC. ("BISYS"), a corporation organized under the laws
of the State of Ohio and having its principal place of business at 1900 East
Dublin-Granville Road, Columbus, Ohio 43229.
WHEREAS, the Trust desires that BISYS perform certain fund accounting
services for each investment portfolio of the Trust identified on Schedule A
hereto (individually referred to herein as a "Fund" and collectively as the
"Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES AND FUND ACCOUNT. BISYS will keep and maintain the
following books and records of each Fund pursuant to Rule 31a-1 under the
Investment Company Act of 1940 (the "Rule"):
a. Journals containing an itemized daily record in detail of
all purchases and sales of securities, all receipts and disbursements of cash
and all other debits and credits, as required by subsection (b)(1) of the Rule;
b. General and auxiliary ledgers reflecting all asset,
liability, reserve, capital, income and expense accounts, including interest
accrued and interest received, as required by subsection (b)(2)(i) of the Rule;
c. Separate ledger accounts required by subsection (b)(2)(ii)
and (iii) of the Rule; and
d. A monthly trial balanced of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8) of the Rule.
All such books and records shall be the property of the Trust, and BISYS agrees
to make such books and records available for inspection by the Trust or by the
Securities and Exchange commission at reasonable times and otherwise to keep
confidential all records and other information relative to the Trust; except
when requested to divulge such information by duly-constituted authorities or
court process, or when requested by the Trust.
<PAGE>
In addition to the maintenance of the books and records specified
above, BISYS shall perform the following account services daily for each Fund:
a. Calculate the net asset value per Share;
b. Calculate the dividend and capital gain distribution, if
any;
c. Calculate the yield;
d. Provide the following reports:
(i) a current security position report;
(ii) a summary report of transactions and pending maturities
(including the principal, cost, and accrued interest on
each portfolio security in maturity date order); and
(iii) a current cash position report (including cash
available from portfolio sales and maturities and sales
of a Fund's Shares less cash needed for redemptions and
settlement of portfolio purchases);
e. Such other similar services with respect to a Fund as may be
reasonable requested by the Trust.
2. COMPENSATION. See Schedule B attached.
3. EFFECTIVE DATE. This Agreement shall become effective with respect
to a Fund as of the date first written above (the "Effective Date").
4. TERM. This Agreement shall become effective on the Effective Date
and, unless earlier terminated as provided herein, shall continue as to a
particular Fund until May 31, 1996 and thereafter, if not terminated, this
Agreement shall continue automatically as to a particular Fund for successive
terms of one year; provided, that such continuance is specifically approved at
least annually (a) by the vote of a majority of those members of the Trust's
Board of Trustees who are not parties to this Agreement or interested persons of
any such party, cast in person at a meeting called for the purpose of voting on
such approval, and (b) by the vote of (i) the Trust's Board of Trustees or (ii)
a majority of the outstanding voting securities of such Fund. This Agreement is
terminable with respect to a Fund (a) if its continuance is not approved in the
manner described in this Section 4, (b) upon mutual agreement of the parties, or
(c) for "cause" (as defined below) by the party alleging cause upon the
provision of sixty days' notice. After such termination, for so long as BISYS,
with the written consent of the Trust, in fact
2
<PAGE>
continues to perform any one or more of the services contemplated by this
Agreement or any schedule or exhibit hereto, the provisions of this Agreement,
including without limitation the provisions dealing with indemnification, shall
continue in full force and effect. Compensation due BISYS and unpaid by the
Trust upon such termination shall be immediately due and payable upon and
notwithstanding such termination. BISYS shall be entitled to collect from the
Trust, in addition to the compensation described under Section 2 hereof, the
amount of all of BISYS' cash disbursements for services in connection with
BISYS' activities in effecting such termination, including without limitation,
the delivery to the Trust and/or its designees of the Trust's property, records,
instruments and documents, or any copies thereof. Subsequent to such termination
for a reasonable fee, BISYS will provide the Trust with reasonable access to any
Trust documents or records remaining in its possession.
For purposes of this Agreement, "cause" shall mean (i) willful
misfeasance, bad faith, negligence, abandonment, or reckless disregard on the
part of either party with respect to its obligations and duties set forth
herein; (ii) regulatory, administrative, or judicial action initiated against
either party with regard to the violation of any rule, regulation, order, or
law; (iii) the dissolution or liquidation of either party or other cessation of
business other than a reorganization or recapitalization of such party as an
ongoing business; (iv) financial difficulties on the part of either party which
is evidenced by the authorization or commencement of, or involvement by way of
pleading, answer, consent, or acquiescence in, a voluntary or involuntary case
under Title 11 of the United States Code, as from time to time in effect, or any
applicable law, other than said Title 11, of any jurisdiction relating to the
modification or alternation of the rights of creditors; (v) an assignment (as
that term is defined in the Investment Company Act of 1940) of this Agreement;
or (vi) any circumstance which substantially impairs the performance of either
party's obligations and duties as contemplated herein.
5. STANDARD OF CARE; INDEMNIFICATION. BISYS shall use its best efforts
to insure the accuracy of all services performed under this Agreement, but shall
not be liable to the Trust for any action taken or omitted by BISYS in the
absence of bad faith, willful misconduct or negligence. BISYS assumes no
responsibility hereunder, and shall not be liable, for any damage, loss of data,
delay or any other loss whatsoever caused by events beyond its reasonable
control. A Fund agrees to indemnify and hold harmless BISYS, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' actions taken or non-actions with respect to the
performance of services under this Agreement with respect to such Fund or based,
3
<PAGE>
if applicable, upon information, instructions or requests with respect to such
Fund given or made to BISYS by an officer of the Trust thereunto duly
authorized; provided that this indemnification shall not apply to actions or
omissions of BISYS in cases of its own willful misconduct or negligence, and
further provided that prior to confessing any claim against it which may be the
subject of this indemnification, BISYS shall give the Trust written notice of
and reasonable opportunity to defend against said claim in its own name or in
the name of BISYS.
6. HEADINGS. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
7. ASSIGNMENT. This Agreement and the rights and duties hereunder shall
not be assignable with respect to a Fund by either of the parties hereto except
by the specific written consent of the other party.
8. GOVERNING LAW. This Agreement shall be governed by and provisions
shall be construed in accordance with the laws of The Commonwealth of
Massachusetts.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS. A copy of
the Declaration of Trust of the Trust is on file with the Secretary of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the Trustees of the Trust as Trustees and not
individually and that the obligations of this instrument are not binding upon
any of the Trustees or Shareholders individually but are binding only upon the
assets and property of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
THE VICTORY PORTFOLIOS
By:/s/ J. David Huber
---------------
Title: Vice President
BISYS FUND SERVICES OHIO, INC.
By:/s/ Stephen Mintos
------------------
Title: Executive Vice President
4
<PAGE>
Amended Schedule A
to the Fund Accounting Agreement
between the Victory Portfolios (formerly the Society Funds)
and BISYS Fund Services Ohio, Inc.
Dated as of May 31, 1995
Name of Portfolio
Victory Balanced Fund
Victory Diversified Stock Fund
Victory Government Mortgage
Fund Victory Growth Fund
Victory Intermediate Income Fund
Victory International Growth Fund
Victory Investment Quality Bond Fund
Victory Limited Term Income Fund
Victory Ohio Municipal Bond Fund
Victory Ohio Regional Stock Fund
Victory Prime Obligations Fund
Victory Special Growth Fund
Victory Special Value Fund
Victory Stock Index Fund
Victory Tax-Free Money Market Fund
Victory U.S. Government Obligations Fund
Victory Value Fund
Victory Financial Reserves Fund
Victory Fund for Income Fund
Victory Government Bond Fund
Victory Institutional Money Market Fund
Victory National Municipal Bond Fund
Victory New York Tax-Free Fund
Victory Ohio Municipal Money Market Fund
Victory Convertible Securities Fund
Victory Florida Tax-Free Bond Fund
Victory Municipal Bond Fund
Victory Short Term Government Income Fund
5
<PAGE>
THE VICTORY PORTFOLIOS
By:/s/ J. David Huber
--------------------------------
Title: Vice President
BISYS FUND SERVICES OHIO, INC.
By:/s/ Stephen Mintas
--------------------------------
Title: Executive Vice President
6
<PAGE>
Amended Schedule A
to the Fund Accounting Agreement
between the Victory Portfolios
and BISYS Fund Services Ohio, Inc.
Dated as of February 19, 1997
Name of Portfolio
Victory Balanced Fund
Victory Diversified Stock Fund
Victory Government Mortgage Fund
Victory Growth Fund
Victory Intermediate Income Fund
Victory International Growth Fund
Victory Investment Quality Bond Fund
Victory Lakefront Fund
Victory Limited Term Income Fund
Victory Ohio Municipal Bond Fund
Victory Ohio Regional Stock Fund
Victory Prime Obligations Fund
Victory Special Growth Fund
Victory Special Value Fund
Victory Stock Index Fund
Victory Tax-Free Money Market Fund
Victory U.S. Government Obligations Fund
Victory Value Fund
Victory Financial Reserves Fund
Victory Fund for Income
Victory Government Bond Fund
Victory Institutional Money Market Fund
Victory National Municipal Bond Fund
Victory New York Tax-Free Fund
Victory Ohio Municipal Money Market Fund
Victory Convertible Securities Fund
Victory Florida Tax-Free Bond Fund
Victory Municipal Bond Fund
Victory Short Term Government Income Fund
<PAGE>
Amended Schedule A
to the Fund Accounting Agreement
between the Victory Portfolios
and BISYS Fund Services Ohio, Inc.
Dated as of March 2, 1998
Name of Portfolio
1. Victory Balanced Fund
2. Victory Diversified Stock Fund
3. Victory Government Mortgage Fund
4. Victory Growth Fund
5. Victory Intermediate Income Fund
6. Victory International Growth Fund
7. Victory Investment Quality Bond Fund
8. Victory Lakefront Fund
9. Victory Limited Term Income Fund
10. Victory Ohio Municipal Bond Fund
11. Victory Ohio Regional Stock Fund
12. Victory Prime Obligations Fund
13. Victory Real Estate Investment Fund
14. Victory Special Growth Fund
15. Victory Special Value Fund
16. Victory Stock Index Fund
17. Victory Tax-Free Money Market Fund
18. Victory U.S. Government Obligations Fund
19. Victory Value Fund
20. Victory Financial Reserves Fund
21. Victory Fund for Income
22. Victory Institutional Money Market Fund
23. Victory National Municipal Bond Fund
24. Victory New York Tax-Free Fund
25. Victory Ohio Municipal Money Market Fund
26. Victory Federal Money Market Fund
27. Victory Convertible Securities Fund
28. Victory LifeChoice Conservative Investor Fund
29. Victory LifeChoice Growth Investor Fund
30. Victory LifeChoice Moderate Investor Fund
<PAGE>
Schedule B
VICTORY PORTFOLIOS
BISYS FUND SERVICES OHIO, INC.
Date as of May 31, 1995
Fund accounting fees will be determined based on a combination of asset-based
charges (subject to minimums), transaction charges, and out-of-pocket expenses.
Asset-based fees are accrued daily upon average total net assets of a Fund.
Asset charges per Fund - Annually
Net Assets Amounts
First $100 Million .03%
Next $100 Million .02%
Over $200 Million .01% for all Funds other than
money market Fund; money market
Fund will have no incremental
asset charge when net assets
exceed $500 million ($80,000
asset charge cap for each money
market Fund)
Minimum Monthly Asset Charge
The above charge will be subject to a minimum monthly amount of $2,500
per taxable Fund, $2,917 per tax-free Fund, and $3,333 per
international Fund.
Transaction Charges per Fund
$5 per security transaction (including foreign exchanges, patents,
corporate actions, and margin payments).
Multiple Class Charges
A $833 per month charge will be assessed for each class of shares after
the first class. This is separate from and in addition to other charges
and the minimum charge.
Out-of-Pocket Expenses
Out-of-pocket expenses incurred on behalf of the Fund will
be billed monthly and include, but not limited to:
o Payment to pricing or corporate actions vendors
o Costs in obtaining prices for non-exchange traded
securities
o Postage and communication (wires, modem fees)
o Courier expenses
o Microfilming, archiving, etc.
7
<PAGE>
THE VICTORY PORTFOLIOS
By:/s/ J. David Huber
--------------------------------
Title: Vice President
BISYS FUND SERVICES OHIO, INC.
By:/s/ Stephen Mintos
--------------------------------
Title: Executive Vice President
8
<PAGE>
Schedule B (Additional)
to the Fund Accounting Agreement
between The Victory Portfolios (LifeChoice Funds)
and BISYS Fund Services Ohio, Inc.
Dated as of March 2, 1998
Fund accounting fees will be determined based on a combination of
asset-based charges (subject to minimums), transaction charges, and
out-of-pocket expenses. Asset-based fees are accrued daily upon average total
net assets of a Fund.
Asset charges per Fund - Annually
Net Assets Amounts
First $100 Million .02%
Over $100 Million .01% (60,000 asset charge cap
for each LifeChoice Fund)
Minimum Monthly Asset Charge
The above charge will be subject to a minimum monthly amount of
$1,666.66 per taxable Fund.
Transaction Charges per Fund
$5 per security transaction (including foreign exchanges, patents,
corporate actions, and margin payments).
Multiple Class Charges
A $833 per month charge will be assessed for each class of shares after
the first class. This is separate from and in addition to other charges
and the minimum charge.
Out-of-Pocket Expenses
Out-of-pocket expenses incurred on behalf of the Fund will
be billed monthly and include, but not limited to:
o Payment to pricing or corporate actions vendors
o Costs in obtaining prices for non-exchange traded
securities
o Postage and communication (wires, modem fees)
o Courier expenses
o Microfilming, archiving, etc.
THE VICTORY PORTFOLIOS
SHAREHOLDER SERVICING PLAN
This Shareholder Servicing Plan (the "Plan") is adopted by The Victory
Portfolios, a business trust organized under the laws of the Commonwealth of
Massachusetts (the "Company"), on behalf of each of its Funds (individually, a
"Fund," and collectively, the "Funds") as set forth in Schedule I, as amended
from time to time, subject to the following terms and conditions:
SECTION 1. ANNUAL FEES.
Shareholder Services Fee. Each Fund (or Class thereof, as the case may
be) may pay to the distributor of its shares (the "Distributor") or financial
institutions that provide certain services to the Funds, a shareholder services
fee under the Plan at an annual rate not to exceed 0.25% of the average daily
net assets of the Fund or Class attributable to the Distributor or financial
institution thereof (the "Services Fee").
Adjustment to Fees. Any Fund may pay a Services Fee to the Distributor
or financial institution at a lesser rate than the fees specified in Section 1
hereof as agreed upon by the Board of Trustees and the Distributor or financial
institution and approved in the manner specified in Section 3 of this Plan.
Payment of Fees. The Services Fees will be calculated daily and paid
monthly by each Fund at the annual rates indicated above.
SECTION 2. EXPENSES COVERED BY THE PLAN.
Services Fees may be used by the Distributor or financial institution
for payments to financial institutions and persons who provide administrative
and support services to their customers who may from time to time beneficially
own shares, which may include (i) establishing and maintaining accounts and
records relating to shareholders; (ii) processing dividend and distribution
payments from the Fund on behalf of shareholders; (iii) providing information
periodically to shareholders showing their positions in shares and integrating
such statements with those of other transactions and balances in shareholders'
other accounts serviced by such financial institution; (iv) arranging for bank
wires; (v) responding to shareholder inquiries relating to the services
performed; (vi) responding to routine inquiries from shareholders concerning
their investments; (vii) providing subaccounting with respect to shares
beneficially owned by shareholders, or the information to the Fund necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from the Fund (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to
shareholders; (ix) assisting in processing purchase, exchange and redemption
requests from shareholders and in placing such orders with our
<PAGE>
service contractors; (x) assisting shareholders in changing dividend options,
account designations and addresses; (xi) providing shareholders with a service
that invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; and (xii) providing such other similar services as
the Fund may reasonably request to the extent the Distributor or financial
institution is permitted to do so under applicable statutes, rules and
regulations.
SECTION 3. APPROVAL OF TRUSTEES.
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Company and
(b) those Trustees who are not interested persons of the Company and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to it (the "Qualified Trustees"), cast in person at a meeting
called for the purpose of voting on the Plan and the related agreements.
SECTION 4. CONTINUANCE OF THE PLAN.
The Plan will continue in effect until June 5, 1996, and thereafter for
successive twelve-month periods: provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by a
majority of the Qualified Trustees.
SECTION 5. TERMINATION.
The Plan may be terminated at any time with respect to a Fund (i) by
the Company without the payment of any penalty, by the vote of a majority of the
outstanding voting securities of the Fund (or, the shareholders of a particular
class, if applicable) or (ii) by a vote of the Qualified Trustees. The Plan may
remain in effect with respect to a Fund even if the Plan has been terminated in
accordance with this Section 5 with respect to any other Fund.
SECTION 6. AMENDMENTS.
No material amendment to the Plan may be made unless approved by the
Company's Board of Trustees in the manner described in Section 3 above.
SECTION 7. SELECTION OF CERTAIN TRUSTEES.
While the Plan is in effect, the selection and nomination of the
Company's Trustees who are not interested persons of the Fund will be committed
to the discretion of the Trustees then in office who are not interested persons
of the Company.
2
<PAGE>
SECTION 8. WRITTEN REPORTS.
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by a Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Company's Board of Trustees, and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule which set out the
amounts expended under the Plan and the purposes for which those expenditures
were made.
SECTION 9. PRESERVATION OF MATERIALS.
The Company will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 8 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
SECTION 10. LIMIT OF LIABILITY.
The limitation of shareholder liability set forth in the Company's
Declaration of Trust is hereby acknowledged. The obligations of the Company
under this Plan, if any, shall not be binding upon the Trustees individually or
upon holders of shares of the Company individually but shall be binding only
upon the assets and property of the Company, and upon the Trustees insofar as
they hold title thereto.
SECTION 11. MEANINGS OF CERTAIN TERMS.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act by the Securities and Exchange Commission.
IN WITNESS WHEREOF, the Company executed this Plan as of June 5, 1995.
The Victory Portfolios
By:/s/ Leigh A. Wilson
--------------------
President
3
<PAGE>
SCHEDULE I
This Shareholder Servicing Plan shall be adopted with respect to the
following Funds (and Classes) of The Victory Portfolios:
Name of Fund Class
- ------------ -----
The Victory Balanced Fund A/B
The Victory Diversified Stock Fund A/B
The Victory Government Mortgage Fund A
The Victory Growth Fund A
The Victory Intermediate Income Fund A
The Victory International Growth Fund A/B
The Victory Investment Quality Bond Fund A
The Victory Limited Term Income Fund A
The Victory Ohio Municipal Bond Fund A
The Victory Ohio Regional Stock Fund A/B
The Victory Prime Obligations Fund A
The Victory Special Value Fund A/B
The Victory Tax-Free Money Market Fund A
The Victory U.S. Government Obligations
Money Market Fund Service
The Victory Value Fund A
The Victory Stock Index Fund A
The Victory Fund for Income A
The Victory Government Bond Fund A/B
The Victory National Municipal Bond Fund A/B
The Victory New York Tax-Free Fund A/B
The Victory Ohio Municipal Money Market Fund A
The Victory Special Growth Fund A
The Victory Institutional Money Market Fund Service
<PAGE>
SCHEDULE I
Amended as of March 1, 1997
This Shareholder Servicing Plan shall be adopted with respect to the
following Funds (and Classes) of The Victory Portfolios:
Name of Fund Class
- ------------ -----
1. The Victory Balanced Fund A/B
2. The Victory Diversified Stock Fund A/B
3. The Victory Government Mortgage Fund A
4. The Victory Growth Fund A
5. The Victory Intermediate Income Fund A
6. The Victory International Growth Fund A/B
7. The Victory Investment Quality Bond Fund A
8. The Victory Limited Term Income Fund A
9. The Victory Ohio Municipal Bond Fund A
10. The Victory Ohio Regional Stock Fund A/B
11. The Victory Prime Obligations Fund A
12. The Victory Special Value Fund A/B
13. The Victory Tax-Free Money Market Fund A
14. The Victory U.S. Government Obligations Fund Select Shares
15. The Victory Value Fund A
16. The Victory Stock Index Fund A
17. The Victory Fund for Income A
18. The Victory Government Bond Fund A/B
19. The Victory National Municipal Bond Fund A/B
20. The Victory New York Tax-Free Fund A/B
21. The Victory Ohio Municipal Money Market Fund A
22. The Victory Special Growth Fund A
23. The Victory Institutional Money Market Fund Select Shares
24. The Victory Lakefront Fund A
25. The Victory Real Estate Investment Fund A
<PAGE>
SCHEDULE I
Amended as of March 2, 1998
- --------------------------------------------------------------------------------
1. Victory Balanced Fund 26. Victory Federal Money Market Fund
Class A Shares Investor Shares
Class B Shares Select Shares
Key Shares 27. Victory Convertible Securities Fund
2. Victory Diversified Stock Fund 28. Victory LifeChoice Conservative
Class A Shares Investor Fund
Class B Shares 29. Victory LifeChoice Growth
3. Victory Government Mortgage Fund Investor Fund
4. Victory Growth Fund 30. Victory LifeChoice Moderate
5. Victory Financial Reserves Fund Investor Fund
6. Victory Fund for Income
7. Victory Institutional Money Market Fund
Investor Shares
Select Shares
8. Victory Intermediate Income Fund
9. Victory International Growth Fund
Class A Shares
Class B Shares
10. Victory Investment Quality Bond Fund
11. Victory Lakefront Fund
12. Victory Limited Term Income Fund
13. Victory National Municipal Bond Fund
Class A Shares
Class B Shares
14. Victory New York Tax-Free Fund
Class A Shares
Class B Shares
15. Victory Ohio Municipal Bond Fund
16. Victory Ohio Municipal Money Market Fund
17. Victory Ohio Regional Stock Fund
Class A Shares
Class B Shares
18. Victory Prime Obligations Fund
19. Victory Real Estate Investment Fund
20. Victory Special Growth Fund
21. Victory Special Value Fund
Class A Shares
Class B Shares
22. Victory Stock Index Fund
23. Victory Tax-Free Money Market Fund
24. Victory U.S. Government Obligations Fund
Investor Shares
Select Shares
25.Victory Value Fund
- --------------------------------------------------------------------------------
[LETTERHEAD OF KRAMER, LEVIN, NAFTALIS & FRANKEL]
June 12, 1998
The Victory Portfolios
3435 Stelzer Road
Columbus, Ohio 43219
Re: The Victory Portfolios
File No. 33-8982
Post-Effective Amendment
to Registration Statement on Form N-1A
--------------------------------------
Dear Gentlemen:
We hereby consent to the reference of our firm as counsel in
Post-Effective Amendment No. 40 to the Registration Statement on Form N-1A.
Very truly yours,
/s/Kramer, Levin, Naftalis & Frankel
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our Firm under the caption "Independent
Accountants" in the Prospectus and in the Statement of Additional Information in
this Post-Effective Amendment No. 40 to the Registration Statement of The
Victory Portfolios on Form N-1A (File No. 33-8982).
/s/COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
June 10, 1998
THE VICTORY PORTFOLIOS
DISTRIBUTION
AND SERVICE PLAN
1. This Distribution and Services Plan (the "Plan") when effective in
accordance with its terms, shall be the written plan contemplated by Rule 12b-1
under the Investment Company Act of 1940 (the "1940 Act") of each of the Funds
set forth on Schedule I (individually, a "Fund" and collectively, the "Funds")
as amended from time to time, each a duly established series of shares of The
Victory Portfolios, a Massachusetts Business Trust, registered as an open-end
investment company under the 1940 Act (the "Company").
2. The Company has entered into a separate Administration Agreement and
Distribution Agreement with respect to each Fund, under which the Distributor
uses all reasonable efforts, consistent with its other business, to secure
purchasers for each Fund's shares of beneficial interest ("shares"). Under the
Distribution Agreement, the Distributor pays, among other things, the expenses
of printing and distributing any prospectuses, reports and other literature used
by the Distributor, advertising, and other promotional activities in connection
with the offering of shares of the Fund for sale to the public. The Company has
entered into separate Investment Advisory Agreements with the party listed
opposite each Fund or Schedule I hereto (the "Investment Adviser"). It is
understood that the Administrator may reimburse the Distributor for these
expenses from any source available to it, including the administration fee paid
to the Administrator by the Funds.
3. The Investment Adviser, or any subadviser, may, subject to the
approval of the Trustees, make payments to third parties who render shareholder
support services, including but not limited to, answering routine inquiries
regarding the Funds, processing shareholder transactions and providing such
other shareholder and administrative services as the Company may reasonably
request.
4. The Funds will not make separate payments as a result of this Plan
to the Investment Adviser, Administrator, Distributor or any other party, it
being recognized that the Funds presently pay, and will continue to pay, an
investment advisory fee to the Investment Adviser and an administration fee to
the Administrator. To the extent that any payments made by any Fund to the
Investment Adviser or Administrator, including payment of fees under the
Investment Advisory Agreement or the Administration Agreement, respectively,
should be deemed to be indirect financing of any activity primarily intended to
result in the sale of shares of the Fund within the context of Rule 12b-1 under
the 1940 Act, then such payments shall be deemed to be authorized by this Plan.
<PAGE>
5. This Plan shall become effective upon the first business day of the
month following approval by a vote of at least a "majority of the outstanding
voting securities of each Fund" (as defined in the 1940 Act), the Plan having
been approved by a vote of a majority of the Trustees of the Company, including
a majority of Trustees who are not interested persons of the Company (as defined
in the 1940 Act) and who have no direct or indirect financial interest in the
operation of this Plan or in any agreements related to this Plan (the
"Independent Trustees"), cast in person at a meeting called for the purpose of
voting on this Plan.
6. This Plan shall, unless terminated as hereinafter provided, remain
in effect from the date specified above until June 5, 1996, and from year to
year thereafter, provided, however, that such continuance is subject to approval
annually by a vote of a majority of the Trustees of the Company, including a
majority of the Independent Trustees, cast in person at a meeting called for the
purpose of voting on this Plan. This Plan may be amended at any time by the
Board of Trustees, provided that (a) any amendment to authorize direct payments
by each Fund to finance any activity primarily intended to result in the sale of
shares of the Funds, to increase materially the amount spent by the Funds for
distribution, or any amendment of the Investment Advisory Agreement or the
Administration Agreement to increase the amount to be paid by any Fund
thereunder shall be effective only upon approval by a vote of a majority of the
outstanding voting securities of the Fund, and (b) any material amendments of
this Plan shall be effective only upon approval in the manner provided in the
first sentence in this paragraph.
7. This Plan may be terminated at any time, without the payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of a
majority of the outstanding voting securities of each Fund.
8. During the existence of this Plan, the Trust shall require the
Investment Adviser and/or Distributor to provide the Company, for review by the
Company's Board of Trustees, and the Trustees shall review, at least quarterly,
a written report of the amounts expended in connection with financing any
activity primarily intended to result in the sale of shares of the Funds (making
estimates of such costs where necessary or desirable) and the purposes for which
such expenditures were made.
9. This Plan does not require the Investment Adviser or Distributor to
perform any specific type or level of distribution activities or to incur any
specific level of expenses for activities primarily intended to result in the
sale of shares of the Funds.
10. Consistent with the limitation of shareholder and Trustee liability
as set forth in the Company's Declaration of Trust, any obligations assumed by a
Fund pursuant to this Plan
2
<PAGE>
and any agreements related to this Plan shall be limited in all cases to each
Fund individually, and the assets of each Fund individually, and shall not
constitute obligations of any shareholder or other series or classes of shares
of the Company or of any Trustee.
11. If any provision of this Plan shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Plan shall not
be affected thereby.
IN WITNESS WHEREOF, the Company has executed this Plan on behalf of
each Fund listed on Schedule I, individually and not jointly, as of June 5,
1995.
THE VICTORY PORTFOLIOS
By:/s/ Leigh A. Wilson
-------------------
3
<PAGE>
SCHEDULE I
Amended as of March 1, 1997
This Distribution Plan shall be adopted with respect to Class A shares
of the following Funds of The Victory Portfolios:
Government Bond Fund
National Municipal Bond Fund
New York Tax-Free Fund
This Distribution Plan shall be adopted with respect to the following
Funds of The Victory Portfolios:
Fund For Income Fund
Financial Reserves Fund
Institutional Money Market Fund
(Select Class and Investor Class)
Lakefront Fund
Ohio Municipal Money Market Fund
Real Estate Investment Fund
<PAGE>
SCHEDULE I
Amended as of February 19, 1997
The Distribution Plan shall be adopted with respect to the Shares of
the following Funds of The Victory Portfolios:
- --------------------------------------------------------------------------------
Victory Financial Reserves Fund
Victory Fund for Income
Victory Government Bond Fund
Class A Shares
Victory Institutional Money Market Fund
Investor Shares
Select Shares
Victory Lakefront Fund
Victory National Municipal Bond Fund
Class A Shares
Victory New York Tax-Free Fund
Class A Shares
Victory Ohio Municipal Money Market Fund
Victory Real Estate Investment Fund
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE I
Amended as of March 2, 1997
The Distribution Plan shall be adopted with respect to the Shares of
the following Funds of The Victory Portfolios:
- --------------------------------------------------------------------------------
1. Victory Financial Reserves Fund 9. Victory Federal Money MarketFund
2. Victory Fund for Income Investor Shares
3. Victory Institutional Money Market Fund Select Shares
Investor Shares 10. Victory Convertible Fund
Select Shares 11. Victory LifeChoice Conservative
4. Victory Lakefront Fund Investor Fund
5. Victory National Municipal Bond Fund 12. Victory LifeChoice Growth
Class A Shares Investor Fund
6. Victory New York Tax-Free Fund 13. Victory LifeChoice Moderate
Class A Shares Investor Fund
7. Victory Ohio Municipal Money Market Fund
8. Victory Real Estate Investment Fund
- --------------------------------------------------------------------------------
THE VICTORY PORTFOLIOS
DISTRIBUTION PLAN
CLASS B SHARES
This Distribution Plan (the "Plan") is adopted in accordance with Rule
12b-1 (the "Rule") under the Investment Company Act of 1940, as amended (the
"1940 Act"), by The Victory Portfolios, a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Company"), on behalf of the
Class B shares, a class of shares of its Funds (individually, a "Fund," and
collectively, the "Funds") as set forth in Schedule I, as amended from time to
time, subject to the following terms and conditions:
SECTION 1. ANNUAL FEES.
Distribution Fee. Each Fund will pay to the distributor of its shares,
Concord Holdings Corporation (the "Distributor"), a distribution fee under the
Plan at the annual rate of 0.75% of the average daily net assets of the Fund
attributable to the Class B shares (the "Distribution Fee").
Adjustment to Fees. Class B of any Fund may pay a Distribution Fee to
the Distributor at a lesser rate than the fees specified in Section 1 hereof as
agreed upon by the Board of Trustees and the Distributor and approved in the
manner specified in Section 3 of this Plan.
Payment of Fees. The Distribution Fees will be calculated daily and
paid monthly by each Fund with respect to the Class B shares at the annual rates
indicated above.
SECTION 2. EXPENSES COVERED BY THE PLAN.
Distribution Fees may be used by the Distributor for: (a) costs of
printing and distributing a Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs involved
in preparing, printing and distributing sales literature pertaining to a Fund;
(c) an allocation of overhead and other branch office distribution- related
expenses of the Distributor; (d) payments to persons who provide support
services in connection with the distribution of a Fund's shares, including but
not limited to, office space and equipment, telephone facilities, answering
routine inquiries regarding a Fund, processing shareholder transactions and
providing any other shareholder services not otherwise provided by a Fund's
transfer agent; (e) accruals for interest on the amount of the foregoing
expenses that exceed the Distribution Fee and the contingent deferred sales
charge received by the Distributor; and (f) any other expense primarily intended
to result in the sale of a Fund's shares, including, without limitation,
payments to salesmen and selling dealers at the time of the sale of shares, if
applicable, and continuing fees to each such salesman and selling dealers, which
fee shall begin to accrue immediately after the sale of such shares.
<PAGE>
The amount of the Distribution Fees payable by any Fund under Section 1
hereof is not related directly to expenses incurred by the Distributor and this
Section 2 does not obligate a Fund to reimburse the Distributor for such
expenses. The Distribution Fees set forth in Section 1 will be paid by a Fund to
the Distributor unless and until the Plan is terminated or not renewed with
respect to a Fund or Class thereof, any distribution or service expenses
incurred by the Distributor on behalf of a Fund in excess of payments of the
Distribution Fees specified in Section 1 hereof which the Distributor has
accrued through the termination date are the sole responsibility and liability
of the Distributor and not an obligation of a Fund.
SECTION 3. INDIRECT EXPENSES.
While each Fund is authorized to make payments under this Plan to the
Fund's Distributor for expenses described above, it is expressly recognized that
each Fund presently pays, and will continue to pay, an investment advisory fee
to its Investment Adviser and an administration fee to the Administrator. To the
extent that any payments made by any Fund to the Investment Adviser or
Administrator, including payment of fees under the Investment Advisory Agreement
or the Administration Agreement, respectively, should be deemed to be indirect
financing of any activity primarily intended to result in the sale of shares of
the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments
shall be deemed to be authorized by this Plan.
SECTION 4. APPROVAL OF TRUSTEES.
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Company and
(b) those Trustees who are not interested persons of the Company and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to it (the "Qualified Trustees"), cast in person at a meeting
called for the purpose of voting on the Plan and the related agreements.
SECTION 5. CONTINUANCE OF THE PLAN.
The Plan will continue in effect until June 5, 1996, and thereafter for
successive twelve-month periods: provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Company and by a
majority of the Qualified Trustees.
SECTION 6. TERMINATION.
The Plan may be terminated at any time with respect to a Fund (i) by
the Company without payment of any penalty, by the vote of a majority of the
outstanding voting securities of the Class B of any Fund or (ii) by a vote of
the Qualified Trustees. The Plan may remain in effect with respect to a Fund
even if the Plan has been terminated in accordance with this Section 6 with
respect to any other Fund.
2
<PAGE>
SECTION 7. AMENDMENTS.
The Plan may not be amended with respect to any Fund so as to increase
materially the amounts of the fees described in Section 1 above, unless the
amendment is approved by a vote of the holders of at least a majority of the
outstanding voting securities of Class B of that Fund. No material amendment to
the Plan may be made unless approved by the Company's Board of Trustees in the
manner described in Section 4 above.
SECTION 8. SELECTION OF CERTAIN TRUSTEES.
While the Plan is in effect, the selection and nomination of the
Company's Trustees who are not interested persons of the Company will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Company.
SECTION 9. WRITTEN REPORTS.
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by a Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Company's Board of Trustees, and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule which set out the
amounts expended under the Plan and the purposes for which those expenditures
were made.
SECTION 10. PRESERVATION OF MATERIALS.
The Company will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 8 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
SECTION 11. MEANINGS OF CERTAIN TERMS.
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act by the Securities and Exchange Commission.
IN WITNESS WHEREOF, the Company executed this Plan as of June 5, 1995.
The Victory Portfolios
By:/s/ Leigh A.Wilson
------------------
President
3
<PAGE>
SCHEDULE I
This Plan shall be adopted with respect to Class B shares of the
following Funds of The Victory Portfolios:
National Municipal Bond Fund
Government Bond Fund
New York Tax-Free Fund
<PAGE>
SCHEDULE I
As Amended As of February 1, 1996
This Plan shall be adopted with respect to Class B shares of the
following Funds of The Victory Portfolios:
1. The Victory Balanced Fund
2. The Victory Diversified Stock Fund
3. The Victory Government Bond Fund
4. The Victory International Growth Fund
5. The Victory National Municipal Bond Fund
6. The Victory New York Tax-Free Fund
7. The Victory Ohio Regional Stock Fund
8. The Victory Special Value Fund
