As filed with the Securities and Exchange Commission on April 29, 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. 39 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 40
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>
The Victory Portfolios
CROSS-REFERENCE SHEET
THE VICTORY PORTFOLIOS
Item Number
Form N-1A
Part A Prospectus Caption
------ ------------------
1. Cover Page Cover Page; Introduction
2. Synopsis Fund Expenses
3. Condensed Financial Information Inapplicable
4. General Description of Registrant Introduction; Investment Objective,
Policies and Strategies; 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>
The Victory Portfolios
CROSS REFERENCE SHEET
THE VICTORY PORTFOLIOS
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
Practices Advisory and Other Contracts
18. Capital Stock and Other Securities Valuation of Portfolio Securities
for the Money Market Funds;
Valuation of Portfolio Securities
for the Taxable Bond Funds and the
Tax-Free Bond Funds; Additional
Purchase, Exchange and Redemption
Information; Additional Information
19. Purchase, Redemption and Pricing Valuation of Portfolio Securities
for the Money of Securities Being
Offered Market Funds; Valuation of
Portfolio Securities for the
Taxable Bond Funds and the Tax-Free
Bond Funds; Additional Purchase,
Exchange and Redemption
Information; Performance of the
Money Market Funds; Performance of
the Non- Money Market Funds;
Additional Information
20. Tax Status Dividends and Distributions; Taxes
21. Underwriters Advisory and Other Contracts
<PAGE>
The Victory Portfolios
22. Calculation of Performance Data Performance of the Money Market
Funds; Performance of the Non-Money
Market Funds; Additional
Information
23. Financial Statements Inapplicable
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>
LOGO (R)
Victory Funds
PROSPECTUS
EQUITY INCOME FUND
800-539-FUND or 800-539-3863
August 1, 1998
<PAGE>
THE VICTORY PORTFOLIOS
PROSPECTUS FOR:
EQUITY INCOME FUND
800-539-FUND 800-539-3863
This prospectus describes the Equity Income Fund. The Fund is a diversified
mutual fund and is a part of The Victory Portfolios (Victory), an open-end
investment management company. This prospectus explains the objective, policies,
risks, and strategies of the Fund. You should read this prospectus before
investing and keep it for future reference. A detailed Statement of Additional
Information (SAI) is also available for your review. The SAI has been filed with
the Securities and Exchange Commission, 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 Fund are:
o Not insured by the FDIC;
o Not deposits or other obligations of, or guaranteed by, any KeyBank, any
o of its affiliates, or any other bank; Subject to investment risks,
o 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.
August 1, 1998
2
<PAGE>
TABLE OF CONTENTS
Introduction 2
Investment Objective, Policies, and Strategies 4
An analysis which includes objectives, policies, strategies, and expenses
Risk Factors 7
Investment Limitations 8
Investment Performance 9
Share Price 9
Dividends, Distributions, and Taxes 10
INVESTING WITH VICTORY 12
How to Purchase Shares 14
How to Exchange Shares 16
How to Redeem Shares 17
Organization and Management of the Fund 18
Additional Information 21
Other Securities and Investment Practices 22
3
<PAGE>
KEY TO
FUND INFORMATION
(1)OBJECTIVE AND STRATEGY
The goals and the strategy that the Fund plans to use
in pursuing its investment objective.
(2)RISK FACTORS
The risks that you may assume
as an investor in the Fund.
(3)EXPENSES
The costs that you will pay as an investor in the Fund, including sales charges
and ongoing expenses.
(1)Investment Objective and Strategy
Objective: The Equity Income Fund seeks to provide dividend income and long-term
capital appreciation.
Strategy: The Fund pursues its investment objective by investing primarily in a
diversified portfolio of equity securities with an above average total return
potential, with emphasis on above average current income. The Portfolio Manager
also may invest in convertible securities to achieve a higher current yield for
the portfolio. Please review "Investment Objective, Policies, and Strategies"
and "Other Securities and Investment Practices" for an overview of the Fund.
(2)Risk Factors
The Fund is not insured by the FDIC. Since equity securities fluctuate in value,
the Fund's shares also will fluctuate in value. This fluctuation may be in
response to the activities of an individual company or in response to general
market or economic conditions. In addition, there are other potential risks,
which are discussed in the section "Risk Factors."
Who Should Invest
o Investors willing to accept higher short-term risk along with higher
potential long-term returns
o Investors seeking capital appreciation over the long-term
o Investors seeking a fund for the growth portion of a diversified
portfolio
o Investors who are investing for goals that are many years in the future
(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,
administrative, and shareholder services, all of which are included in the
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
4
<PAGE>
minimums. The initial investment must be accompanied by the Fund's Account
Application. Fund shares may be purchased by check, Automated Clearing House, or
wire. See "How to Purchase Shares."
Redemptions
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, the 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
Ordinarily, the Fund declares and pays dividends from its net investment income
quarterly. Any net capital gains realized by the Fund are paid as dividends at
least annually. The 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 Funds. 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 The Equity Income Fund
The estimated annual expenses after waivers and reimbursements (as a percentage
of net assets) are ____%. The Fund has a maximum sales charge of 5.75%. The
newspaper abbreviation for the Fund is Victory _______________. All newspapers
do not use the same abbreviation.
The following pages provide you with an overview of the Fund. Please look at the
objective, policies, strategies, risks, and expenses to determine whether the
Fund will 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 Fund can invest and the
risks related to these investments.
5
<PAGE>
EQUITY INCOME FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Fund.
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 Fund. These expenses are
charged directly to the Fund. Expenses include management fees as well as the
costs of maintaining accounts, administering the Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
projected expenses of the Fund.
Annual Fund Operating Expenses
After expense waivers and reimbursements Class A Shares
(as a percentage of average daily net assets)
Management Fees(1)
Other Expenses(1,2)
Total Fund Operating Expenses(1)
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be ______, Other Expenses would be ____%, and Total
Fund Operating Expenses would be ____%.
(2) Other Expenses includes an estimate of shareholder servicing fees the Fund
expects to pay. See "Organization and Management of the Fund -- Shareholder
Servicing Plan".
This example is designed to help you understand the various costs you will bear,
directly or indirectly, as an investor in the Fund.
Example: You would pay the following expenses on a $1,000 investment in the Fund
assuming: (1) a 5% annual return, and (2) redemption at the end of each time
period.
1 Year 3 Years
------ -------
Class A Shares
This example is only an illustration. Actual expenses and returns will vary.
6
<PAGE>
(1)Investment Objective, Policies, and Strategies
(1)Investment Objective
The Fund seeks to provide, over the long-term, dividend income growth and
long-term capital appreciation.
(1)Investment Policies and Strategy
The Fund pursues its objective by investing primarily in a diversified portfolio
of equity securities with an above average total return potential, with emphasis
on above average current income. The securities in the Fund usually are listed
on a national exchange.
The Adviser seeks equity securities of under-valued companies that are
inexpensive relative to historical measurements, such as price to earnings. The
Adviser generally will invest in securities that generate a stable level of
income in inflation-adjusted dollars and will consider the effects of inflation
and taxes on capital gains.
Under normal market conditions, the Fund:
Will invest at least 80% of its total assets in:
o Equity securities and securities convertible or exchangeable into common
stock including domestically traded securities of foreign companies
May invest up to 20% of its total assets in:
o Investment-grade corporate debt securities
o Short-term debt obligations
o U.S. Government obligations
o Equity securities of foreign companies traded on U.S. exchanges, including
ADRs
(2)The Fund is designed for long-term investors. The Fund is subject to the
risks common to all mutual funds and the risks common to mutual funds that
invest in equity securities and debt securities. It also is subject to risks
common to mutual funds that invest in domestically traded securities of foreign
companies. By itself, the Fund does not constitute a complete investment plan
and should be considered a long-term investment for investors who can afford to
weather changes in the value of their investment. Please read "Risk Factors"
carefully before investing.
Portfolio Management
James T. Kitson is the Portfolio Manager of the Fund, a position he has held
since its inception. He is a Portfolio Manager and Senior Managing Director of
Key Asset Management Inc., and has been in the investment business since 1972.
7
<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 Fund. By matching your investment objective with a comfortable level of
risk, you can create your own customized investment plan. Some limitations on
the Fund's 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 the Fund.
As with any mutual fund, there is no guarantee that the Fund will earn income or
show a positive total return over time. The Fund's price, yield, and total
return will fluctuate. You may lose money if the Fund's investments do not
perform well.
See the SAI for more information about risks.
The following risks are common to all mutual funds:
o Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth less than the price the Fund
originally paid for it or less than the security was worth at an earlier
time. Market risk may affect a single security, an industry, a sector of
the economy, or the entire market, and is common to all investments.
o Manager risk is the risk that the Fund's Portfolio Manager may use a
strategy that does not produce the intended result. Manager risk also
refers to the possibility that a Portfolio Manager may fail to execute the
Fund's investment strategy effectively and thus fail to achieve its
objective.
The following risk is common to mutual funds that invest in equity securities:
o Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
earnings and cash flow, equity securities are entitled to the residual
value after the company meets its other obligations. For example, holders
of debt securities have priority over holders of equity securities to a
company's assets in the event of bankruptcy.
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 the 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. Credit
risk is measured by NRSROs* such as S&P, Fitch, or Moody's.
8
<PAGE>
The following risk is common to mutual funds that invest in domestically-traded
securities of foreign companies:
o Investments in securities of foreign companies could be affected by
factors not present in the U.S., including expropriation, confiscation of
property, and difficulties in enforcing contracts. All of these factors can
make foreign investments, especially those in developing countries, more
volatile than U.S. investments.
*An NRSRO is a nationally recognized statistical ratings organization such as
Standard and Poor's (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.
(1)Investment Limitations
**** The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis.****
To help reduce risk, the Fund has adopted limitations on some investment
policies. These limits involve the 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.
The Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations). The 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 Fund does not intend to borrow for leveraging purposes.
Diversification Requirements
o SEC Requirement: The Fund is "diversified" according to certain federal
securities provisions regarding diversification of its assets. Generally,
under these provisions, the Fund must invest at least 75% of its total
assets so that no more than 5% of its total assets are invested in the
securities of any one issuer.
o IRS Requirement: The Fund also intends to comply with certain federal tax
requirements regarding the diversification of its assets, which generally
are less restrictive than the securities provisions. 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.****
Victory may advertise the performance of the Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information also
may appear in various publications. Any fees charged by Investment Professionals
may not be reflected in these performance calculations. Performance information
9
<PAGE>
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 the Fund for a year and the Fund continued to earn the same net
interest income throughout that year. To calculate 30-day yield, the Fund's net
investment income per share for the most recent 30 days is divided by the
maximum offering price per share.
To calculate "total return," the 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.
Yield is a measure of net dividend income.
Average annual total return is a hypothetical measure of past dividend income
plus capital appreciation. It is the sum of all parts of a Fund's investment
return for periods greater than one year.
Total return is the sum of all parts of a Fund's investment return.
Whenever you see information on the Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future.
History does not always repeat itself.
**** 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.****
Share Price
The Fund's share price, called its net asset value (NAV) is calculated each
business day as of the close of 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 instructions are 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 the Fund to materially affect the NAV. 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 the 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
The Fund's net asset value usually can be found daily in The Wall Street Journal
and other newspapers.
Dividends, Distributions, and Taxes
10
<PAGE>
**** Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at 800-539-FUND.****
****Buying a Dividend.
You should check the Fund's distribution schedule before you invest. If you buy
shares of the 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 the Fund's investments. The Fund passes its earnings along to investors in
the form of dividends. Dividend distributions are the net dividends or interest
earned on investments after expenses. If the 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 the Fund.
Ordinarily, the Fund declares and pays dividends from its net investment income
quarterly. The Fund pays 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 the
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 the Fund 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 the same class of 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.
Important Information about Taxes
The 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.
11
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o Ordinary dividends from the Fund are taxable as ordinary income; dividends
from the 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 Dividends from the Fund that are attributable to interest on certain U.S.
Government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to U.S.
Government obligations will be provided to you with the tax statements you
receive from the Fund.
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 the Fund every January showing the
amounts and tax status of distributions made to you.
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 THE 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 open an account, how to access information on your account, and how to
purchase, exchange, and redeem shares of the 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 Fund in this prospectus offers 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%
- --------------------------------- ------------------------- -------------------------- -------------------------
$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%
- --------------------------------- ------------------------- -------------------------- -------------------------
12
<PAGE>
$1,000,000 and above* 0.00% 0.00% *
- --------------------------------- ------------------------- -------------------------- -------------------------
</TABLE>
*There is no initial sales charge on purchases of $1 million or more. However, 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 current net asset value at the time of redemption, whichever is lower.
There will be no CDSC on reinvested dividends. 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.
Sales Charge Reductions and Waivers
****There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.****
You may qualify for reduced sales charges in the following cases:
o A Letter of Intent lets you purchase Class A Shares of the 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.
o 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.
o 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.
o 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 Advisers 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 for fee-based investment
products or accounts, and selling brokers and their sales representatives.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
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
13
<PAGE>
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 the Fund.
Keep the following addresses handy for purchases, exchanges, or redemptions.
Regular U.S. Mail Address:
Send a completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
PO 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
800-539-FUND
800-539-3863
Fax Number:
800-529-2244
Telecommunication Device for the Deaf (TDD):
800-970-5296
Make your check payable to:
The Victory Funds
14
<PAGE>
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic members banks may be used. It
takes about 15 days to set up the ACH feature. Currently, the Fund does 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 their
statements to you. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Fund. 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 account 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 into
shares of the Fund.
Retirement Plans
You can use the Fund 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.
****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.
16
<PAGE>
****You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-539-FUND.****
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. The Fund whose shares you want to exchange and the fund
whose shares you want to buy must offer the exchange privilege.
o Shares of the 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. The registration and tax identification numbers of the two
accounts must be identical. 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.
How to Redeem Shares
If your request is received and accepted by 4:00 p.m. Eastern Time, your
redemption will be processed the same day.
****There are a number of convenient ways to redeem shares of the Fund. You can
use the same mailing addresses listed for purchases. You will earn dividends up
to the date your redemption request is processed.****
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 you 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
16
<PAGE>
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;
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
your instructions are 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 accried 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 an account value of $5,000 or more
to start withdrawals. Once again, we will need 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 account value falls below $500, we may ask
you to bring the account back to the $500 minimum. 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 Fund
****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 Fund to
service its shareholders. They are paid a fee for their services.****
****The Fund is supervised by the Board of Trustees, who monitors the services
provided to investors.****
About Victory
17
<PAGE>
The Fund is a member of the Victory Funds, a group of 35 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 Fund. They are elected by the shareholders.
The Investment Adviser
One of the Fund's most important contracts is its Advisory Agreement with Key
Asset Management Inc. (KAM or the Adviser), a New York Corporation registered as
an investment adviser with the SEC. KAM is a subsidiary of KeyBank National
Association, a wholly-owned subsidiary of KeyCorp. Affiliates of the Adviser
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.
It also allows KAM to choose brokers or dealers to handle the purchases and
sales of the Fund's securities. Subject to Board approval, Key Investments, Inc.
(KII) and/or Key Clearing Corporation (KCC) may act as clearing broker for the
Fund's security 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 fee at an annual rate of
_____% based on the average annual daily net assets of the Fund.
------------------------------------------------
Management of the Fund
------------------------------------------------
Trustees
------------------------------------------------
Supervise the Fund's activities.
------------------------------------------------
------------------------------------------------
Investment Adviser
------------------------------------------------
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Manages the Fund's business
and investment activities.
------------------------------------------------
The Administrator, Distributor, and Fund Accountant
BISYS Fund Services is the Administrator and the Distributor. The 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 the Fund's average daily net assets to perform some of the
administrative duties for the Fund. The Fund does not pay BISYS a fee for its
services as Distributor, although BISYS receives the sales charge. The 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 the Fund. Payments may be in the form of trips, tickets,
18
<PAGE>
and/or merchandise offered through sales contests. It does this at its own
expense, and not at the expense of the Fund or its shareholders.
Shareholder Servicing Plan
The Fund has adopted a Shareholder Servicing Plan. The shareholder servicing
agent performs a number of services for its customers who are shareholders of
the Fund. 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 the Fund pays a fee at an annual
rate of up to .25% of the average daily net assets of the Fund serviced by the
agent. The Fund may enter into agreements with various shareholder servicing
agents, including KeyBank National Association and its affiliates, other
financial institutions, and securities brokers. The Fund 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
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Fund. The Fund does not currently pay
expenses under this plan.
Brokerage
The Fund may buy and sell securities through an affiliate of KAM. The Board of
Trustees has adopted procedures to ensure that these transactions are fair and
in the best interest of the Fund.
Independent Accountants
Coopers & Lybrand L.L.P. serves as independent accountants to the Fund.
Legal Counsel
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.
19
<PAGE>
OTHER COMPANIES THAT PROVIDE SERVICES TO THE FUND
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 Boston Financial Data Services
225 Franklin Street Two Heritage Drive
Boston, MA 02110 Quincy, MA 02171
Handles services such as record-keeping, 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 Fund 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 Fund
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 operations Provides for safekeeping of the
of the Fund. Funds' investments and cash,
and settles trades made by
the Funds.
<PAGE>
[graphic]
Additional Information
****Some additional information you should know about the Fund.****
Share Classes
The Fund offers only the class of shares described in this prospectus, but at
some future date, the Fund may offer additional classes of shares through a
separate prospectus. The Fund is the successor to the former Key Trust Equity
Income Fund.
Your Rights as a Shareholder All shareholders have equal voting, liquidation,
and other rights. As a shareholder of the 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 Advisers 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 may also purchase shares of such a company 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 the Fund. In addition, you also
will 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.
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.
****If you would like to receive additional copies of any materials, please call
the Fund at 800-539-FUND.****
22
<PAGE>
Other Securities and Investment Practices
The following table lists the types of securities the Fund may choose to
purchase under normal market conditions. The majority of the portfolio for the
Fund is made up of equity securities. However, the Fund is also permitted to
invest in the securities listed in the table below and 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>
List of Allowable Investments and Investment Practices Equity Income Fund
- ---------------------------------------------------------------------------------------------------------- -----------------------
<S> <C>
U.S. Equity Securities. Can include common stock and securities convertible into stock of U.S. 80 - 100%
corporations.
- ---------------------------------------------------------------------------------------------------------- -----------------------
Equity Securities of Foreign Companies Traded on U.S. Exchanges. Can include common stock and
securities convertible into stock. Also may include American Depositary Receipts (ADRs) and Global 20%
Depositary Receipts (GDRs).
- ---------------------------------------------------------------------------------------------------------- -----------------------
Preferred Stock. A class of stock that pays dividends at a specified rate and that has preference over 10%
common stock in the payment of dividends and the liquidation of assets.
- ---------------------------------------------------------------------------------------------------------- -----------------------
U.S. Corporate Debt Obligations. Debt instruments issued by public corporations. They may be secured or 20%
unsecured by property.
- ---------------------------------------------------------------------------------------------------------- -----------------------
U.S. Government Securities. Securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. Some are direct obligations of the U.S. Treasury; others are obligations only of the 20%
U.S. agency.
- ---------------------------------------------------------------------------------------------------------- -----------------------
Short-Term Debt Obligations. Includes banker's acceptances, certificates of deposit, prime quality
commercial paper, Eurodollar obligations, variable and floating rate notes, cash, and cash equivalents. 20%
- ---------------------------------------------------------------------------------------------------------- -----------------------
Warrants. The right to purchase an equity security at a stated price for a limited period of time. 10%
- ---------------------------------------------------------------------------------------------------------- -----------------------
When-Issued and Delayed-Delivery Securities. A security that is purchased for delivery at a later time. 33-1/3%
The market value may change before the delivery date.
- ---------------------------------------------------------------------------------------------------------- -----------------------
o Receipts. Separately traded interest or principal components of U.S. Government securities. 20%
- ---------------------------------------------------------------------------------------------------------- -----------------------
Repurchase Agreements. An agreement to sell and repurchase a security at the same price plus interest.
The seller's obligation to the Fund is secured with collateral. Subject to the receipt of exemptive 20%
relief from the SEC, the Adviser may combine repurchase transactions among one
or more Victory funds into a single transaction.
- ---------------------------------------------------------------------------------------------------------- -----------------------
Illiquid Securities. Investments that cannot be sold readily within seven days in the usual course of 15% of
business at approximately the price at which the Fund values them. net assets
- ---------------------------------------------------------------------------------------------------------- -----------------------
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. 20%
- ---------------------------------------------------------------------------------------------------------- -----------------------
o Futures Contracts and Options on Futures Contracts. Contracts involving the right or obligation to 5% in margins and
deliver or receive assets or money depending on the performance of one or more assets or an economic premiums; 33-1/3%
index. To reduce the effects of leverage, liquid assets equal to the contract commitment are set aside subject to futures or
to cover the commitment limit. The Funds may invest in futures in an effort to hedge against market options on futures
risk.
23
<PAGE>
- ---------------------------------------------------------------------------------------------------------- -----------------------
o Options. The Fund may write, or sell, a covered call option on a security that it owns or on an index 25% in
to hedge its position or generate additional income. covered calls
- ---------------------------------------------------------------------------------------------------------- -----------------------
Borrowing, Reverse Repurchase Agreements. The borrowing of money from banks (up to 5% of total assets)
or through reverse repurchase agreements (up to 33 1/3% of total assets). The Funds will not use 33 1/3%
borrowing to create leverage.
- ---------------------------------------------------------------------------------------------------------- -----------------------
Securities Lending. To generate additional income, a Fund may lend its portfolio securities. The Fund
will receive collateral for the value of the security plus any interest due. The Fund only will enter
into securities lending arrangements with entities that the Adviser has determined are creditworthy. 33-1/3%
Subject to the receipt of exemptive relief from the SEC, Key Trust Company of Ohio, N.A.,
the Fund's Custodian and lending agent, may earn a fee based on the amount of income earned
on the investment of collateral.
- ---------------------------------------------------------------------------------------------------------- -----------------------
Investment Company Securities. Shares of other mutual funds with similar investment objectives. The
following limitations apply: (1) No more than 5% of the Fund's total assets may be invested in one 5%
mutual fund, (2) a Fund and its affiliates may not own more than 3% of the securities of any one mutual 3%
fund, and (3) no more than 10% of the Fund's total assets may be invested in combined mutual fund 10%
holdings.
- ---------------------------------------------------------------------------------------------------------- -----------------------
</TABLE>
For temporary defensive purposes, the Fund may invest up to 100% of its total
assets in U.S. Government securities, or short-term, high quality debt
obligations. For more information on ratings and detailed descriptions of each
of the above investment vehicles, see the SAI.
<PAGE>
Logo(R)
Victory Funds
800-539-FUND(R)
or
800-539-3863
MAINE INTERMEDIATE MUNICIPAL BOND FUND
MAINE SHORT-TERM MUNICIPAL BOND FUND
MICHIGAN MUNICIPAL BOND FUND
WASHINGTON MUNICIPAL BOND FUND
PROSPECTUS
August 1, 1998
<PAGE>
THE VICTORY PORTFOLIOS
MAINE INTERMEDIATE MUNICIPAL BOND FUND
MAINE SHORT-TERM MUNICIPAL BOND FUND
MICHIGAN MUNICIPAL BOND FUND
WASHINGTON MUNICIPAL BOND FUND
800-539-FUND 800-539-3863
The four Victory Funds discussed in this prospectus are a part of The Victory
Portfolios (Victory), an open-end investment management company. The Funds are
non-diversified mutual funds. 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,
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 Fund are:
o Not insured by the FDIC;
o Not deposits or other obligations of, or guaranteed by, any 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.
August 1, 1998
2
<PAGE>
TABLE OF CONTENTS PAGE
Introduction 2
AN OVERVIEW OF EACH OF THE FUNDS
An fund-by-fund analysis which includes objectives, policies, strategies, and
expenses
Maine Intermediate Municipal Bond Fund 6
Maine Short-Term Municipal Bond Fund 8
Michigan Municipal Bond Fund 10
Washington Municipal Bond Fund 12
Risk Factors 14
Investment Limitations 15
Investment Performance 15
Share Price 16
Dividends, Distributions, and Taxes 17
INVESTING WITH VICTORY 18
How to Purchase Shares 19
How to Exchange Shares 20
How to Redeem Shares 21
Organization and Management of the Funds 22
Additional Information 28
Other Securities and Investment Practices 29
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>
(1)INVESTMENT OBJECTIVE AND STRATEGY:
(1)OBJECTIVE:
The Maine Intermediate Municipal Bond Fund seeks to provide a reasonable level
of income which is exempt from federal income taxation with at least 65% of the
assets in municipal debt issues which are exempt from Maine state income tax.
The Maine Short-Term Municipal Bond Fund seeks to provide a reasonable level of
income which is exempt from federal income taxation with at least 65% of the
assets in municipal debt issues which are exempt from Maine state income tax.
The Michigan Municipal Bond Fund seeks to generate a reasonable level of income
which is exempt from federal income tax, with at least 65% exempt from Michigan
state income tax.
The Washington Municipal Bond Fund seeks to provide a reasonable level of
income, which is exempt from federal income tax.
(1)STRATEGY:
Each of the Funds pursues its investment objective by investing primarily in
general obligation bonds and revenue bonds. 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 not insured by the FDIC. The Funds generally invest in tax-exempt
obligations of a single state. Therefore, an investment in one of these Funds
may involve additional risks, including economic, political, or credit risks
specific to that state. 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
Victory Fund Waivers (as a % of Sales Charge Abbreviation*
net assets)
- -------------------------------------------------- --------------------- -------------- ----------------------
<S> <C> <C> <C>
Maine Intermediate Municipal Bond Fund 0% 5.75% Victory
- -------------------------------------------------- --------------------- -------------- ----------------------
Maine Short-Term Municipal Bond Fund 0% 5.75% Victory
- -------------------------------------------------- --------------------- -------------- ----------------------
Michigan Municipal Bond Fund 0% 5.75% Victory
- -------------------------------------------------- --------------------- -------------- ----------------------
Washington Municipal Bond Fund 0% 5.75% Victory
- -------------------------------------------------- --------------------- -------------- ----------------------
</TABLE>
*All newspapers do not use the same abbreviation.
The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, policies, 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>
MAINE INTERMEDIATE MUNICIPAL BOND FUND
(1)Investment Objective: The Maine Intermediate Municipal Bond Fund seeks to
provide a reasonable level of income which is exempt from federal income
taxation with at least 65% of the assets in municipal debt issues which are
exempt from taxation in Maine.
(1)Investment Policies and Strategy: The Maine Intermediate Municipal Bond Fund
pursues its investment objective by investing primarily in a diversified
portfolio of tax-exempt obligations.
Under normal market conditions, the Maine Intermediate Municipal Bond Fund
primarily invests in:
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 the Maine Intermediate Municipal Bond Fund's
Investments:
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 Maine
Intermediate Municipal Bond Fund generally will range from 4 to 11 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 Maine Intermediate Municipal Bond Fund primarily invests in
municipal securities issued by the State of Maine and its municipalities. The
Maine Intermediate Municipal Bond Fund 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. The Maine
Intermediate Municipal Bond Fund is subject to additional risks because it
concentrates its investments in a single geographic area, and it may invest more
than 5% of its total assets in the securities of a single issuer. The Maine
Intermediate Municipal Bond Fund may concentrate its investments in securities
of issuers that derive revenues from similar projects such as educational
facilities, or industrial projects. This could make the Maine Intermediate
Municipal Bond Fund more susceptible to economic, political, business, or credit
risks than a fund that invests in a more diversified geographic area. The SAI
explains the risks specific to investments in Maine municipal securities. 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
Maine Intermediate Municipal Bond Fund since its inception. He is a Senior
Portfolio Manager and Director of Key Asset Management Inc., and has been in the
investment business since 1992.
6
<PAGE>
Maine Intermediate Municipal Bond Fund
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Maine Intermediate Municipal Bond
Fund.
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 Maine Intermediate
Municipal Bond Fund. These expenses are charged directly to the Maine
Intermediate Municipal Bond Fund. Expenses include management fees as well as
the costs of maintaining accounts, administering the Maine Intermediate
Municipal Bond Fund, providing shareholder services, and other activities. The
expenses shown are estimated based on anticipated expenses of the Maine
Intermediate Municipal Bond Fund.
Annual Fund Operating Expenses Class A Shares
After expense waivers and reimbursements
(as a percentage of average daily net assets)
Management Fees(1)
Other Expenses(1,2)
Total Fund Operating Expenses(1)
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be ______, Other Expenses would be ____%, and Total Fund
Operating Expenses would be ____%.
(2) Other Expenses includes an estimate of shareholder servicing fees the Maine
Intermediate Municipal Bond Fund expects to pay. See "Organization and
Management of the Fund--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 Maine Intermediate
Municipal Bond Fund.
Example: You would pay the following expenses on a $1,000 investment in the
Maine Intermediate Municipal Bond Fund assuming: (1) a 5% annual return and (2)
redemption at the end of each time period.
1 Year 3 Years
------ -------
Class A Shares
This example is only an illustration. Actual expenses and returns will vary.
7
<PAGE>
MAINE SHORT-TERM MUNICIPAL BOND FUND
(1)Investment Objective: The Maine Short-Term Municipal Bond Fund seeks to
provide a reasonable level of income which is exempt from federal income
taxation with at least 65% of the assets in municipal debt issues which are
exempt from Maine state income tax.
(1)Investment Policies and Strategy: The Maine Short-Term Municipal Bond Fund
pursues its investment objective by investing primarily in a diversified
portfolio of tax-exempt obligations.
Under normal market conditions, the Maine Short-Term Municipal Bond Fund
primarily invests in:
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 the Maine Short-Term Municipal Bond Fund's
Investments:
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 Maine
Short-Term Municipal Bond Fund generally will range from 1 to 5 years.
Under certain market conditions, the Portfolio Manager may go outside these
boundaries.
(2) Risk: The Maine Short-Term Municipal Bond Fund primarily invests in
municipal securities issued by the State of Maine and its municipalities. The
Maine Short-Term Municipal Bond Fund 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. The Maine
Short-Term Municipal Bond Fund is subject to additional risks because it
concentrates its investments in a single geographic area, and it may invest more
than 5% of its total assets in the securities of a single issuer. The Maine
Short-Term Municipal Bond Fund may concentrate its investments in securities of
issuers that derive revenues from similar projects such as educational
facilities, or industrial projects. This could make the Maine Short-Term
Municipal Bond Fund more susceptible to economic, political, or credit risks
than a fund that invests in a more diversified geographic area. The SAI explains
the risks specific to investments in Maine municipal securities. 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
Maine Short-Term Municipal Bond Fund since its inception. He is a Senior
Portfolio Manager and Director of Key Asset Management Inc., and has been in the
investment business since 1992.
8
<PAGE>
MAINE SHORT-TERM MUNICIPAL BOND FUND
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Maine Short-Term Municipal Bond
Fund.
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 Maine Short-Term Municipal
Bond Fund. These expenses are charged directly to the Maine Short-Term Municipal
Bond Fund. Expenses include management fees as well as costs of maintaining
accounts, administering the Maine Short-Term Municipal Bond Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on anticipated expenses of the Maine Short-Term Municipal Bond Fund.
Annual Fund Operating Expenses
After expense waivers and reimbursements Class A Shares
(as a percentage of average daily net assets)
Management Fees(1)
Other Expenses(1,2)
Total Fund Operating Expenses(1)
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be ______%, Other Expenses would be ______%, and Total
Fund Operating Expenses would be ______%.
(2) Other Expenses includes an estimate of shareholder servicing fees the
Michigan Municipal Bond 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 Maine Short-Term
Municipal Bond Fund.
Example: You would pay the following expenses on a $1,000 investment in the
Maine Short-Term Municipal Bond Fund, assuming: (1) a 5% annual return and (2)
redemption at the end of each time period.
1 Year 3 Years
------ -------
Class A Shares
This example is only an illustration. Actual expenses and returns will vary.
9
<PAGE>
MICHIGAN MUNICIPAL BOND FUND
(1)Investment Objective: The Michigan Municipal Bond Fund seeks to generate a
reasonable level of income which is exempt from federal income tax, with at
least 65% of income exempt from state of Michigan taxation.
(1)Investment Policies and Strategy: The Michigan Municipal Bond Fund pursues
its investment objective by investing at least 80% of its total assets in
investment grade obligations. The interest on these obligations is exempt from
federal income taxes, including the federal alternative minimum tax. The
Michigan Municipal Bond Fund expects to invest at least 65% of its total assets
in bonds that pay interest which is also exempt from Michigan state income tax.
Under normal market conditions, the Michigan Municipal Bond Fund primarily
invests in:
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 the Michigan Municipal Bond Fund's Investments:
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 Michigan
Municipal Bond Fund generally will range from 5 to 15 years. Under certain
market conditions, the Portfolio Manager may go outside these boundaries.
(2) Risk: The Michigan Municipal Bond Fund primarily invests in municipal
securities issued by the State of Michigan and its municipalities. The Michigan
Municipal Bond Fund 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. The Michigan
Municipal Bond Fund is subject to additional risks because it concentrates its
investments in a single geographic area, and it may invest more than 5% of its
total assets in the securities of a single issuer. The Michigan Municipal Bond
Fund may concentrate its investments in securities of issuers that derive
revenues from similar projects such as educational facilities, or industrial
projects. This could make the Michigan Municipal Bond Fund more susceptible to
economic, political, or credit risks than a fund that invests in a more
diversified geographic area. The SAI explains the risks specific to investments
in Michigan municipal securities. 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: Scott S. Cottier has served as the Portfolio Manager for
the Michigan Municipal Bond Fund since its inception. He is a Portfolio Manager
and Director of Key Asset Management Inc., and has been in the investment
business since 1995.
10
<PAGE>
Michigan Municipal Bond Fund
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Michigan Municipal Bond Fund.
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 Michigan Municipal Bond
Fund. These expenses are charged directly to the Michigan Municipal Bond Fund.
Expenses include management fees, as well as the costs of maintaining accounts,
administering the Michigan Municipal Bond Fund, providing shareholder services,
and other activities. The expenses shown are estimated based on anticipated
expenses of the Michigan Municipal Bond Fund.
Annual Fund Operating Expenses
After expense waivers and reimbursements Class A Shares
(as a percentage of average daily net assets)
Management Fees(1)
Other Expenses(1,2)
Total Fund Operating Expenses(1)
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be ______%, Other Expenses would be ______%, and Total
Fund Operating Expenses would be ______%.
(2) Other Expenses includes an estimate of shareholder servicing fees the
Michigan Municipal Bond Fund 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 Michigan Municipal Bond
Fund.
Example: You would pay the following expenses on a $1,000 investment in the
Michigan Municipal Bond Fund assuming: (1) a 5% annual return and (2) redemption
at the end of each time period.
1 Year 3 Years
------ -------
Class A Shares
This example is only an illustration. Actual expenses and returns will vary.
11
<PAGE>
WASHINGTON MUNICIPAL BOND FUND
(1)Investment Objective: The Washington Municipal Bond Fund seeks to provide a
reasonable level of income which is exempt from federal income tax.
(1)Investment Policies and Strategy: The Washington Municipal Bond Fund pursues
its objective by investing primarily in a diversified portfolio of tax exempt
obligations.
Under normal market conditions, the Washington Municipal Bond Fund primarily
invests in:
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 the Washington Municipal Bond Fund's Investments:
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 Washington
Municipal Bond Fund generally will range from 5 to 11 years. Under certain
market conditions, the Portfolio Manager may go outside these boundaries.
(2) Risk: The Washington Municipal Bond Fund primarily invests in municipal
securities issued by the State of Washington and its municipalities. The
Washington Municipal Bond Fund 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. The Washington
Municipal Bond Fund is subject to additional risks because it concentrates its
investments in a single geographic area, and it may invest more than 5% of its
assets in the securities of a single issuer. The Washington Municipal Bond Fund
may concentrate its investments in securities of issuers that derive revenues
from similar projects such as educational facilities, or industrial projects.
This could make the Washington Municipal Bond Fund more susceptible to economic,
political, or credit risks than a fund that invests in a more diversified
geographic area. The SAI explains the risks specific to investments in
Washington municipal securities. 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
Washington Municipal Bond Fund since its inception. He is a Senior Portfolio
Manager and Director of Key Asset Management Inc., and has been in the
investment business since 1992.
12
<PAGE>
Washington Municipal Bond Fund
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Washington Municipal Bond Fund.
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 Washington Municipal Bond
Fund. These expenses are charged directly to the Washington Municipal Bond Fund.
Expenses include management fees, as well as the costs of maintaining accounts,
administering the Washington Municipal Bond Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical or projected expenses of the Washington Municipal Bond Fund.
Annual Fund Operating Expenses
After expense waivers and reimbursements Class A Shares
(as a percentage of average daily net assets)
Management Fees (1)
Other Expenses (1,2)
Total Fund Operating Expenses(1)
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be ______%, Other Expenses would be ______%, and Total
Fund Operating Expenses would be ______%.
(2) Other Expenses includes an estimate of shareholder servicing fees the
Michigan Municipal Bond 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 Washington Municipal
Bond Fund.
Example: You would pay the following expenses on a $1,000 investment in the
Washington Municipal Bond Fund assuming (1) a 5% annual return and (2)
redemption at the end of each time period.
1 Year 3 Years
------ -------
Washington Municipal Bond Fund
This example is only an illustration. Actual expenses and returns will vary.
13
<PAGE>
(2)RISK FACTORS
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. ****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.****
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 Internal Revenue Service to be
taxable.
The following risk is common to mutual funds that invest in the securities of a
single state:
o Concentration and diversification risk is the risk that only a limited
number of high-quality securities of a particular type may be available.
Concentration and diversification risk is greater for Funds that primarily
invest in the securities of a single state.
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.
14
<PAGE>
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.
INVESTMENT LIMITATIONS
****The SEC and 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.****
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.
15
<PAGE>
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 materially affect the NAV. 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
Each Fund's net asset value can 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
16
<PAGE>
****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.
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.
Some dividends may be subject to the federal alternative minimum tax. 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.****
17
<PAGE>
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%
- -------------------------------------- -------------------------- ---------------------------- --------------------------
$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 dividends. 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
18
<PAGE>
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.
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.
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
19
<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 an 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 their 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 receive 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 into 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.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. ****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.**** 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.
20
<PAGE>
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.
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. 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;
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.
21
<PAGE>
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 withdrawls. 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. 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 35 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 Key
Asset Management Inc. (KAM or the Adviser), a New York Corporation registered as
an investment adviser with the SEC. KAM is a subsidiary of KeyBank 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 hire employees of its affiliates. 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 of
___% based on the average daily net assets (after waivers) of each Fund.
22
<PAGE>
MANAGEMENT OF THE FUNDS
-------------------------------------------------
Trustees
Supervise each Fund's activities.
-------------------------------------------------
-------------------------------------------------
Investment Adviser
Key Asset Management Inc.
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. The Fund pays BISYS a
fee as the Administrator at the following annual rate 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.
Under a Sub-Administration Agreement, BISYS pays KAM a fee at the annual rate of
up to .05% of the Fund's average daily net assets to perform some of the
administrative duties for the Funds. The Funds does 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 Funds' 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.
Shareholder Servicing Plan:
The Funds have adopted a Shareholder Servicing Plan. The shareholder servicing
agent performs a number of services for their customers who are shareholders of
the Fund. 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
rater 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:
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Fund. The Fund does not currently pay
expenses under this plan.
23
<PAGE>
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.
24
<PAGE>
OTHER COMPANIES THAT PROVIDE SERVICES TO THE FUND
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 Boston Financial Data Services
225 Franklin Street Two Heritage Drive
Boston, MA 02110 Quincy, MA 02171
Handles services such as record-keeping, 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 Fund 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 Fund
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 operations Provides for safekeeping of the
of the Fund. Funds' investments and cash,
and settles trades made by
the Funds.
25
<PAGE>
ADDITIONAL INFORMATION
****Some additional information you should know about the Funds.****
Share Classes
The Funds offer only the class 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 Municipal Common Trust - Victory Maine Intermediate
(Maine) & Key Trust Maine Tax-Exempt Bond Fund Municipal Bond Fund
Key Trust Dirigo Short Term Maine - Victory Maine Short-Term
Municipal Bond Fund
Key Trust Michigan Tax-Exempt Fund - Victory Michigan Municipal
Bond Fund
Key Trust Municipal Bond Victory Washington Municipal
(Washington) Fund - Bond Fund
Your Rights as a Shareholder. All shareholders 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 Advisers have each adopted a Code of Ethics to
which all investment personnel and all other access persons to the Funds 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.****
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 as shown in
the table below and in the SAI.
For temporary defensive purposes each Fund may hold up to 100% of its total
assets in cash or short-term money market instruments.
% 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>
- -----------------------------------------------------------------------------------------------------------------------------
Maine Intermediate Maine Short- Term
List of Allowable Investments Municipal Bond Fund Municipal Bond Fund
and Investment Practices
- -----------------------------------------------------------------------------------------------------------------------------
<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 for 33-1/3% 33-1/3%
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 5% 5%
than 5% of the Fund's total assets may be invested in one mutual fund, (2) 3% 3%
a Fund and its affiliates may not own more than 3% of the securities of any one 10% 10%
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.
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Michigan Municipal Washington
List of Allowable Investments Bond Fund Municipal Bond Fund
and Investment Practices
- -----------------------------------------------------------------------------------------------------------------------------
<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 for 33-1/3% 33-1/3%
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 5% 5%
than 5% of the Fund's total assets may be invested in one mutual fund, (2) 3% 3%
a Fund and its affiliates may not own more than 3% of the securities of any one 10% 10%
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.
- -----------------------------------------------------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------
Maine Intermediate Maine Short- Term
List of Allowable Investments Municipal Bond Fund Municipal Bond Fund
and Investment Practices
- -----------------------------------------------------------------------------------------------------------------------------
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 obligations of the U.S. Treasury; 20% 20%
others are obligations only of the U.S. agency.
- -----------------------------------------------------------------------------------------------------------------------------
Variable & Floating Rate Securities. Investment grade instruments,
some of which may be derivatives and illiquid, with interest rates that # #
reset periodically.
- -----------------------------------------------------------------------------------------------------------------------------
Asset Backed Securities. Debt securities backed by loans or accounts
receivable originated by banks, credit card companies, student loan issues, or other 35% 35%
by insurance coverage provided by a third party.anced by a bank letter of credit or
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities, Tax-Exempt. Tax-exempt investments secured 35% 35%
by 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 large 25% 25%
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.
- -----------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Michigan Municipal Washington
List of Allowable Investments Bond Fund Municipal Bond Fund
and Investment Practices
- ------------------------------------------------------------------------------------------------------------------------------
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 obligations of the U.S. Treasury; 20% 20%
others are obligations only of the U.S. agency.
- ------------------------------------------------------------------------------------------------------------------------------
Variable & Floating Rate Securities. Investment grade instruments,
some of which may be derivatives and illiquid, with interest rates that # #
reset periodically.
- ------------------------------------------------------------------------------------------------------------------------------
Asset Backed Securities. Debt securities backed by loans or accounts
receivable originated by banks, credit card companies, student loan issues, or other 35% 35%
by insurance coverage provided by a third party.anced by a bank letter of credit or
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities, Tax-Exempt. Tax-exempt investments secured 35% 35%
by 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 large 25% 25%
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.
- ------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------------------------------------------------------
Maine Intermediate Maine Short- Term
List of Allowable Investments Municipal Bond Fund Municipal Bond Fund
and Investment Practices in Funds
- --------------------------------------------------------------------------------------------------------------------------------
oFutures Contracts and Options on Futures Contracts. Contracts involving the right 5% in margins or 5% in margins or
or obligation to deliver or receive assets or money depending on the performance of premiums; 33-1/3% premiums; 33-1/3%
one or more assets or a securities index. To reduce the effects of leverage, liquid subject to futures subject to futures
assets equal to the contract commitment are set aside to cover the commitment or options on or options on
limit. The Funds may invest in futures in an effort to hedge against market risk. futures futures
- --------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements. An agreement to sell and repurchase a security at a stated
price plus interest. The seller's obligation to the Fund is secured by collateral. 20% 20%
- --------------------------------------------------------------------------------------------------------------------------------
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 intend to 20% 20%
use.
- --------------------------------------------------------------------------------------------------------------------------------
Illiquid Securities. Investments that cannot be sold readily within seven days in 15% of 15% of
the usual course of business at approximately the price at which a Fund values them. net assets net assets
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
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 banks (up to
5% of total assets) or through reverse repurchase agreements (up to 33 1/3% of total 33 1/3% 33 1/3%
assets). The Funds will not use borrowing to create leverage.
- --------------------------------------------------------------------------------------------------------------------------------
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. This
measures the sensitivity of a debt security's value to changes in interest rates. 4 to 11 1 to 5
Longer term debt securities are more volatile than shorter term debt securities Years Years
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.
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Michigan Municipal Washington
List of Allowable Investments Bond Fund Municipal Bond Fund
and Investment Practices in Funds
- -------------------------------------------------------------------------------------------------------------------------------
oFutures Contracts and Options on Futures Contracts. Contracts involving the right 5% in margins or 5% in margins or
or obligation to deliver or receive assets or money depending on the performance of premiums; 33-1/3% premiums; 33-1/3%
one or more assets or a securities index. To reduce the effects of leverage, liquid subject to futures subject to futures
assets equal to the contract commitment are set aside to cover the commitment or options on or options on
limit. The Funds may invest in futures in an effort to hedge against market risk. futures futures
- -------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements. An agreement to sell and repurchase a security at a stated
price plus interest. The seller's obligation to the Fund is secured by collateral. 20% 20%
- -------------------------------------------------------------------------------------------------------------------------------
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 intend to 20% 20%
use.
- -------------------------------------------------------------------------------------------------------------------------------
Illiquid Securities. Investments that cannot be sold readily within seven days in 15% of 15% of
the usual course of business at approximately the price at which a Fund values them. net assets net assets
- -------------------------------------------------------------------------------------------------------------------------------
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 banks (up to
5% of total assets) or through reverse repurchase agreements (up to 33 1/3% of total 33 1/3% 33 1/3%
assets). The Funds will not use borrowing to create leverage.
- -------------------------------------------------------------------------------------------------------------------------------
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. This
measures the sensitivity of a debt security's value to changes in interest rates. 5 to 15 5 to 10
Longer term debt securities are more volatile than shorter term debt securities Years Years
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>
The Funds may also hold cash for temporary defensive purposes. For more
information on ratings and detailed descriptions of each of the above instrument
vehicles, see the SAI.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
The Victory Equity Income Fund
The Victory Maine Intermediate Municipal Bond Fund
The Victory Maine Short-Term Municipal Bond Fund
The Victory Michigan Municipal Bond Fund
The Victory Washington Municipal Bond Fund
August 1, 1998
<PAGE>
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the prospectuses of The Victory Equity Income Fund, Victory
Maine Intermediate Municipal Bond Fund, Victory Michigan Municipal Bond Fund,
Victory Maine Short-Term Municipal Bond Fund, and Victory Washington Municipal
Bond Fund (individually, a "Prospectus," and collectively, the "Prospectuses"),
each of which is dated the same date as the date hereof as amended or
supplemented from time to time. This Statement of Additional Information is
incorporated by reference in its entirety into the Prospectuses. Copies of the
Prospectuses 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
2
<PAGE>
Table of Contents [TO BE REVISED]
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS................ 7
FUNDAMENTAL RESTRICTIONS OF THE FUNDS........................................ 8
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS................................... 16
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST................................... 19
U.S. Corporate Debt Obligations.................................... 19
Short-Term Obligations..............................................20
Short-Term Corporate Obligations....................................20
Demand Features.....................................................20
Bankers' Acceptances............................................... 20
Certificates of Deposit............................................ 20
Eurodollar Certificates of Deposit................................. 20
Yankee Certificates of Deposit..................................... 21
Eurodollar Time Deposits........................................... 21
Canadian Time Deposits............................................. 21
Commercial Paper................................................... 21
International Bonds................................................ 21
Foreign Debt Securities............................................ 21
Repurchase Agreements.............................................. 21
Reverse Repurchase Agreements...................................... 22
Short-Term Funding Agreements...................................... 22
Variable Amount Master Demand Notes................................ 22
Variable Rate Demand Notes......................................... 22
Variable and Floating Rate Notes................................... 22
Extendible Debt Securities......................................... 23
Receipts........................................................... 23
Zero-Coupon Bonds.................................................. 23
High-Yield Debt Securities......................................... 24
Loans and Other Direct Debt Instruments............................ 24
Securities of Other Investment Companies........................... 25
U.S. Government Obligations........................................ 25
Municipal Securities............................................... 25
Tax-Exempt Obligations............................................. 28
Municipal Lease Obligations........................................ 29
Lower-Rated Municipal Securities................................... 30
Federally Taxable Obligations...................................... 30
Refunded Municipal Bonds........................................... 30
When-Issued Securities............................................. 31
Delayed-Delivery Transactions...................................... 31
Mortgage-Backed Securities......................................... 31
In General................................................ 31
U.S. Government Mortgage-Backed Securities................ 32
GNMA Certificates......................................... 32
FHLMC Securities.......................................... 32
FNMA Securities........................................... 33
Collateralized Mortgage Obligations....................... 33
Non-Government Mortgage-Backed Securities................. 33
Asset-Backed Securities............................................ 33
Futures and Options................................................ 34
Futures Contracts......................................... 34
3
<PAGE>
Restrictions on the Use of Futures Contracts.............. 35
Risk Factors in Futures Transactions...................... 36
Options................................................... 36
Illiquid Investments............................................... 37
Restricted Securities.............................................. 38
Securities Lending Transactions.................................... 38
Short Sales Against-the-Box........................................ 39
Investment-Grade and High Quality Investments...................... 39
Participation Interests............................................ 39
Warrants........................................................... 39
Refunding Contracts................................................ 39
Standby Commitments................................................ 39
Foreign Investments................................................ 40
Miscellaneous Securities........................................... 40
Additional Information Concerning Maine Issuers.................... 41
Additional Information Concerning Michigan Issuers................. 44
Additional Information Concerning Washington Issuers............... 44
DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS...................... 64
VALUATION OF PORTFOLIOS SECURITIES FOR THE MONEY MARKET FUNDS............... 65
VALUATION OF PORTFOLIO SECURITIES FOR THE TAX-FREE BOND FUNDS............... 66
VALUATION OF PORTFOLIOS SECURITIES FOR THE EQUITY FUNDS..................... 66
PERFORMANCE OF THE FUNDS.................................................... 70
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION................... 80
DIVIDENDS AND DISTRIBUTIONS................................................. 83
TAXES....................................................................... 84
TRUSTEES AND OFFICERS....................................................... 92
ADVISORY AND OTHER CONTRACTS................................................ 99
ADDITIONAL INFORMATION......................................................112
APPENDIX....................................................................121
4
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end management
investment company. The Victory Portfolios consists of 35 series (each a "Fund,"
and collectively, the "Funds") of units of beneficial interest ("shares"). The
outstanding shares represent interests in the 35 separate investment portfolios.
This Statement of Additional Information (the "SAI") relates to the shares of 5
of the 35 Funds and are listed below. Much of the information contained in this
Statement of Additional Information expands on subjects discussed in the
Prospectuses. Capitalized terms not defined herein are used as defined in the
Prospectuses. No investment in shares of a Fund should be made without first
reading that Fund's Prospectus.
The Victory Portfolios:
The Victory Equity Income Fund
The Victory Maine Intermediate Municipal Bond Fund
The Victory Michigan Municipal Bond Fund
The Victory Maine Short-Term Municipal Bond Fund
The Victory Washington Municipal Bond Fund
5
<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 Prospectuses. The Funds' investments in the following
securities and other financial instruments are subject to the other investment
policies and limitations described in the Prospectuses and this SAI.
Unless otherwise noted in the prospectus or this SAI, a Fund may invest no more
than 5% of its total assets in any of the securities or financial instruments
described below (unless the context requires otherwise).
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 (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 objective and its 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 Group
Moody's: Moody's Investors Service, Inc.
Fitch: Fitch Investors Service, Inc.
NRSRO: Nationally Recognized Statistical Ratings Organization
6
<PAGE>
FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. Senior Securities
The Funds may not:
Issue any senior security (as defined in the Investment Company Act of 1940, as
amended (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 the Fund may
be considered an underwriter within the meaning of the Securities Act of 1933
(the "1933 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. Any borrowings representing more than 33 1/3% of a Fund's total assets
must be repaid before the Fund may make additional investments.
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.
7
<PAGE>
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
The Equity Income 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. 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.
The Maine Intermediate Municipal Bond Fund, Maine Short-Term Municipal Bond
Fund, Michigan Municipal Bond Fund, and Washington Municipal Bond 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
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.
8
<PAGE>
7. Diversification
The Equity Income Fund is "diversified", which means:
With respect to 75% of a Fund's total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of that issuer, or (b)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer.
The Maine Intermediate Municipal Bond Fund, Maine Short-Term Municipal Bond
Fund, Michigan Municipal Bond, and Washington Municipal Bond Fund are
"non-diversified".
9
<PAGE>
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. Illiquid Securities
The Funds:
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 1933 Act ("Restricted
Securities") shall not be deemed illiquid solely by reason of being
unregistered. Key Asset Management Inc. 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 the Fund.
3. Other Investment Companies
The Funds:
May invest up to 5% of their 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
Victory Portfolios from the Securities and Exchange Commission (the "SEC"), the
Funds may invest in the other money market funds of the Victory Portfolios. Each
Fund 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
The Maine Intermediate Municipal Bond Fund, Maine Short-Term Municipal Bond,
Michigan Municipal Bond Fund, and Washington Municipal Bond Fund may not:
Hold more than five percent of their total assets in securities that have been
downgraded below investment grade.
5. Lending
The Equity Income Fund may not:
Lend any security or make any other loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, but this limitation does not
apply to purchases of publicly issued debt securities or to repurchase
agreements.
The Maine Intermediate Municipal Bond Fund, Maine Short-Term Municipal Bond
Fund, Michigan Municipal Bond Fund, and Washington Municipal Bond Fund may not:
Lend any security or make any other loan, but this limitation does not apply to
purchases of publicly issued debt securities or to repurchase agreements.
10
<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 a Fund's Prospectus and
this Statement of Additional Information.
U.S. Corporate Debt Obligations. U.S. Corporate Debt Obligations include bonds,
debentures, and notes. Debentures represent unsecured promises to pay, while
notes and bonds may be secured by mortgages on real property or security
interests in personal property. Bonds include, but are not limited to, debt
instruments with maturities of approximately one year or more, debentures,
mortgage-related securities, stripped government securities, and zero coupon
obligations. Bonds, notes, and debentures in which the Funds may invest may
differ in interest rates, maturities, and times of issuance. The market value of
a Fund's fixed income investments will change in response to interest rate
changes and other factors. During periods of falling interest rates, the values
of outstanding fixed income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Moreover, while securities with longer maturities tend to produce
higher yields, the price of longer maturity securities are also subject to
greater market fluctuations as a result of changes in interest rates.
Changes by recognized agencies in the rating of any fixed income security and in
the ability of an issuer to make payments of interest and principal also affect
the value of these investments. Except under conditions of default, changes in
the value of a Fund's securities will not affect cash income derived from these
securities but will affect the Fund's net asset value.
Short-Term Obligations. These include high quality, short-term obligations such
as domestic and foreign 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 foreign banks, and
repurchase agreements. (See "Foreign Securities" for a description of risks
associated with investments in foreign securities.)
Short-Term Corporate Obligations. Corporate obligations are bonds issued by
corporations and other business organizations in order to finance their
long-term credit needs. Corporate bonds in which a Fund may invest generally
consist of those rated in the two highest rating categories of an NRSRO that
possess many favorable investment attributes. In the lower end of this category,
credit quality may be more susceptible to potential future changes in
circumstances.
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
11
<PAGE>
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.
Eurodollar Certificates of Deposit ("ECDs") are U.S. dollar-denominated
certificates of deposit issued by branches of foreign and domestic banks located
outside the United States.
Yankee Certificates of Deposit ("Yankee CDs") are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States.
Eurodollar Time Deposits ("ETDs") are U.S. dollar-denominated deposits in a
foreign branch of a U.S. bank or a foreign bank.
Canadian Time Deposits ("CTDs") are U.S. dollar-denominated certificates of
deposit issued by Canadian offices of major Canadian Banks.
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 Statement of Additional Information.
International Bonds. International Bonds include Euro and Yankee obligations,
which are U.S. dollar-denominated international bonds for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Eurodollar Bonds"). International Bonds also
include Canadian and Supranational Agency Bonds (e.g., International Monetary
Fund). (See "Foreign Debt Securities" for a description of risks associated with
investments in foreign securities.)
Foreign Debt Securities. Investments in securities of foreign companies
generally involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there generally is less publicly available
information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards, practices, and requirements
12
<PAGE>
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of a Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation, or
confiscatory taxation; limitations on the removal of securities, property, or
other assets of a Fund; there may be political or social instability; there may
be increased difficulty in obtaining legal judgments; or diplomatic developments
which could affect U.S. investments in those countries. The Adviser will take
such factors into consideration in managing a Fund's investments. A Fund will
not hold foreign currency in amounts exceeding 5% of its assets as a result of
such investments.
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, for money market funds, 10% of the Fund's net
assets, and for all other funds, 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
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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 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.
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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 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.
High-Yield Debt Securities. High-Yield Debt Securities are lower-rated debt
securities, commonly referred to as "junk bonds" (those rated Ba to C by Moody's
or BB to C by S&P), that have poor protection with respect to the payment of
interest and repayment of principal, or may be in default. These securities are
often considered to be speculative and involve greater risk of loss or price
changes due to changes in the issuer's capacity to pay. The market prices of
High-Yield Debt Securities may fluctuate more than those of higher-rated debt
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates.
While the market for High-Yield Debt Securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly-leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of future performance of the high yield bond market,
especially during periods of economic recession. In fact, from 1989 to 1991, the
percentage of High-Yield Debt Securities that defaulted rose significantly above
prior levels, although the default rate decreased in 1992.
The market for High-Yield Debt Securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, High-Yield
Debt Securities will be valued in accordance with procedures established by the
Victory Portfolios' Board of Trustees, including the use of outside pricing
services.
Judgment plays a greater role in valuing High-Yield Debt Securities than is the
case for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value High-Yield Debt
Securities and a Fund's ability to sell these securities.
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Since the risk of default is higher for High-Yield Debt Securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by a Fund. In considering investments for
a Fund, the Adviser will attempt to identify those issuers of high-yielding debt
securities whose financial condition is adequate to meet future obligations, has
improved, or is expected to improve in the future. Analysis of the Adviser
focuses on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.
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 Victory Portfolios from the SEC,
a Fund may invest in the money market funds of the Victory Portfolios. 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 Victory Portfolios, 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.
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.
Three specific types of Municipal Securities are "Maine Tax-Exempt Obligations,"
"Michigan Tax-Exempt Obligations," and "Washington Tax-Exempt Obligations."
Maine Tax-Exempt Obligations are Municipal Securities issued by the State of
Maine and its political subdivisions, the interest on which is, in the opinion
of the issuer's bond counsel at the time of issuance, excluded from gross income
for purposes of both federal income taxation and Maine personal income tax.
Michigan Tax-Exempt Obligations are Municipal Securities issued by the State of
Michigan and its political subdivisions, the interest on which is, in the
opinion of the issuer's bond counsel at the time of issuance, excluded from
gross income for purposes of both federal income taxation and Michigan personal
income tax. Washington Tax-Exempt Obligations are
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Municipal Securities issued by the State of Washington and its political
subdivisions, the interest on which is, in the opinion of the issuer's bond
counsel at the time of issuance, excluded from gross income for purposes of both
federal income taxation and Washington personal income 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 issued and industrial development bonds 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, 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
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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 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.
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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 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.
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Lower-Rated Municipal Securities. The Funds do not currently intend to invest in
lower-rated municipal securities. However, certain Funds 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 believes accurately
reflects fair value. The impact of changing investor perceptions may be
especially pronounced in markets where municipal securities are thinly traded.
The 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. None of the tax-exempt Funds intend to invest in
securities whose interest is federally taxable; however, from time to time,
these Funds may invest a portion of their assets on a temporary basis in
fixed-income obligations whose interest is subject to federal income tax. For
example, these Funds 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 these Funds invest in federally taxable obligations, they 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 the 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.
These Funds anticipate 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 occasions when, in order to raise cash to meet redemptions, these Funds
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.
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
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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 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
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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.
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. The FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. The 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. The 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. The FHLMC guarantee is not backed by the full faith and credit of the
U.S. Government.
FNMA Securities. The 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
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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.
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.
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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.
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.
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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.
The Funds 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 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 Victory Portfolios have undertaken to restrict their futures contract
trading as follows: first, the Victory Portfolios will not engage in
transactions in futures contracts for speculative purposes; second, the Victory
Portfolios 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 Victory Portfolios will disclose to all prospective
shareholders the purpose of and limitations on its funds' commodity futures
trading; fourth, the Victory Portfolios 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
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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 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.
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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.
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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 Victory Portfolios' Board of Trustees, 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 (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.
Restricted Securities. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
1933 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.
Securities Lending Transactions. The Equity Income Fund may from time to time
lend securities from its portfolio to broker-dealers, banks, financial
institutions and institutional borrowers of securities and receive collateral in
the form of cash or U.S. Government Obligations. Key Trust Company of Ohio,
N.A., an affiliate of the Investment Adviser, serves as lending agent for the
Fund pursuant to a Securities Lending Agency Agreement that was adopted by the
Trustees of the Fund. Under the Fund's current practices (which are subject to
change), a Fund must receive initial collateral equal to 102% of the market
value of the loaned securities, plus any interest due in the form of cash or
U.S. Government Obligations. The Equity Income Fund will not lend portfolio
securities to: (a) any "affiliated person" (as that term is defined in the 1940
Act)) of any Fund; (b) any affiliated person of the Investment Adviser; or (c)
any affiliated person of such an affiliated person. This collateral must be
valued daily and should the market value of the loaned securities increase, the
borrower must furnish additional collateral to a Equity Income Fund sufficient
to maintain the value of the collateral equal to at least 100% of the value of
the loaned securities. During the time portfolio securities are on loan, the
borrower will pay the Fund any dividends or interest paid on such securities
plus any interest negotiated between the parties to the lending agreement. Loans
will be subject to termination by the Fund or the borrower at any time. While
the Fund
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will not have the right to vote securities on loan, they intend to terminate
loans and regain the right to vote if that is considered important with respect
to the investment. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which the Adviser has determined are
creditworthy under guidelines established by the Trustees. The Equity Income
Fund will limit its securities lending to 33 1/3% of total assets. The Maine
Intermediate Municipal Bond Fund, Maine Short-Term Municipal Bond Fund, Michigan
Municipal Bond Fund, and Washington Municipal Bond Fund will not engage in
securities lending.
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.
Investment Grade and High Quality Securities. The Funds may invest in
"investment grade" obligations, which are those rated at the time of purchase
within the four 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 of Trustees.
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.
Warrants. Warrants are securities that give a Fund the right to purchase equity
securities from the issuer at a specific price (the strike price) for a limited
period of time. The strike price of warrants typically is much lower than the
current market price of the underlying securities, yet they are subject to
greater price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater potential for
capital appreciation as well as capital loss.
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
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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.
Foreign Investments. The Equity Income Fund may invest in sponsored and
unsponsored American Depository Receipts ("ADRs") and Global Depository Receipts
("GDRs"). Such investment may subject the Fund to significant investment risks
that are different from, and additional to, those related to investments in
obligations of U.S. domestic issuers or in U.S. securities markets. Unsponsored
ADRs may involve additional risks.
The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that the Advisers will be able to
anticipate these potential events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
The Equity Income Fund may invest in foreign securities that impose restrictions
on transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
The Adviser continuously evaluates issuers based in countries all over the
world. Accordingly, the Fund may invest in the securities of issuers based in
any country, subject to approval by the Trustees, when such securities met the
investment criteria of the Adviser and are consistent with the investment
objectives and policies of the Fund.
Miscellaneous Securities. The Funds can invest in various securities issued by
domestic and foreign corporations, including preferred stocks and investment
grade corporate bonds, notes, and warrants. Bonds
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are long-term corporate debt instruments secured by some or all of the issuer's
assets, debentures are general corporate debt obligations backed only by the
integrity of the borrower, and warrants are instruments that entitle the holder
to purchase a certain amount of common stock at a specified price, which price
is usually higher than the current market price at the time of issuance.
Preferred stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights.
Additional Information Concerning Maine Issuers
[TO BE ADDED]
Additional Information Concerning Michigan Issuers
[TO BE ADDED]
Additional Information Concerning Washington Issuers
[TO BE ADDED]
VALUATION OF PORTFOLIO SECURITIES FOR THE TAX-FREE BOND FUNDS
Investment securities held by the Maine Intermediate Municipal Fund, Michigan
Municipal Bond Fund, Maine Short-Term Municipal Bond Fund, and Washington
Municipal Bond Fund 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.
VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY INCOME FUND.
Each equity security held by the Equity Income Fund is valued at its last sales
price on the exchange where the security is principally traded or, lacking any
sales on a particular day, the security is valued at the mean between the
closing bid and asked prices on that day. Exchange listed convertible debt
securities are valued at the mean between the last bid and asked prices obtained
from broker-dealers or a comparable alternative, such as Bloomberg or Telerate.
Each security traded in the over-the-counter market (but not including
securities reported on the NASDAQ National Market System) is valued at the mean
between the last bid and asked prices based upon quotes furnished by market
makers for such securities. Each security reported on the NASDAQ National Market
System is valued at the sales price on the valuation date or absent a last sales
price, at the mean between the closing bid and asked prices on that day.
Non-convertible debt securities are valued on the basis of prices provided by an
independent pricing service. Prices provided by the pricing service may be
determined without exclusive reliance on quoted prices, and may reflect
appropriate factors such as institution-size trading in similar groups of
securities, developments related to special securities, yield, quality, coupon
rate, maturity, type of issue, individual trading characteristics and other
market data. Securities for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the supervision
of the Victory Portfolios' officers in a manner specifically authorized by the
Board of Trustees. Short-term obligations having 60 days or less to maturity are
valued on the basis of amortized cost. For purposes of determining net asset
value per share, futures and options contracts
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<PAGE>
generally will be valued 15 minutes after the close of trading of the NYSE,
currently 4:00 p.m. Eastern Time.
Generally, trading in foreign securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the close of the NYSE. The values of such securities used
in computing the net asset value of each Fund's shares are determined at such
times. Foreign currency exchange rates are also generally determined prior the
close of the NYSE. Occasionally, events affecting the values of such securities
and such exchange rates may occur between the times at which such values are
determined and the close of the NYSE which will not be reflected in the
computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by or under the
supervision of the Board of Trustees.
PERFORMANCE OF THE FUNDS
From time to time, the "standardized 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 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 Victory
Portfolios 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.
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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)
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:
(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
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<PAGE>
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 Salomon Brothers World Government Bond Index, the
Standard & Poor's 500 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 Salomon Brothers World
Government Bond Index generally represents the performance of government debt
securities of various markets throughout the world, including the United States.
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 S&P 500 Index is a composite index of 500 common stocks generally
regarded as an index of U.S. stock market performance. 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 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.
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<PAGE>
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., Standard & Poor's Corporation,
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 New York Stock Exchange ("NYSE") holiday closing schedule indicated in the
SAI under "Valuation of Portfolio Securities for the Tax-Free Bond Funds" is
subject to change.
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 Victory Portfolios 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.
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<PAGE>
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 Victory Portfolios. 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 Victory
Portfolios 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 Victory Portfolios 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 ERISA); and tax-exempt organizations under Section 501(c)(3) of the Internal
Revenue 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 Victory Portfolios 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
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.
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<PAGE>
Exchanging Shares.
Shares of any Victory money market fund may be exchanged for shares of any of
the Victory Portfolios, including Class A and Class B shares of the Victory
Portfolios where applicable. Exchanges for Class A shares of the Victory
Portfolios 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 Victory Portfolios. 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 Victory Portfolios 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 Prospectuses for the imposition of the Class B
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 Victory Portfolios 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 of the Victory Portfolios
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.
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. The Funds ordinarily declare and pay dividends from their
net investment income as follows:
Income Capital
Fund Dividends Gains
- --------------------------------------------------------------------------------
Victory Equity Income Fund Declared and paid Declared and paid
quarterly annually
Victory Maine Intermediate Declared and paid Declared and paid
Municipal Bond Fund monthly annually
Victory Maine Short-Term Declared and paid Declared and paid
Municipal Bond Fund monthly annually
Victory Michigan Municipal Bond Declared and paid Declared and paid
Fund monthly annually
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Victory Washington Municipal Declared and paid Declared and paid
Bond Fund monthly 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
Victory Portfolios in proportion to the Fund's share of the total net assets of
the Victory Portfolios.
TAXES
THE Common Trust Funds SAI Tax Section
TAXES
Information set forth in the Prospectuses 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 Prospectuses 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.
If a Fund has a net capital loss (i.e., an excess of capital losses over capital
gains) for any year, the amount thereof may be carried forward up to eight years
and treated as a short-term capital loss which can be used to offset capital
gains in such future years. As of December 31, 1997, the _________Fund has
capital loss carryforwards of $972,568, $2,280,435, and $10,373,808, which
expire in 2000, 2001, and 2005, respectively. Under Code sections 382 and 383,
if a Fund has an "ownership change," then such Fund's use of its capital loss
carryforwards in any year following the ownership change will be limited to an
amount equal to the net asset value of the Fund immediately prior to the
ownership change multiplied by the long-term tax-exempt rate (which is published
monthly by the Internal Revenue Service) in effect for the month in which the
ownership change occurs (the rate for April 1998 is 5.04%). Each Fund will use
its best efforts to avoid having an ownership change. However, because of
circumstances which may be beyond the control or knowledge of the Funds, there
can be no assurance that the Funds will not have, or have not already had, an
ownership change. If a Fund has or has had an ownership change, then any capital
gain net
38
<PAGE>
income for any year following the ownership change in excess of the annual
limitation on the capital loss carryforward will have to be distributed by the
Fund and will be taxable to shareholders as described under "Fund Distributions"
below.
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 extent
of the portion of the market discount which accrued while the Fund held the debt
obligation. In addition, under the rules of Code section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section 1256
(unless a Fund elects otherwise), generally will be treated as ordinary income
or loss.
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.
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<PAGE>
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.
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 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.
A Fund may enter into notional principal contracts, including interest rate
swaps, caps, floors, and collars. Under Treasury Regulations, in general, the
net income or deduction from a notional principal contract for a taxable year is
included in or deducted from gross income for that taxable year. The net income
or deduction from a notional principal contract for a taxable year equals the
total of all of the periodic payments (generally, payments that are payable or
receivable at fixed periodic intervals of one year or less during the entire
term of the contract) that are recognized from that contract for the taxable
year and all of the non- periodic payments (including premiums for caps, floors
and collars) that are recognized from that contract for the taxable year. No
portion of a payment by a party to a notional principal contract is recognized
prior to the first year to which any portion of a payment by the counterparty
relates. A periodic payment is recognized ratably over the period to which it
relates. In general, a non-periodic payment must be recognized over the term of
the notional principal contract in a manner that reflects the economic substance
of the contract. A non- periodic payment that relates to an interest rate swap,
cap, floor or collar shall be recognized
40
<PAGE>
over the term of the contract by allocating it in accordance with the values of
a series of cash-settled forward or option contracts that reflect the specified
index and notional principal amount upon which the notional principal contract
is based (or, in the case of swaps and certain caps and floors, under an
alternative method contained in the regulations).
A Fund may purchase securities of certain foreign investment funds or trusts
which constitute passive foreign investment companies ("PFICs") for federal
income tax purposes. If a Fund invests in a PFIC, it has three separate options.
First, it may elect to treat the PFIC as a qualifying electing fund (a "QEF"),
in which case it will each year have ordinary income equal to its pro rata share
of the PFIC's ordinary earnings for the year and long-term capital gain equal to
its pro rata share of the PFIC's net capital gain for the year, regardless of
whether the Fund receives distributions of any such ordinary earnings or capital
gains from the PFIC. Second, for tax years beginning after December 31, 1997,
the Fund may make a mark-to-market election with respect to its PFIC stock.
Pursuant to such an election, the Fund will include as ordinary income any
excess of the fair market value of such stock at the close of any taxable year
over its adjusted tax basis in the stock. If the adjusted tax basis of the PFIC
stock exceeds the fair market value of such stock at the end of a given taxable
year, such excess will be deductible as ordinary loss in the amount equal to the
lesser of the amount of such excess or the net mark-to-market gains on the stock
that the Fund included in income in previous years. The Fund's holding period
with respect to its PFIC stock subject to the election will commence on the
first day of the following taxable year. If the Fund makes the mark-to-market
election in the first taxable year it holds PFIC stock, it will not incur the
tax described below under the third option.
Finally, if the Fund does not elect to treat the PFIC as a QEF and does not make
a mark-to-market election, then, in general, (1) any gain recognized by the Fund
upon a sale or other disposition of its interest in the PFIC or any "excess
distribution" (as defined) received by the Fund from the PFIC will be allocated
ratably over the Fund's holding period in the PFIC stock, (2) the portion of
such gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Fund's gross income for such year as ordinary income (and the distribution of
such portion by the Fund to shareholders will be taxable as an ordinary income
dividend, but such portion will not be subject to tax at the Fund level), (3)
the Fund shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate, as the
case may be) in effect for such prior year, plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received, at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the Fund to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the Fund
thereon) will again be taxable to the shareholders as an ordinary income
dividend.
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
41
<PAGE>
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 (including, to the extent provided in Treasury
Regulations, losses recognized pursuant to the PFIC mark-to-market election)
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 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.
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<PAGE>
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. Distributions attributable to dividends received by the Funds from
domestic corporations will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below. Distributions
attributable to interest received by the Funds will not, and distributions
attributable to dividends paid by a foreign corporation generally should not,
qualify for the dividend-received deduction.
Ordinary income dividends paid by a Fund with respect to a taxable year will
qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations such as S corporations, which are not
eligible for the deduction because of their special characteristics, and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
A dividend received by a Fund will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the Fund has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c)(3) and (4) any
period during which the Fund has an option to sell, is under a contractual
obligation to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the Fund is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code section 246A. The 46 day holding period must be satisfied
during the 90 day period beginning 45 days prior to each applicable ex-dividend
date; the 91 day holding period must be satisfied during the 180 day period
beginning 90 days before
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each applicable ex-dividend date. Moreover, the dividends-received deduction for
a corporate shareholder may be disallowed or reduced (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund or (2) by application of Code section 246(b) which in general
limits the dividends-received deduction to 70% of the shareholder's taxable
income (determined without regard to the dividends-received deduction and
certain other items).
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 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 Maine Intermediate Municipal Bond Fund, Maine Short-Term Municipal Bond
Fund, Michigan Municipal Bond Fund and Washington Municipal Bond Market Fund
(the "Tax Exempt Funds") intend to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Tax-Exempt
Funds' taxable year at least 50% of each Fund's total assets consists of
tax-exempt municipal obligations. Distributions from a Tax-Exempt 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 Tax-Exempt 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 Tax-Exempt 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
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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. For purposes of the corporate AMT, the corporate dividends
received deduction is not itself an item of tax preference that must be added
back to taxable income or is otherwise disallowed in determining a corporation's
AMTI. However, corporate shareholders will generally be required to take the
full amount of any dividend received from the Fund into account (without a
dividends-received deduction) in determining their adjusted current earnings.
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 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
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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 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.
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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 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.
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TRUSTEES AND OFFICERS
Board of Trustees.
Overall responsibility for management of the Victory Portfolios rests with the
Trustees, who are elected by the shareholders of the Victory Portfolios. The
Victory Portfolios are managed by the Trustees in accordance with the laws of
the State of Delaware. There are currently nine Trustees, seven of whom are not
"interested persons" of the Victory Portfolios within the meaning of that term
under the 1940 Act ("Independent Trustees"). The Trustees, in turn, elect the
officers of the Victory Portfolios to supervise actively its day-to-day
operations.
The Trustees of the Victory Portfolios, their addresses, ages, and their
principal occupations during the past five years are as follows:
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<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- -------------------
<S> <C> <C>
Roger Noall,* 63 Chairman and Trustee From 1996 to present, Executive of
c/o Brighton Apt. 1603 KeyCorp; from 1995 to 1996, General
8231 Bay Colony Drive Counsel and Secretary of KeyCorp;
Naples, Florida 34108 from 1994 to 1996, Senior Executive
Vice 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).
From 1989 to present, Chairman and
Leigh A. Wilson,** 53 President and Trustee Chief Executive Officer, New Century
New Century Care, Inc. Care, Inc. (merchant bank); from 1995
53 Sylvan Road North to present, Principal of New Century
Westport, CT 06880 Living, Inc.; from 1989 to present,
Director of Chimney Rock Vineyard and
Chimney Rock Winery.
- -----------------
* Mr. Noall is an "interested person" and an "affiliated person" of the Company.
** Mr. Wilson is deemed to be an "interested person" of the Victory Portfolios under the 1940 Act solely
by reason of his position as President.
49
<PAGE>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- -------------------
Edward P. Campbell, 48 Trustee From October 1997 to present, President
Nordson Corporation and Chief Executive Officer of Nordson
28601 Clemens Road Corporation (manufacturer of application
Westlake, OH 44145 equipment); July 1996 to October 1997,
President and Chief 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
17822 Lake Road Thomas Corporation.
Lakewood, OH 44107
50
<PAGE>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- -------------------
Eugene J. McDonald, 65 Trustee From 1990 to present, Executive Vice
Duke Management Company President and Chief Investment
2200 West Main Street Officer for Asset Management of Duke
Suite 1000 University and President and CEO of
Durham, N.C. 27705 Duke Management Company; Director of
CCB Financial Corporation, Flag Group of
Mutual Funds, DP Mann Holdings, Greater
Triangle Community Foundation, and NC
Bar Association Investment Committee.
Dr. Thomas F. Morrissey, 64 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management; 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.
Dr. H. Patrick Swygert, 55 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 402 formerly, Executive Vice President,
Washington, D.C. 20059 Temple University.
Frank A. Weil, 67 Trustee Chairman and Chief Executive Officer of
Abacus & Associates Abacus & Associates, Inc. (private
147 E. 47th Street investment firm); Director and President
New York, N.Y. 10017 of the Norman and Hickrill Foundations;
Director, Trojan Industries. Formerly
United States Assistant Secretary of
51 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 1998. The function of the Investment Policy Committee is to review
the existing investment policies of the Victory Portfolios, 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 Victory Portfolios' 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
1998. 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.
The Investment Policy Committee met four times during the 12 months ended
October 31, 1997. The Business, Legal and Audit Committee met four times during
the 12 months ended October 31, 1997.
Remuneration of Trustees and Certain Executive Officers.
Each Trustee (other than Leigh A. Wilson) receives an annual fee of $27,000 for
serving as Trustee of all the Funds of the Victory Portfolios, and an additional
per meeting fee ($2,400 in person and $1,200 per telephonic meeting). Leigh A.
Wilson receives an annual fee of $33,000 for serving as President and Trustee
for all of the funds of the Victory Portfolios, and an additional per meeting
fee ($3,000 in person and $1,500 per telephonic meeting). The Advisor pays the
fees and expenses of Roger Noall.
The following table indicates the compensation received by each Trustee from the
Victory "Fund Complex"(1) for the 12 month period ended October 31, 1997.
52
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Pension or Retirement Estimated Annual Compensation Total Compensation
Benefits Accrued as Benefits from Victory from Victory
Portfolio Expenses Upon Retirement Portfolios "Fund Complex" (1)
--- ------------------- --------------- --- ----------- ------------------
<S> <C> <C> <C> <C>
Leigh A. Wilson, Trustee........ -0- -0- $ 45,000 $ 56,250
Robert G. Brown, Trustee........ -0- -0- 39,000 39,000
Edward P. Campbell, Trustee..... -0- -0- 39,000 50,250
Harry Gazelle, Trustee.......... -0- -0- 40,200 40,200
Thomas F. Morrissey, Trustee -0- -0- 39,000 39,000
H. Patrick Swygert, Trustee..... -0- -0- 36,600 36,600
</TABLE>
(1) There are presently 35 mutual funds from which the above-named Trustees
are compensated in the Victory "Fund Complex," but not all of the
above-named Trustees serve on the board of each fund in the "Fund
Complex."
Officers.
The officers of the Victory Portfolios, their ages, addresses, and principal
occupations during the past five years, are as follows:
53
<PAGE>
<TABLE>
<CAPTION>
Position(s) with the Principal Occupation
Name, Age, and Address Victory Portfolios During Past 5 Years
- ----------------------- -------------------- -------------------
<S> <C> <C>
Leigh A. Wilson, 53 President and Trustee From 1989 to present, Chairman and
New Century Care, Inc. Chief Executive Officer, New Century
53 Sylvan Road North Care, Inc. (merchant bank); from
Westport, CT 06880 1995 to present, Principal of New
Century Living, Inc.; from 1989 to
present, Director of Chimney Rock
Vineyard and Chimney Rock Winery.
William B. Blundin, 59 Vice President Senior Vice President of BISYS Fund
125 West 55th Street Services ("BISYS"); officer of other
New York, N.Y. 10019 investment companies administered by
BISYS Fund Services; President and
Chief Executive Officer of Vista
Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
Executive Vice President of BISYS.
J. David Huber, 51 Vice President
3435 Stelzer Road
Columbus, OH 43219-3035
From December 1996 to present,
Thomas E. Line, 30 Treasurer employee of BISYS Funds Services;
3435 Stelzer Road from September 1989 to November
Columbus, OH 43219-3035 1996, Audit Senior Manager at KPMG
Peat Marwick LLP.
54
<PAGE>
Positions(s) with the Principal Occupation
Name, Age, and Address Victory Portfolios During Past Years
- ---------------------- ------------------ -----------------
Michael J. Sullivan, 33 Secretary From December 1996 to present, Vice
3435 Stelzer Road President of BISYS Fund Services;
Columbus, OH 43219-3035 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 Secretary From 1994 to Present, Partner,
Kramer, Levin, Naftalis Kramer, Levin, Naftalis & Frankel;
& Frankel previously, Partner, Reid & Priest.
919 Third Avenue, 41st Floor
New York, NY 10022
Alaina V. Metz, Age 31 Assistant Secretary From June 1995 to present, Chief
3435 Stelzer Road Administrative and Regulatory
Columbus, OH 43219-3035 Services, BISYS Fund Services
Limited Partnership; 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 Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS receives fees from the Victory Portfolios as Administrator.
As of March 31, 1998, the Trustees and officers as a group owned beneficially
less than 1% of all classes of outstanding shares of the Funds.
55
<PAGE>
ADVISORY AND OTHER CONTRACTS
Investment Adviser.
One of the Fund's most important contracts is with its investment adviser, Key
Asset Management Inc. ("KAM" or the "Adviser"), 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 December 31, 1997, KeyCorp had an asset
base of $74 billion, with banking offices in 26 states from Maine to Alaska, and
trust and investment offices in 16 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 following schedule lists the advisory fees for Funds that are advised by the
Adviser.
.60 of 1% of average daily net assets
Victory Maine Intermediate Municipal Bond Fund
Victory Maine Short-Term Municipal Bond Fund
Victory Michigan Municipal Bond Fund
Victory Washington Municipal Bond Fund
1% of average daily net assets
Victory Equity Income Fund
The Investment Advisory Agreement.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Victory Portfolios, 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 of Trustees
of the Victory Portfolios, or by the Adviser. The Investment Advisory Agreement
also terminates automatically in the event of any assignment, as defined in the
1940 Act.
56
<PAGE>
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 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. 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 Company
of Ohio, N.A. and the Adviser.
Portfolio Transactions.
Income and Equity Funds. Pursuant to the Investment Advisory Agreement, the
Adviser determines, subject to the general supervision of the Trustees of the
Victory Portfolios, and in accordance with each Fund's investment objective and
restrictions, which securities are to be purchased and sold by the Funds, and
which brokers are to be eligible to execute its portfolio transactions.
Purchases from underwriters and/or broker-dealers of portfolio securities
include a commission or concession paid by the issuer to the underwriter and/or
broker-dealer and purchases from dealers serving as market makers may include
the spread between the bid and asked price. While the Adviser generally seeks
competitive spreads or commissions, each Fund may not necessarily pay the lowest
spread or commission available on each transaction, for reasons discussed below.
57
<PAGE>
Allocation of transactions to dealers is determined by the Adviser in its best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the Adviser may receive orders for transactions by the
Victory Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by the Adviser and does not reduce the
investment advisory fees payable to the Adviser by the Funds. Such information
may be useful to the Adviser in serving both the Victory Portfolios and other
clients and, conversely, such supplemental research information obtained by the
placement of orders on behalf of other clients may be useful to the Adviser in
carrying out its obligations to the Victory Portfolios. The Trustees have
authorized the allocation of brokerage to affiliated broker-dealers on an agency
basis to effect portfolio transactions. The Trustees have adopted procedures
incorporating the standards of Rule 17e-1 of the 1940 Act, which require that
the commission paid to affiliated broker-dealers must be "reasonable and fair
compared to the commission, fee or other remuneration received, or to be
received, by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time." At times, the Funds may
also purchase portfolio securities directly from dealers acting as principals,
underwriters or market makers. As these transactions are usually conducted on a
net basis, no brokerage commissions are paid by the Funds.
All Funds. The Victory Portfolios 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 Company of Ohio, N.A. ("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 Victory Portfolios 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 Victory
Portfolios or for other investment companies or accounts in order to obtain best
execution. In making investment recommendations for the Victory Portfolios, 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 Victory Portfolios.
58
<PAGE>
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.
Administrator.
BISYS Fund Services Limited Partnership (d/b/a BISYS Fund Services) ("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 of Trustees.
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 Victory
Portfolios 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.
59
<PAGE>
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, assist in 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 Fund Services 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 Victory Portfolios. 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 Victory Portfolios 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 Victory
Portfolios, State Street has agreed (1) to issue and redeem shares of the
Victory Portfolios; (2) to address and mail all communications by the Victory
Portfolios 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 Victory Portfolios'
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 you are permitted to do so 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.
60
<PAGE>
Distribution and Service Plan.
The Victory Portfolios, 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 of Trustees 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 Victory Portfolios 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 of Trustees. 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 Victory
Portfolios dated May 31, 1995 (the "Fund Accounting Agreement"). As fund
accountant for the Victory Portfolios, 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. Cash
and securities owned by the Funds are also held by Morgan Stanley Trust Company
("Morgan Stanley") as sub-custodian, and certain foreign sub-custodians,
pursuant to a Sub-Custody Agreement. Under these Agreements, Key Trust and
Morgan Stanley each (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 Victory Portfolios' operations.
61
<PAGE>
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.
Independent Accountants.
Coopers & Lybrand L.L.P. serves as The Victory Portfolios' 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 Victory Portfolios.
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 Victory Portfolios (sometimes referred to as 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 Victory Portfolios presently has 35 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
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Investment Quality Bond Fund
Lakefront Fund
LifeChoice Conservative Investor Fund
LifeChoice Growth Investor Fund
LifeChoice Moderate Investor Fund
Limited Term Income Fund
Maine Intermediate Municipal Bond Fund
Maine Short-Term Municipal Bond Fund
Michigan Municipal Bond Fund
National Municipal Bond Fund
Class A Shares
Class B Shares
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
Washington Municipal Bond Fund
The Victory Portfolios' Trust Instrument authorizes the Trustees to divide or
redivide any unissued shares of the Victory Portfolios 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 Statement of Additional
Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, 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.
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Shares of the Victory Portfolios 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 Victory
Portfolios will provide a list of shareholders or disseminate appropriate
materials (at the expense of the 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 Victory Portfolios 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 Victory Portfolios 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
Victory Portfolios voting without regard to series.
Shareholder and Trustee Liability.
The Victory Portfolios 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 Victory Portfolios shall not be liable for the
obligations of the Victory Portfolios. 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 Victory
Portfolios shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Victory Portfolios, 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 Delaware Trust Instrument states further that no Trustee, officer, or agent
of the Victory Portfolios shall be personally liable in connection with the
administration or preservation of the assets of the funds or the conduct of the
Victory Portfolios' 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 Declaration of Trust also provides that all persons having any
claim against the Trustees or the Victory Portfolios shall look solely to the
assets of the Victory Portfolios for payment.
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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 Victory
Portfolios 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 Victory Portfolios, 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 Victory Portfolios
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 Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios 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.
As used in the Prospectus and in this SAI, a "vote of a majority of the
outstanding shares" of the 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 Victory Portfolios 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 Victory Portfolios.
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 Statement of Additional Information 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 Statement of Additional Information.
65
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APPENDIX
Description of Security Ratings.
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Adviser with regard to portfolio
investments for the Funds include Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch
Investors Service, Inc. ("Fitch"), IBCA Limited and its affiliate, IBCA Inc.
(collectively, "IBCA"), and Thomson BankWatch, Inc. ("Thomson"). 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 Statement of Additional Information, 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.
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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.
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.
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Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
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.
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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.
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.
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Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
BankWatch Ratings do not constitute a recommendation to buy or sell securities
of any of these companies. Further, BankWatch 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.
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.
Definitions of Certain Money Market Instruments
Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.
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.
Bankers' Acceptances. Bankers' acceptances are negotiable drafts or bills of
exchange, normally 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.
U.S. Treasury Obligations. U.S. Treasury Obligations are obligations issued or
guaranteed as to payment of principal and interest by the full faith and credit
of the U.S. Government. These obligations may include Treasury bills, notes and
bonds, and issues of agencies and instrumentalities of the U.S. Government,
provided such obligations are guaranteed as to payment of principal and interest
by the full faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations. Obligations issued by
agencies and instrumentalities of the U.S. Government include such agencies and
instrumentalities as the Government National Mortgage Association, the
Export-Import Bank of the United States, the Tennessee Valley Authority, the
Farmers Home Administration, the Federal Home Loan Banks, the Federal
Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land
Banks, the Federal Housing Administration,
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the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association. Some of these
obligations, such as those of the Government National Mortgage Association are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Export-Import Bank of the United States, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, 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
instrumentalities if it is not obligated to do so by law. A Fund will invest in
the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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The Victory Portfolios
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.(10)
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.(7)
(b) Investment Advisory Agreement between the Registrant and Key
Asset Management Inc. regarding Lakefront Fund and Real
Estate Investment Fund.(7)
(c) Investment Sub-Advisory Agreement between Key Asset
Management Inc. and Lakefront Capital Investors, Inc.
regarding the Lakefront Fund.(7)
(d) Form of Investment Advisory Agreement between the Registrant
and Key Asset Management Inc. regarding the International
Growth Fund.(11)
(e) Form of Investment Advisory Agreement between the Registrant
and Key Asset Management Inc. regarding the Maine
Intermediate Municipal Bond Fund, Maine Short-Term Municipal
Bond Fund, Michigan Municipal Bond Fund, Washington
Municipal Bond Fund and Equity Income Fund.(12)
<PAGE>
The Victory Portfolios
EX-99.B6(a) Distribution Agreement dated June 1, 1996 between the
Registrant and BISYS Fund Services Limited Partnership.(4)
(b) Form of Broker-Dealer Agreement.(2)
EX-99.B7 None.
EX-99.B8(a) Amended and Restated Mutual Fund Custody Agreement dated May
24, 1995 by and between the Registrant and Key Trust Company
of Ohio, N.A. is incorporated herein by reference to Exhibit
8(a) to Post-Effective Amendment No. 22 to the Registrant's
Registration Statement on Form N-1A filed on August 28,
1995.
(b) Custody Agreement dated May 31, 1996 between Morgan Stanley
Trust Company and Key Trust Company of Ohio. (4)
EX-99.B9(a) Administration Agreement dated October 1, 1997 between the
Registrant and BISYS Fund Services Limited Partnership.(10)
(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.(10)
(c) Transfer Agency and Service Agreement dated July 12, 1996
between the Registrant and State Street Bank and Trust
Company.(4)
(e) Fund Accounting Agreement dated May 31, 1995 between the
Registrant and BISYS Fund Services Ohio, Inc., and Schedule
A thereto, are incorporated herein by reference to Exhibit
(d) to Post-Effective Amendment No. 22 to the Registrant's
Registration Statement on Form N-1A filed on August 28,
1995.
(f) Shareholder Servicing Plan dated June 5, 1995 with an
amended Schedule I dated March 1, 1997.(5)
(g) 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)
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
C-2
<PAGE>
The Victory Portfolios
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
Victory Portfolios Class A Shares of National Municipal Bond
Fund, New York Tax-Free Fund, Fund for Income, Financial
Reserves Fund, Institutional Money Market Fund, Ohio
Municipal Money Market Fund Lakefront Fund and Real Estate
Investment Fund with amended Schedule I dated March 1, 1997.
(5)
(b) Distribution Plan dated June 5, 1995 for Class B Shares of
National Municipal Bond Fund, and New York Tax-Free Fund and
adopted December 6, 1995 for Class B Shares of Balanced
Fund, Diversified Stock Fund, International Growth Fund,
Ohio Regional Stock Fund, Special Value Fund, Institutional
Money Market Fund and Investor Shares of the U.S. Government
Obligations Fund.(2)
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.(6)
(d) Computation of performance quotation for the Real Estate
Investment Fund.(8)
(e) Computation of performance quotation for U.S. Government
Obligations Fund -Investor Shares.(10)
EX-99.B17 See EX-27.
EX-99.B18 Amended and Restated Rule 18f-3 Multi-Class Plan effective
as of December 3, 1997.(10)
EX-99.B19(a) Powers of Attorney of Roger Noall and Frank A. Weil.(9)
C-3
<PAGE>
The Victory Portfolios
(b) Powers of Attorney of Leigh A. Wilson, Edward P. Campbell,
Harry Gazelle, Thomas F. Morrissey, H. Patrick Swygert and
Eugene J. McDonald. (10)
EX-27 None.
- --------------------------------
(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. 28 to the Registrant's
Registration Statement on Form N-1A filed electronically on February 28,
1996, accession number 0000922423-96-0000106.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(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
Fund For Income 1,695
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The Victory Portfolios
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
Stock Index Fund 1,458
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The Victory Portfolios
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 Intermediate Municipal Bond Fund 0
Maine Short-Term Municipal Bond Fund 0
Michigan Municipal Bond Fund 0
Washington Municipal Bond Fund 0
Equity Income Fund 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 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
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The Victory Portfolios
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 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
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<PAGE>
The Victory Portfolios
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 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 $74 billion as of December 31, 1997. KeyCorp is a
leading financial institution doing business in 25 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 $60 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, subject to shareholder approval, Indocam
International Investment Services, S.A. ("IIIS"), will be 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 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
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<PAGE>
The Victory Portfolios
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 Key Asset Management Inc.
Vincent DeP. Farrell, Senior Managing Director and Chief Investment
Officer. Also Chief Investment Officer, Executive Vice President adn
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 KMC.
Kathleen A. Dennis, Senior Managing Director.
The business address of each of the foregoing individuals is 127
Public Square, Cleveland, Ohio 44114.
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The Victory Portfolios
The principal executive officers and directors of Lakefront are as
follows:
Nathaniel E. Carter, President. Also 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
The Infinity Mutual Funds, Inc.
INTRUST Funds Trust
The Kent Funds
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<PAGE>
The Victory Portfolios
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.
The business address of each of the foregoing individuals is BISYS
Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43215.
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<PAGE>
The Victory Portfolios
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>
The Victory Portfolios
(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.
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<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 29th day of April, 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 29th day of April, 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.
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<PAGE>
The Victory Portfolio
THE VICTORY PORTFOLIOS
INDEX TO EXHIBITS
Exhibit Number
- --------------
EX-99.B5(e) Form of Investment Advisory Agreement between the Registrant
and Key Asset Management Inc. regarding the Maine
Intermediate Municiapl Bond Fund, Maine Short-Term Municipal
Bond Fund, Michigan Municipal Bond Fund, Washington
Municipal Bond Fund and Equity Income Fund.
EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
EX-99.B11(b) Consent of Coopers & Lybrand L.L.P.
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
2
<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
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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
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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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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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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;
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(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
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Schedule A
Name of Fund Fee*
- ------------ ----
1. The Maine Intermediate Municipal Bond Fund .60%
2. The Maine Short-Term Municipal Bond Fund .60%
3. The Michigan Municipal Bond Fund .60%
4 The Washington Municipal Bond Fund .60%
5. The Equity Income 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.
[LETTERHEAD OF KRAMER, LEVIN, NAFTALIS & FRANKEL]
April 28, 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. 39 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 Prospectuses and in the Statement of Additional Information
in this Post-Effective Amendment No. 39 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
April 28, 1998
