THE LIFECHOICE FUNDS
SEMIANNUAL
REPORT
APRIL 30,
1998
(LOGO)
<PAGE>
TABLE OF CONTENTS
Shareholder Letter 2
Investment Review and Outlook 3
Financial Statements
Schedule of Investments 7
Statement of Assets and Liabilities 10
Statement of Operations 11
Statement of Changes in Net Assets 12
Notes to Financial Statements 13
Financial Highlights 16
Key Asset Management Inc. (KAM), a subsidiary of KeyCorp, is the investment
adviser to The Victory Funds. The Victory Funds are sponsored and distributed
by BISYS Fund Services, which is not affiliated with KeyCorp or its
subsidiaries. KAM receives a fee for its services from The Victory Funds.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus for
The Victory Funds.
NOT FDIC INSURED
Shares of The Victory Funds are not insured
by the FDIC, are not deposits or other obligations of, or guaranteed by, any
KeyCorp bank, Key Asset Management Inc., or their affiliates, and are subject to
investment risks, including possible loss of the principal amount invested.
(LOGO)
1-800-KEY-FUND(R)
(1-800-539-3863)
<PAGE>
Letter to our Shareholders
Welcome to the April 30, 1998 semiannual report of the Victory LifeChoice
Funds.
We are happy to have this opportunity to welcome all our new shareholders,
as well as to share information on your Funds' performance. The continued
onward
surge of the US stock markets has been matched by investor sentiment which is
becoming increasingly focused on the long term. The LifeChoice Funds are
especially suited to serve this long-term orientation by offering
diversification across asset classes.
This long term orientation is also facilitated by the fact that all the
three LifeChoice Funds--Conservative Investor, Moderate Investor and Growth
Investor--are broadly diversified across different mutual funds. Each underlying
fund was specifically chosen based on its type and style. The Funds'investments
are allocated among mutual funds based on how these funds are expected to work
together, and how they contribute to the overall objective of each LifeChoice
Fund. The adviser continuously monitors asset allocation and, as market
conditions change, rebalances the LifeChoice Funds to their targeted investment
allocations. Changes in fund allocations will be few and minor in nature, as we
believe this will best serve investors in the long run.
If you are receiving a retirement plan distribution from your employer,
you'll want to keep that money working for you as long as possible to increase
the potential of achieving your retirement savings' goals without interruption.
One of the easiest ways to accomplish these goals is through the Victory Funds
IRA. And now, with recent tax legislation Victory is pleased to offer you a
Further service enhancement in the form of the Roth IRA in addition to the
Traditional IRA account. For further information on these tax advantaged
investment plans as well as on funds in the Victory family, please call
1-800-539-3863.
As you can see, Victory continues to provide investors a wide range of
investment options. We are happy that you have chosen Victory and welcome
your comments on this report.
Thank you
/s/ Leigh A. Wilson
Leigh A. Wilson
President
The Victory Funds
<PAGE>
Investment Review and Outlook
Something remarkable occurred in the domestic equity market in the
first quarter of 1998. Not only did prices soar, with most benchmarks closing at
or near record highs, but by the end of the period, stocks had acquired an air
of invincibility. The potent combination of a sturdy economy and a seemingly
never-ending supply of money inflated bullish sentiment, overwhelming concerns
about Asia and overcoming bloated valuations. Almost overnight, all news became
good news, every glass that had been half empty was suddenly half full, and
potential problems turned into potential opportunities. In a world of
uncertainty, stocks were a sure thing.
Such optimism was not constrained by national borders. While the
double-digit advance posted by U.S. stocks ranked among their best quarterly
gains on record, several European bourses delivered even stronger returns,
and a number of Asian markets staged impressive come-backs after early
stumbles. Taken together, the value of the world's stock markets rose by some
$2 trillion in the first three months of the year.
The bond market was considerably less effervescent. The prospect of a
substantial Federal budget surplus in the current fiscal year and the steep
drop in commodity prices (most notably oil) was not enough to offset the fear
that the economy was growing too fast. As a result, long-term interest rates
fluctuated in a narrow band during the quarter, ending the period at roughly
the same level as they began.
How long can such euphoric conditions persist? Though emotion and
adrenaline may sustain the market's momentum in the near-term, I think that
eroding fundamentals and extreme valuations will weigh against stocks
longer-term, leading to below-average returns over the next several years. Bonds
are more attractive, offering high real rates and the potential for modest
capital appreciation. The following paragraphs explore these issues in greater
depth.
The Fountain of Economic Youth
Judging by recent statistics, you would never guess that the domestic
economic expansion has just passed its seventh anniversary. Despite its
advanced age, the economy is spry and establishing new records every month.
Nowhere is this more evident than in the employment numbers. More new jobs
have been created since November than in any six-month period in 14 years,
which has brought the unemployment rate down to just 4.3%, the lowest in a
quarter-century. Over 64% of all Americans have jobs, the highest level of
employment on record. According to one recent survey, just one out of eight
respondents consider jobs "hard to get," the lowest reading ever. The labor
market is so tight that managers throughout the country and across a broad
range of businesses are reporting difficulty in finding qualified help to
fill positions.
As a consequence, wages are rising. Average hourly earnings are
more than 4% higher than they were a year ago, the greatest rate of annual
change in nine years. Disposable personal income has risen at an even faster
pace, supporting strong growth in personal consumption expenditures. Retail
sales have been particularly healthy, as the mild weather has led to increased
store traffic. Demand has been enhanced by a sharp rise in mortgage refinancing
activity, which has enabled many consumers to lower their monthly payments and
thereby to increase their discretionary cash flow.
<PAGE>
That jump in refinancing was sparked by the lowest mortgage interest rates in
four years, which has concurrently fueled one of the strongest housing markets
in recent memory. New homes are selling at the fastest pace in ten years, and
existing home sales are at the highest level since records started being kept.
Responding to this surge, new construction has picked up substantially, with
over 1.5 million units started in April. Permit activity has accelerated,
foreshadowing further gains ahead.
As unusual as this performance is for an economy so long in the tooth,
the virtual lack of inflation is even more noteworthy, and is attributable to
an extraordinary confluence of circumstances. For several years, an abundance
of global capacity has kept prices in check, with companies fighting for
valuable market share. That competition has intensified in the past few months,
as the collapse of Asian currencies and the strength of the dollar vis-a-vis
other major currencies has produced a sharp decline in import prices, most
notably oil. Since imports account for roughly a third of all goods sold in
this country, this retreat is exerting a powerful moderating force on overall
inflation.
With jobs plentiful, inflation low and real incomes rising, it is no
wonder that consumer confidence is at an all-time high. The stock market is
basking in this warm glow, and is helping to reinforce it as consumers watch
their nest eggs grow. All is well.
If the Earthquake Doesn't Get You...
Or is it? As strong as the economy is now, hints of a slowdown are
accumulating.
The most direct threat is the ballooning trade deficit. Imports have surged
While exports have flattened, inflating the trade gap to $13.0 billion in
March,
The most recent figure available. There are less obvious signs as well.
While the consumer is in good shape, the industrial side of the economy has
been
Somewhat less robust. Manufacturing employment fell in each of the last two
months. According to the monthly survey conducted by the National Association
of Purchasing Managers (NAPM), business is well below fourth quarter 1997
levels.
The NAPM measure of vendor performance, which is closely watched by the Federal
Reserve for signs of potentially inflationary bottlenecks, is flat, and Business
Week's index of industrial production has fallen in recent weeks.
One way or another, all of these issues can trace their roots to Asia.
Though many Asian stock markets rallied in the first-quarter on hopes that
the worst is over, the magnitude of the region's economic woes is only now
becoming apparent. Ed Hyman of ISI Group estimates that Pacific Rim countries
are contracting at an annual rate of 30%, a dramatic reversal of fortune for
a region that had accounted for the lion's share of the world's economic
growth in recent years. Layoffs are mounting, and inflation is a serious
problem, running in the triple digits in some countries. Each day brings new
headlines of economic distress, threatening the political stability of the
region.
Most troubling is the malaise that plagues Japan, the world's second
largest economy. Real GDP is receding, and corporate profits are declining at
a rate of 15%-20%. Scandal continues to rock the nation's financial
infrastructure, leaving a growing list of resignations (and even suicides) in
its wake. Relations with Washington are strained, though U.S. badgering may
quiet down following the proposal of a Y16 trillion ($124 billion) stimulus
package on March 26th. With its economy in a tailspin, Japan is in no
position to help its Asian neighbors, and any further drop in the yen could
instead worsen their prospects.
...the Tsunami Afterwards Might...
Although the U.S. economy has thus far avoided any serious fallout from the
Asian crisis (and in fact may have benefited from the resultant downward
pressure on prices), it is only a matter of time before more meaningful
reverberations are felt, given the severity of the contraction in the Far East.
After exports, corporate profits are likely to be among the first victims. The
combination of diminished pricing power and rising labor costs threatens to
pinch operating margins, neutralizing the positive influence of lower commodity
costs and productivity enhancements. Lower interest expense will boost the
bottom line a little, but earnings are not likely to grow by much more than
5%-6% in 1998, with the first half a little stronger than the second half.
Companies with significant exposure to Asia will be lucky to register any growth
at all, and several (including Motorola, Compaq and Nike) have warned analysts
to lower their projections for the year.
<PAGE>
Since the beginning of the year, consensus forecasts for first half S&P
500 profits have declined sharply, from 10%-12% growth to just 2%-3%.
Frankly, it appears that these estimate revisions overshot the mark, and many
companies will once again report "positive surprises" as a result. Full-year
1998 projections have not been adjusted by as much, indicating that analysts
expect a fairly vigorous profit rebound in the second half. This strikes me
as too optimistic, setting the stage for disappointments and more downward
revisions later in the year.
Slender profit growth has negative implications for capital spending.
Intel's recent decision to postpone the construction of a plant in Texas,
announced just a couple of weeks after warning of a first quarter revenue
shortfall, may be just the tip of the iceberg. Employment growth is likely to
slow, as managers react to tighter margins by trimming head counts. Thousands
of pink slips have been handed out in recent weeks, as the number of
corporate restructuring announcements has mounted from companies as diverse
as Boeing, Chase Manhattan and Micron Technology. Weighing the evidence, I
think real economic activity will slow modestly over the next several
quarters, to a pace of 2.5%-3.0% growth by year-end 1998.
Valuation Matters (Eventually)
The stock market has shaken off a lot of
potentially bad news in the past three months, buoyed by a steady stream of new
cash. Money flows are traditionally strong in the first quarter, as investors
make annual contributions to retirement plans, adjust asset allocation and buy
stocks with year-end bonuses. This year was no exception, judging by the pace of
mutual fund sales. Corporations were also a strong source of demand, buying both
their own stock and others'. Share repurchase announcements totaled $26 billion
in the first two months of the year, a figure dwarfed by the more than $70
billion worth of cash acquisitions (as opposed to share-for-share mergers)
announced in the same period. Finally, foreign investors were active buyers of
U.S. shares, continuing the trend of the past two years.
Some have argued that demand for stocks will only intensify. The Baby
Boom generation is entering its peak savings years, and may be more motivated
to save and invest than its predecessors, given the fear that the Social
Security system may not be around when Boomers start to retire in 10-15
years. Although the percentage of personal financial assets tied up in
equities is the highest in over 40 years, there is still over $1.5 trillion
of cash and equivalents on household balance sheets, which could potentially
seek the higher returns that stocks have historically offered. If only a
fraction of that money made its way into the market, it could send equity
prices soaring.
There is one significant hitch: by every measure I can think of,
valuations are already at historic extremes, at least for large
capitalization blue chip stocks. According to various Wall Street dividend
discount models, the S&P 500 is 20%-30% overvalued, a level rarely surpassed.
The index is currently trading for 23 times estimated 1998 earnings, or over
2.7 times its long-term earnings growth rate. It is selling for roughly 2.3
times sales, 15 times cash flow and over six times book value. Its dividend
yield is just 1.5%, or roughly 30% of the 90-day Treasury bill rate. For each
of these measures to return to median levels, the index would have to drop by
30%-50%.
By itself, valuation is not a particularly useful tool to predict near-term
returns. Just because stocks have never been this rich does not mean that they
cannot get even more expensive. Moreover, an examination of historical data
reveals that holding stocks for 10-15 years has rarely produced negative
returns, regardless of valuation. On the other hand, that same historical data
shows that when valuations are in the upper quartile of their range, equity
returns in the subsequent 10-15 years have rarely approached the hundred-year
average of 10%, let alone exceeded it.
<PAGE>
My Advice: Reduce Your Risk
Simply stated, I believe there is more risk than opportunity in the stock
market
today, and over the next several years investors will be inadequately
compensated for assuming that risk. This is by no means a call to abandon
stocks, since they will likely retain their preeminence among various asset
classes over the long haul. On the other hand, it makes sense to me to take
advantage of the market's current strength to shore up your portfolio by
seeking to reduce its overall level of risk.
This can be accomplished in two fashions: stock selection and
asset allocation. Although the market as a whole is fully valued, there are
still some stocks that offer favorable risk/reward profiles. An emphasis on
maximizing total return leads me to higher-yielding stocks, such as real estate
investment trusts (REITs) and selected utilities. Bowing to my contrarian urges,
I find some of the energy stocks to be very appealing and exceptionally
inexpensive (as long as oil prices stay in the mid-teens or higher). Companies
engaged in natural gas exploration and production stand out as the cheapest of
all energy-related groups. I am also intrigued by some of the other commodity
producers, if only because they are so completely out of favor on Wall Street
due to the tough pricing environment.
Among faster growing companies, I think biotechnology stocks offer
considerable long-term appeal, as more biotech firms transition from
unprofitable research & development laboratories to highly profitable
pharmaceutical companies. The rest of the technology sector poses a challenge
to the value investor: the healthy companies are not cheap, and the cheap
companies are not healthy. The outlook for software and services is brighter
than that for the hardware companies, but there are a few stories among the
latter group that deserve consideration. Finally, I think that equity
portfolios should have some exposure to consumer cyclical stocks such as
homebuilders and retailers, acknowledging consumers' financial health and
buoyant sentiment.
Small and mid-sized stocks are considerably more attractive
than their large-cap counterparts. Small and mid-cap price/earnings multiples
are somewhat lower, and their expected earnings growth is substantially greater.
Moreover, smaller companies tend to have less international exposure, so their
profits are less likely to disappoint because of the problems in Asia. Though
they tend to be overlooked by foreign investors, and their share prices are more
volatile, small and mid-cap stocks offer much greater long-term potential. After
four years of relative underperformance, I think they are ready to shine.
Equity investors should also consider increasing their exposure to convertible
securities and international stocks. Convertibles offer substantially greater
income than common stocks, and typically provide greater downside protection in
the event of a stock market correction. Looking beyond our shores, Europe is in
considerably better shape than Asia, but its stock markets are pretty fully
valued after the recent run-up. For long-term investors with a tolerance for
volatility, Japan and Asia's emerging markets are worth investigating.
Risk-adjusted potential returns favor bonds over blue chip stocks, and investors
should consider adding to their bond positions. Stocks have outperformed bonds
by such a large margin in recent quarters that balanced accounts should make
sure that equity exposure has not gotten too high. Within bond portfolios, the
middle of the yield curve is the most attractive, though investors should add
some longer-duration securities if rates move back over 6%.
Above all, take careful measure of your tolerance for risk. Most households
have never had more exposure to equities. As long as the market turns a blind
eye (or ear) to the potential problems ahead, more lucrative thrills may be in
store. However, with stocks as expensive as they are, the possibility of some
nasty spills cannot be ignored. Be prepared.
April 30, 1998
/s/ Charles G. Crane
Charles G. Crane, Chief Market Strategist
Key Asset Management Inc.
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Schedule of Investments
LifeChoice Conservative Investor Fund April 30, 1998
(Amounts in Thousands, Except Shares) (Unaudited)
<CAPTION>
Shares or
Principal Market
Security Description Amount Value
<S> <C> <C>
Mutual Funds (99.7%)
Equity Funds (34.4%):
Victory Value Fund 24,988 $ 471
Victory Diversified Stock Fund,
Class A 28,587 549
Victory Growth Fund 3,866 80
Victory Special Value Fund,
Class A 13,000 224
PBHG Growth Fund 8,341 236
Neuberger&Berman Genesis Fund 17,882 304
Victory Special Growth Fund 10,395 152
Victory International Growth Fund,
Class A 42,952 627
2,643
Fixed Income/Bond Funds (62.2%):
Victory Convertible
Securities Fund <F3> 65,176 913
Loomis Sayles Bond Fund 62,367 821
Victory Investment Quality
Bond Fund 186,427 1,830
Victory Intermediate Income Fund 63,489 611
Victory Fund For Income 62,624 611
4,786
Money Market Funds (3.1%):
Victory Financial Reserves Fund 239,211 239
Total Mutual Funds (Cost $7,565) 7,668
Total Investments (Cost $7,565)<F1>--99.7% 7,668
Other assets in excess of liabilities 0.3% 24
TOTAL NET ASSETS--100.0% $7,692
<FN>
<F1> Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows (amounts in
thousands):
Unrealized appreciation $158
Unrealized depreciation (55)
Net unrealized appreciation $103
<F2> Non-income producing securities.
<F3> Previously known as Key SBSF Convertible Securities Fund.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Schedule of Investments
LifeChoice Moderate Investor Fund April 30, 1998
(Amounts in Thousands, Except Shares) (Unaudited)
<CAPTION>
Shares or
Principal Market
Security Description Amount Value
<S> <C> <C>
Mutual Funds (99.8%)
Equity Funds (59.6%):
Victory Value Fund 74,119 $ 1,396
Victory Diversified Stock Fund,
Class A 59,924 1,152
Victory Growth Fund 12,347 255
Victory Special Value Fund,
Class A 42,810 738
PBHG Growth Fund 22,925 650
Neuberger&Berman Genesis Fund 51,156 869
Victory Special Growth Fund 33,813 494
Victory International Growth Fund,
Class A 130,896 1,910
7,464
Fixed Income/Bond Funds (37.4%):
Victory Convertible Securities Fund <F3> 61,616 863
Loomis Sayles Bond Fund 56,058 738
Victory Investment Quality Bond Fund 226,519 2,224
Victory Intermediate Income Fund 38,570 371
Victory Fund For Income 50,722 495
4,691
Money Market Funds (2.8%):
Victory Financial Reserves Fund 351,906 352
Total Mutual Funds (Cost $11,693) 12,507
Total Investments (Cost $11,693)<F1>--99.8% 12,507
Other assets in excess of liabilities 0.2% 26
TOTAL NET ASSETS--100.0% $12,533
<FN>
<F1> Cost for federal
income tax purposes differs from value by net unrealized appreciation of
securities as follows (amounts in thousands):
Unrealized appreciation $842
Unrealized depreciation (28)
Net unrealized appreciation $814
<F2> Non-income producing securities.
<F3> Previously known as Key SBSF Convertible Securities Fund.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Schedule of Investments
LifeChoice Growth Investor Fund April 30, 1998
(Amounts in Thousands, Except Shares) (Unaudited)
<CAPTION>
Shares or
Principal Market
Security Description Amount Value
<S> <C> <C>
Mutual Funds (99.8%)
Equity Funds (79.9%):
Victory Value Fund 75,431 $ 1,420
Victory Diversified Stock Fund,
Class A 74,531 1,432
Victory Growth Fund 4,924 102
Victory Special Value Fund,
Class A 53,332 919
PBHG Growth Fund 25,688 728
Neuberger&Berman Genesis Fund 54,240 921
Victory Special Growth Fund 35,462 518
Victory International Growth Fund,
Class A 146,937 2,146
8,186
Fixed Income/Bond Funds (17.0%):
Victory Convertible
Securities Fund <F3> 50,962 714
Victory Investment Quality
Bond Fund 104,693 1,028
1,742
Money Market Funds (2.9%):
Victory Financial Reserves Fund 301,622 302
Total Mutual Funds (Cost $9,599) 10,230
Total Investments (Cost $9,599) <F1>--99.8% 10,230
Other assets in excess of liabilities 0.2% 23
TOTAL NET ASSETS--100.0% $10,253
<FN>
<F1> Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows (amounts in
thousands):
Unrealized appreciation $673
Unrealized depreciation (42)
Net unrealized appreciation $631
<F2> Non-income producing securities.
<F3> Previously known as Key SBSF Convertible Securities Fund.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Statements of Assets and Liabilities
LifeChoice Funds April 30, 1998
(Amounts in Thousands, Except Per Share Amounts) (Unaudited)
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
<S> <C> <C> <C>
ASSETS:
Investments, at value
(Cost $7,565; $11,693 & $9,599) $7,668 $12,507 $10,230
Interest and dividends receivable 1 2 1
Receivable from affiliates 8 8 6
Receivable for capital shares issued -- 3 1
Unamortized organization costs 37 37 37
Prepaid expenses and other assets 19 17 19
Total Assets 7,733 12,574 10,294
LIABILITIES:
Payable for organization costs 40 40 40
Accrued expenses and other payables:
Investment advisory fees 1 1 1
Total Liabilities 41 41 41
NET ASSETS:
Capital 7,338 11,272 9,093
Undistributed net investment income 28 26 5
Net unrealized appreciation/depreciation
from investments 103 814 631
Accumulated undistributed net realized
gains (losses) from investment
transactions 223 421 524
Net Assets $7,692 $12,533 $10,253
Outstanding units of beneficial interest
(shares) 672 1,041 818
Net asset value
Offering and redemption price per share $11.45 $ 12.03 $ 12.53
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Statements of Operations
LifeChoice Funds For the Five Months Ended April 30, 1998
(Unaudited)
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
<S> <C> <C> <C>
Investment Income:
Dividend income $127 $ 108 $ 48
Expenses:
Investment advisory fees 6 8 7
Administration fees 5 5 5
Accounting fees 13 14 13
Legal and audit fees 3 2 3
Amortization of organization costs 4 4 4
Trustees' fees and expenses 1 1 1
Transfer agent fees 2 2 3
Registration and filing fees 4 4 4
Printing fees 1 2 1
Total Expenses 39 42 41
Expenses voluntarily reduced (1) (2) (2)
Expenses before reimbursement
from distributor 38 40 39
Expenses reimbursed
by distributor (29) (28) (29)
Net Expenses 9 12 10
Net Investment Income 118 96 38
Realized/Unrealized Gains (Losses) from
Investments and Foreign Currencies:
Net realized gains (losses) from
investment transactions 150 344 346
Change in unrealized appreciation/depreciation
from investments 204 564 632
Net realized/unrealized gains (losses)
from investments: 354 908 978
Change in net assets resulting
from operations $472 $1,004 $1,016
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS Statements of Changes in Net Assets
LifeChoice Funds
(Amounts in Thousands) (Unaudited)
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
Five Months Ended Year Ended Five Months Ended Year Ended Five Months Ended Year Ended
April 30, November 30, April 30, November 30, April 30, November 30,
1998<F1> 1997<F4> 1998<F2> 1997<F4> 1998<F3> 1997<F4>
(000) (000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 118 $ 76 $ 96 $ 86 $ 38 $ 25
Net realized gain (losses)
from investment
transactions 150 95 344 137 346 291
Net change in unrealized
appreciation/depreciation
from investments 204 (101) 564 250 632 (1)
Change in net assets resulting
from operations 472 70 1,004 473 1,016 315
Distributions to Shareholders:
From net investment income (139) (31) (98) (62) (43) (19)
From net realized gains from
investment transactions (22) -- (60) -- (113) --
Change in net assets from
distibutions to shareholders (161) (31) (158) (62) (156) (19)
Capital Transactions:
Proceeds from shares issued 1,938 9,405 4,782 8,443 2,707 9,564
Dividends reinvested 161 30 158 60 152 19
Cost of shares redeemed (3,855) (337) (981) (1,186) (981) (2,364)
Change in net assets from
capital transactions (1,756) 9,098 3,959 7,317 1,878 7,219
Change in net assets (1,445) 9,137 4,805 7,728 2,738 7,515
Net Assets:
Beginning of period 9,137 -- 7,728 -- 7,515 --
End of period $7,692 $9,137 $12,533 $7,728 $10,253 $7,515
Share Transactions:
Issued 172 867 422 796 229 863
Reinvested 15 3 14 5 14 2
Redeemed (354) (31) (85) (110) (82) (207)
Change in shares (167) 839 351 691 161 658
<FN>
<F1> Effective March 23,1998, the KeyChoice Income & Growth Fund became the
Victory LifeChoice Conservative Investor Fund. Changes in net assets
prior to March 23, 1998 represent the KeyChoice Income & Growth Fund.
<F2> Effective March 23, 1998, the KeyChoice Moderate Growth Fund became the
Victory LifeChoice Moderate Investor Fund. Changes in net assets prior to
March 23, 1998 represent the KeyChoice Moderate Growth Fund.
<F3> Effective March 23, 1998, the KeyChoice Growth Fund became the Victory
LifeChoice Growth Investor Fund. Changes in net assets prior to March 23,
1998 represent the KeyChoice Growth Fund.
<F4> For the period December 31, 1996 (commencement of operations) through
November 30, 1997.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
THE VICTORY PORTFOLIOS Notes to Financial Statements
LifeChoice Funds April 30, 1998
(Unaudited)
1. Organization:
The Victory Portfolios (collectively, the "Trust" and individually, a "Fund")
was organized on December 6, 1995 as a successor to a company of the same name
organized as a Massachusetts business trust on February 5, 1986. The Trust is
registered under the Investment Company Act of 1940, as amended, (the "1940
Act") as an open-end investment company established as a Delaware business
trust. The Trust is authorized to issue an unlimited number of shares which are
units of beneficial interest with a par value of $0.001. The Trust presently
offers shares of 30 active funds. Included are the financial statements and
financial highlights of the LifeChoice Growth Investor Fund, LifeChoice Moderate
Investor Fund, and the LifeChoice Conservative Investor Fund.
The LifeChoice Growth Investor Fund seeks to provide growth of capital
by allocating its assets primarily among registered investment companies that
invest in equity securities. The LifeChoice Moderate Investor Fund seeks to
provide growth of capital combined with a moderate level of current income by
allocating its assets primarily among registered investment companies that
invest in equity securities and, to a lesser extent, fixed income securities.
The LifeChoice Conservative Investor Fund seeks to provide current income
combined with moderate growth of capital by allocating its assets primarily
among registered investment companies that invest in fixed income securities
and, to a lesser extent, equity securities.
2. Reorganization:
The Trust entered an Agreement and Plan of Reorganization with The SBSF
Funds, Inc. d/b/a Key Mutual Funds pursuant to which all of the assets and
liabilities of each Key Mutual Fund transferred to a Fund of the Victory
Portfolios in exchange for shares of the corresponding Fund. The KeyChoice
Growth Fund transferred its assets and liabilities to the Victory LifeChoice
Growth Investor Fund. The KeyChoice Moderate Growth Fund transferred its
assets and liabilities to the Victory LifeChoice Moderate Investor Fund. The
KeyChoice Income & Growth Fund transferred its assets and liabilities to the
Victory LifeChoice Conservative Investor Fund. The reorganization, which
qualified as a tax-free exchange for federal income tax purposes, was
completed on March 23, 1998, following approval by shareholders of SBSF
Funds, Inc. d/b/a Key Mutual Funds at a special shareholder meeting held on
March 6, 1998. The following is a summary of shares outstanding, net assets,
net asset value per share and unrealized appreciation immediately before and
after the reorganization:
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
Victory Victory
KeyChoice LifeChoice LifeChoice
Income & Growth Conservative Investor Conservative Investor
Fund Fund Fund
<S> <C> <C> <C>
Shares (000) 578 -- 578
Net Assets (000) $6,590 -- $6,590
Net Asset Value $11.40 -- $11.40
Unrealized appreciation (000) $ 84 -- $ 84
</TABLE>
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
Victory Victory
KeyChoice LifeChoice LifeChoice
Moderate Growth Moderate Investor Moderate Investor
Fund Fund Fund
<S> <C> <C> <C>
Shares (000) 983 -- 983
Net Assets (000) $11,698 -- $11,698
Net Asset Value $ 11.90 -- $ 11.90
Unrealized appreciation (000) $ 708 -- $ 708
</TABLE>
<TABLE>
<CAPTION>
Before Reorganization After Reorganization
Victory Victory
KeyChoice LifeChoice LifeChoice
Growth Growth Investor Growth Investor
Fund Fund Fund
<S> <C> <C> <C>
Shares (000) 800 -- 800
Net Assets (000) $9,859 -- $9,859
Net Asset Value $12.33 -- $12.33
Unrealized appreciation (000) $ 495 -- $ 495
</TABLE>
<PAGE>
3. Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
LifeChoice Funds in the preparation of their financial statements. The policies
are in conformity with generally accepted accounting principles. The preparation
of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
Securities Valuation:
Investments in registered investment companies are valued at the closing net
asset value per share on the day of valuation. Short-term investments with
maturities of sixty days or less are valued at amortized cost, which
approximates market value.
Securities Transactions and Related Income:
Securities transactions are accounted for on the date the security is purchased
or sold (trade date). Interest income is recognized on the accrual basis and
includes, where applicable, the pro rata amortization of premium or accretion of
discount. Dividend income is recorded on the ex-dividend date. Gains or losses
realized on sales of securities are determined by comparing the identified cost
of the security lot sold with the net sales proceeds.
Repurchase Agreements:
The Funds may acquire repurchase agreements from financial institutions such as
banks and broker-dealers which the Funds' investment adviser deems creditworthy
under guidelines approved by the Board of Trustees, subject to the seller's
agreement to repurchase such securities at a mutually agreed-upon date and
price. The repurchase price generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates, which may be more
or less than the rate on the underlying Fund securities. The seller, under a
repurchase agreement, is required to maintain the value of collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest). Securities subject to repurchase agreements are held by the
Funds' custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the 1940 Act.
Dividends to Shareholders:
Dividends payable to shareholders are declared and distributed quarterly.
Distributable net realized capital gains, if any, are declared and distributed
at least annually.
The amounts of dividends from net investment income and of distributions
from net realized gains are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the components of net assets based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions to shareholders which exceed net investment
income and realized capital gains for financial reporting purposes but not
for tax purposes are reported as dividends in excess of net investment income
or distributions in excess of net realized gains. To the extent they exceed
net investment income and net realized gains for tax purposes, they are
reported as distributions of capital.
Federal Income Taxes:
It is the policy of each Fund to continue to qualify as a regulated investment
company by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Internal Revenue Code of
1986, as amended, and to make distributions of net investment income and net
realized capital gains sufficient to relieve it from all, or substantially all,
Federal income taxes.
Other:
Expenses that are directly related to one of the Funds are charged directly to
that Fund. Other operating expenses of the Funds are prorated to each Fund on
the basis of relative net assets or other appropriate basis.
Costs incurred in connection with the organization of the LifeChoice Funds
are being amortized on a straight-line basis over a period not to exceed
sixty months from the date the Funds commenced operations.
<PAGE>
4. Purchases and Sales of Securities:
Purchases and sales of securities (excluding short-term securities) for the
period ended April 30, 1998 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
LifeChoice Conservative Investor Fund $2,670 $4,030
LifeChoice Moderate Investor Fund 5,355 1,191
LifeChoice Growth Investor Fund 3,109 998
</TABLE>
5. Related Party Transactions:
Investment advisory services are provided to the Funds by Key Asset Management
Inc. ("the Adviser"), a wholly owned subsidiary of KeyBank National Association
("Key"), formerly Society National Bank, a wholly owned subsidiary of KeyCorp.
On February 28, 1997, Key Asset Management Inc. became the surviving corporation
after the reorganization of four indirect investment adviser subsidiaries of
KeyCorp, including KeyCorp Mutual Fund Advisers Inc., Spears, Benzak, Salomon &
Farrell, Inc. ("SBSF"), Society Asset Management, Inc. and Applied Technology
Investment, Inc. Pursuant to the terms of the reorganization, the subsidiaries
identified above were merged into SBSF and SBSF then changed its name to Key
Asset Management Inc. Under the terms of the investment advisory agreements, the
Adviser is entitled to receive fees based on a percentage of the average daily
net assets of the LifeChoice Funds. KeyTrust Company of Ohio, N.A., a subsidiary
of KeyCorp and an affiliate of the Adviser, serving as custodian for all of the
LifeChoice Funds, received custodian fees in addition to reimbursement of actual
out-of-pocket expenses incurred.
Key and its affiliated brokerage and banking companies also serve as a
Shareholder Servicing Agent for the Funds. As such, Key and its affiliates
provide support services to their clients who are shareholders, which may
include establishing and maintaining accounts and records, processing
dividend and distribution payments, providing account information, assisting
in processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and
addresses. For providing such services, Key and its affiliates may receive a
fee of up to 0.25% of the average daily net assets of the LifeChoice Funds.
BISYS Fund Services (the "Administrator"), an indirect,
wholly-owned subsidiary of The BISYS Group, Inc. ("BISYS") serves as the
administrator and distributor to the Funds. Certain officers of the Funds are
affiliated with BISYS. Such officers receive no direct payments or fees from the
Funds for serving as officers.
Under the terms of the administration agreement, the Administrator's fee
is computed at the annual rate of 0.01% of the average daily net asset of
each of the LifeChoice Funds with a minimum of $12,000 per fund per year.
BISYS Fund Services, Ohio Inc., an affiliate of BISYS, serves the
LifeChoice Funds as Mutual Fund Accountant. Under the terms of the Fund
Accounting Agreement, the fee is based on a percentage of the average daily net
assets of the Funds with a minimum monthly fee of $1,666.67 per Fund.
Fees may be voluntarily reduced to assist the LifeChoice Funds in maintaining
Competitive expense ratios.
Additional information regarding related party
transactions is as follows for the year ended April 30, 1998:
<TABLE>
<CAPTION>
Investment Advisory Fees
Percentage
of Average Voluntary
Daily Fee
Net Assets Reductions
(000)
<S> <C> <C>
LifeChoice Conservative Investor Fund 0.20% $1
LifeChoice Moderate Investor Fund 0.20% 2
LifeChoice Growth Investor Fund 0.20% 2
</TABLE>
<PAGE>
<TABLE>
THE VICTORY PORTFOLIOS
LifeChoice Funds Financial Highlights
<CAPTION>
LifeChoice LifeChoice LifeChoice
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
Five Months Ended Period Ended Five Months Ended Period Ended Five Months Ended Period Ended
April 30, November 30, April 30, November 30, April 30, November 30,
1998<F3> 1997<F2> 1998<F4> 1997<F2> 1998<F5> 1997<F2>
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.89 $10.00 $ 11.19 $10.00 $ 11.44 $10.00
Investment Activities
Net investment income 0.17 0.31 0.10 0.20 0.05 0.11
Net realized and
unrealized gains(losses)
from investments 0.61 0.84 0.95 1.16 1.27 1.43
Total from
Investment Activities 0.78 1.15 1.05 1.36 1.32 1.54
Distributions
Net investment income (0.19) (0.26) (0.12) (0.17) (0.06) (0.10)
Net realized gains (0.03) -- (0.09) -- (0.17) --
Total Distributions (0.22) (0.26) (0.21) (0.17) (0.23) (0.10)
Net Asset Value,
End of Period $11.45 $10.89 $ 12.03 $11.19 $ 12.53 $11.44
Total Return 7.21%<F4> 11.62%<F4> 9.52%<F4> 13.64%<F4> 11.79%<F4> 15.46%<F4>
Ratios/Supplementary Data:
Net Assets at end
of period (000) $7,692 $9,137 $12,533 $7,728 $10,253 $7,515
Ratio of expenses to
average net assets 0.28%<F5> 0.29%<F5> 0.27%<F5> 0.27%<F5> 0.27%<F5> 0.30%<F5>
Ratio of net investment
income to average
net assets 3.75%<F5> 3.41%<F5> 2.20%<F5> 2.26%<F5> 1.03%<F5> 0.81%<F5>
Ratio of expenses to
average net assets* 1.23%<F5> 5.18%<F5> 0.96%<F5> 3.32%<F5> 1.11%<F5> 3.67%<F5>
Ratio of net investment
income to average
net assets* 2.80%<F5> (1.48)%<F5> 1.51%<F5> (7.90)%<F5> 0.19%<F5> (2.56)%<F5>
Portfolio Turnover 36% 19% 12% 50% 12% 106%
<FN>
<F1> During the period, certain fees were voluntarily reduced
and/or reimbursed. If such voluntary fee reductions and/or expense
reimbursements had not occurred, the ratios would have been as indicated.
<F2> For the period December 31, 1996 (commencement of operations) through
November 30, 1997.
<F3> Effective March 23, 1998, the KeyChoice Income & Growth Fund became
the Victory LifeChoice Conservative Investor Fund. Financial highlights
prior to March 23, 1998 represent the KeyChoice Income & Growth Fund.
<F4> Effective March 23, 1998, the KeyChoice Moderate Growth Fund became the
Victory LifeChoice Moderate Investor Fund. Financial highlights prior to
March 23, 1998 represent the KeyChoice Moderate Growth Fund.
<F5> Effective March 23, 1998, the KeyChoice
Growth Fund became the Victory LifeChoice Growth Investor Fund. Financial
highlights prior to March 23, 1998 represent the KeyChoice Growth Fund.
<F6> Not annualized.
<F7> Annualized.
</FN>
</TABLE>
See notes to financial statements.
(LOGO)
1-800-KEY-FUND(R)
(1-800-539-3863)
1VF-LCHF-SEM 4/98
