THE ESTABLISHED VALUE FUND
THE SMALL COMPANY OPPORTUNITY FUND
ANNUAL
REPORT
MARCH 31,
1999
(LOGO) (R)
Victory Funds
<PAGE>
TABLE OF CONTENTS
Shareholder Letter 2
Financial Statements
Schedules of Investments 5
Statements of Assets and Liabilities 10
Statements of Operations 11
Statements of Changes in Net Assets 12
Notes to Financial Statements 13
Financial Highlights 18
Report of Independent Public Accountants 20
Key Asset Management Inc. (KAM), a subsidiary of KeyCorp, is the investment
adviser to The Victory Funds. The Victory Funds are sponsored and distributed
by BISYS Fund Services, which is not affiliated with KeyCorp or its
subsidiaries. KAM receives fees for its services from The Victory Funds.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus of the Vistory
Established Value Fund and the Victory Small Company Opportunity Fund.
NOT FDIC INSURED
Shares of The Victory Funds are not insured by the FDIC and are not deposits
or other obligations of, or guaranteed by, any KeyCorp bank, Key Asset
Management Inc., or their affiliates, and are subject to investment risks,
including possible loss of the principal amount invested.
Year 2000 Issues. Like all mutual funds, the Funds could be adversely
affected if the computer systems used by its service providers, including
shareholder servicing agents, are unable to recognize dates after 1999. The
risk of such a computer failure may be greater as it relates to investments
in foreign countries. The Funds' service providers have been actively
updating their systems to be able to process Year 2000 data. There can be no
assurance, however, that these steps will be adequate to avoid a temporary
service disruption or other adverse impact on the Funds. In addition, an
issuer's failure to process accurately Year 2000 data may cause that issuer's
securities to decline in value or delay the payment of interest to a Fund.
(LOGO) (R)
Victory Funds
Call Victory at: Or Call Gradison McDonald at:
800-539-FUND (800-539-3863) 800-869-5999 or 513-579-5999
<PAGE>
Letter to our Shareholders
On behalf of the Victory Funds, welcome! We are pleased to present the
Victory Established Value and Small Company Opportunity Funds' Annual Report
for the year ended March 31, 1999. We hope you find this report useful, easy
to read, and a valuable tool provided by the Victory Funds. But, before you
delve into the report, we would like to share some highlights from this past
fiscal year and some brief economic commentary.
In October, KeyCorp acquired McDonald & Company Investments, Inc. and its
related dealer, McDonald & Company Securities Inc., a full service investment
and banking securities brokerage firm. Soon after that merger, during the
Funds' fourth fiscal quarter, the merger of the Gradison Funds into the
Victory Funds was substantially completed. We acknowledge your support in
this effort -- your votes ensured the merger progressed without disturbance
to investment management and shareholder servicing efforts. The combined
assets of the Victory Funds are now over 18 billion dollars spread across
32 distinct funds, giving the Victory Funds the ability to serve an even wider
variety of investors. We have every hope that these recent additions and
structural changes will serve to enhance the Victory Funds' ability to meet
your specific investment goals.
Currently, Key Asset Management reports the domestic economy is in great
shape. Unemployment is low, and real income growth is high. News from Asia
seems to be getting better, a prerequisite for global acceleration. Consumer
confidence is high, and investor sentiment is almost as buoyant. Cash flows
into equities are strong. The Dow Jones recently hit 10,000, and the S&P 500
spent much of the Funds' fourth fiscal quarter in record territory, too.
This healthy economic picture provides all of our shareholders with the
opportunity to further diversify their holdings among the broad investment
options of the expanded Victory Fund complex. As you may know,
diversification can be a powerful tool in helping investors manage risk and
achieving one's investment objectives, through good and bad economic periods.
Thank you for choosing the Victory Funds to help you realize your investment
goals and, as always, we welcome your comments on this report.
/s/ Leigh A. Wilson /s/ Bradley E. Turner
Leigh A. Wilson Bradley E. Turner
President President
The Victory Funds The Gradison Funds
Dow Jones Industrial Average: A price weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are noted on the
New York Stock Exchange.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged
index that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
<PAGE>
The Victory Established Value Fund
For the fiscal year ended March 31, 1999, the mid-cap equities and
particularly mid-cap value equities continued to lag the larger companies
which dominate the popular indices. Specifically, the S&P 500 Index was up
18.5%, the Dow Jones Industrial Average* was up 13.2% and the S&P Mid Cap
Value Index** was down 12.4% for the year ended March 31, 1999. During the
same period, the Fund's total return was -1.0%.
The Fund is substantially fully invested in equity securities and,
under normal circumstances, does not currently intend to invest in cash
equivalents except to maintain sufficient liquidity to satisfy redemptions.
The fund is currently over weighted versus the S&P 500 in a number of areas.
Specifically it is significantly over weighted in consumer cyclical and
capital goods and significantly under weighted in consumer services,
technology and healthcare. The emphasis on consumer cyclical and capital
goods comes about because we buy out of favor, low price-earnings ratio
companies. That is, we search for financially strong companies whose stock
prices are low and, therefore, we believe, represent good values. The areas
that are significantly under weighted have been the current fads -- computer
related (technology) and drugs (healthcare).
The logical questions? When does this change? When does value once again
matter? Cycles come and go and no one knows exactly when value will once
again dominate like it did in the mid '70s, early '80s and the early '90s.
All we can say is that we believe we are closer than we were a year ago. We
continue to own profitable companies that are attractively priced and we'll
wait for value stocks to return to favor. The portfolio is well positioned
with an average price-earnings ratio of 17, a return on equity of 14.7% and
an average earnings increase of 16% last year.
Victory Established Value Fund
vs. S&P 500
(Dollars in thousands)
Established
Value Fund S&P 500
8/31/83 10000 10000
6/30/84 9857 9824.66
9/30/84 10782 10777.04
12/31/84 11225 10979.26
3/31/85 12181 11987.56
6/30/85 13114 12866.76
9/30/85 12602 12339.87
12/31/85 14460 14462.70
3/31/86 16891 16502.61
6/30/86 16805 17475.28
9/30/86 16514 16256.25
12/31/86 17690 17162.20
3/31/87 20753 20826.74
6/30/87 21229 21872.23
9/30/87 23010 23315.12
12/31/87 19887 18063.31
3/31/88 21170 19090.22
6/30/88 22285 20361.06
9/30/88 22195 20428.80
12/31/88 22894 21052.83
3/31/89 24051 22543.72
6/30/89 25312 24531.26
9/30/89 27511 27155.02
12/31/89 26570 27713.06
3/31/90 26442 26879.53
6/30/90 26178 28569.97
9/30/90 22992 24647.53
12/31/90 24415 26855.47
3/31/91 27622 30751.21
6/30/91 27725 30679.52
9/30/91 28546 32317.68
12/31/91 29842 35021.92
3/31/92 29729 34138.88
6/30/92 28900 34786.82
9/30/92 30459 35883.06
12/31/92 32887 37686.53
3/31/93 35917 39332.09
6/30/93 37284 39521.47
9/30/93 39322 40541.02
12/31/93 39719 41479.55
3/31/94 39718 39909.21
6/30/94 38328 40076.74
9/30/94 39657 42034.14
12/31/94 39847 42026.04
3/31/95 42888 46114.81
6/30/95 46485 50511.98
9/30/95 49769 54523.32
12/31/95 50383 57804.36
3/31/96 53541 60906.30
6/30/96 55295 63637.09
9/30/96 57118 65605.54
12/31/96 60117 71070.72
3/31/97 61649 72980.01
6/30/97 69283 85712.11
9/30/97 75785 92129.13
12/31/97 73734 94775.16
3/31/98 79940 107989.23
6/30/98 79017 111552.90
9/30/98 68567 100474.06
12/31/98 78247 121856.22
3/31/99 79129 127926.41
Graph reflects investment growth from end of month of fund commencement.
The Standard & Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged
index that represents the general performance of domestically traded common
stocks of mid- to large-size companies.
Sector Diversification***
Industrial Products/Services 15.0
Retail Stores 12.0
Technology 12.0
Consumer Services 11.0
Insurance 8.2
Consumer Non-Durables 10.0
Energy 9.0
Financial Services 10.8
Transportation 5.0
Natural Resources 4.0
Consumer Durables 3.4
Utilities 1.0
<TABLE>
<CAPTION>
Average Annual Total Returns
(for the Periods ended March 31, 1999) QTR 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C> <C>
Established Value Fund -- Class G 1.12% -1.01% 13.90% 14.78% 12.65%
</TABLE>
Past performance does not indicate future results.
*A price weighted average of thirty blue-chip stocks that are generally the
leaders in their industry and are noted on the New York Stock Exchange.
**S&P Mid Cap Value Index: Constructed by dividing the stocks in the S&P Mid
Cap Index according to the price-to-book ratio. The lower ratios are in the
Value Index.
***Portfolio composition is subject to change.
Investment returns and principle value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The total return figures set forth above may reflect the waiver of a portion
of certain fees for various periods since the Fund's inception. In such
instances and without such waivers, the total returns would have been lower.
<PAGE>
The Victory Small Company Opportunity Fund
The fiscal year ended March 31, 1999 saw a continued emphasis on large
companies. Investors flocked to the largest of the S&P 500 sending that index
up 18.5% for the year ended March 31, 1999. The Dow Jones Industrial
Average,* also a collection of large companies, finished the same period with
a gain of 13.2%. The Fund's benchmark, the Russell 2000 Index, and a close
counterpart, the Russell Value 2000 Index,** by contrast, declined 16.3% and
22.0% respectively, over the year ended March 31, 1999. The Small Company
Opportunity Fund followed suit with a decline of 22.1%.***
Equity styles come in and go out of favor with cycles lasting generally a few
years. It has been about five years since small cap stocks have had their day
in the sun. We feel they are overdue.
The Fund is substantially fully invested in equity securities and, under
normal circumstances, does not currently intend to invest in cash equivalents
except to maintain sufficient liquidity to satisfy redemptions. The Fund
relative to the Russell 2000 Indices is over weighted significantly in
financials and under weighted in technology, healthcare, utilities and
consumer staples. This is due to the fact that the Fund's strategy seeks
companies whose return on equity and growth of earnings are above average yet
their share prices are low in relation to book value and earnings.
Specifically, the average return on equity is 16.7%, and the average growth
of earnings over the last 12 months was 22%. The average price-to-earnings
and price-to-book ratios were 12.3% and 1.8%, respectively.
Victory Small Company Opportunity Fund
vs. Russell 2000
(Dollars in thousands)
Small Company
Opportunity Fund Russell 2000
8/31/83 10000 10000
6/30/84 7994.31 8517.55
9/30/84 8654.67 8985.84
12/31/84 8608.77 8725.45
3/31/85 9499.68 9939.16
6/30/85 9840.03 10291.24
9/30/85 9259.44 9843.42
12/31/85 11028.47 11434.30
3/31/86 13316.45 13052.86
6/30/86 14382.39 13685.80
9/30/86 13239.63 12009.86
12/31/86 12471.33 12083.68
3/31/87 14774.88 15008.79
6/30/87 14273.46 14902.39
9/30/87 14940.85 15533.61
12/31/87 11800.15 11020.21
3/31/88 13969.54 13123.79
6/30/88 14459.49 13992.91
9/30/88 14737.13 13864.87
12/31/88 14581.66 13777.21
3/31/89 15487.13 14839.53
6/30/89 16486.99 15784.77
9/30/89 18191.32 16847.66
12/31/89 17954.61 16017.76
3/31/90 17342.66 15658.47
6/30/90 17668.43 16252.20
9/30/90 14147.14 12276.31
12/31/90 15611.18 12898.01
3/31/91 18771.03 16733.18
6/30/91 18478.08 16467.60
9/30/91 20083.76 17814.82
12/31/91 21218.39 18836.76
3/31/92 22125.84 20247.70
6/30/92 21223.81 18861.85
9/30/92 21708.06 19404.83
12/31/92 24254.77 22304.56
3/31/93 25036.73 23257.88
6/30/93 25342.15 23767.70
9/30/93 27124.8 25846.19
12/31/93 26939.75 26515.47
3/31/94 26294.84 25809.28
6/30/94 25990.39 24799.45
9/30/94 27280.91 26522.39
12/31/94 26353.29 26031.89
3/31/95 27366.29 27233.77
6/30/95 28577.33 29787.02
9/30/95 31932.95 32728.74
12/31/95 33405.83 33438.19
3/31/96 35026.56 35144.44
6/30/96 36316.84 36902.45
9/30/96 36810.05 37027.25
12/31/96 39909.48 38953.57
3/31/97 39390.51 36939.33
6/30/97 45009.3 42927.30
9/30/97 50673.8 49316.21
12/31/97 52352.69 47664.78
3/31/98 55943.16 52459.27
6/30/98 53846.9 50013.61
9/30/98 43098.47 39938.00
12/31/98 48724.5 46451.60
3/31/99 43588.96 43931.34
Graph reflects investment growth from end of month of fund commencement.
The Russell 2000 Index (Russell 2000) is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
small- to mid-sized companies.
Sector Diversification****
Basic Materials 7.0
Capital Goods 16.0
Consumer Cyclicals 23.4
Consumer Staples 11.0
Energy 1.4
Financial 22.3
Technology 18.9
<TABLE>
<CAPTION>
Average Annual Total Returns
(for the Periods ended March 31, 1999) QTR 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C> <C>
Small Company Opportunity Fund --
Class A @ NAV -10.54% -22.08% 7.56% 10.64% 10.90%
Small Company Opportunity Fund -- Class A at
Maximum Offering Price (includes 5.75% sales charge) -15.68% -26.56% 5.46% 9.34% 10.25%
Small Company Opportunity Fund --
Class G -10.54% -22.08% 7.56% 10.64% 10.90%
</TABLE>
Past performance does not indicate future results.
*A price weighted average of thirty blue-chip stocks that are generally the
leaders in their industry and are noted on the New York Stock Exchange.
**Russell Value 2000: measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth
values.
***Reflects the total return of the Fund at NAV of Class G.
****Portfolio composition is subject to change.
Effective March 26, 1999, the Victory Special Growth Fund merged with the
Gradison Opportunity Value Fund and was renamed Victory Small Company
Opportunity Fund. The performance figures for Class G shares prior to March
26, 1999 represents that of the Gradison Opportunity Value Fund. The
performance figures provided for Class A shares includes the performance of
Class G shares of the Fund prior to March 26, 1999 (commencement of
operations for Class A shares as a result of the merger described above).
Performance of Class A shares prior to March 26, 1999 has not been adjusted
to reflect the differences in expenses between those shares and Class G
shares. Performance data subsequent to March 26, 1999 will vary between Class
A and Class G due to differences in sales charges and class specific
expenses. Small capitalization funds typically carry additional risks since
smaller companies generally have a higher risk of failure and, by definition,
are not as well established as "blue-chip" companies. Historically, smaller
companies' stocks have experienced a greater degree of market volatility than
average.
Investment returns and principle value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The total return figures set forth above may reflect the waiver of a portion
of certain fees for various periods since the Fund's inception. In such
instances and without such waivers, the total returns would have been lower.
<PAGE>
THE VICTORY PORTFOLIOS Schedules of Investments
Established Value Fund March 31, 1999
(Amounts in Thousands, Except Shares)
Shares or
Principal Market
Security Description Amount Value
Common Stocks (97.0%)
Aerospace/Defense (4.9%):
B.F. Goodrich Co. 180,000 $ 6,176
Litton Industries, Inc. (b) 105,000 6,038
Lockheed Martin Corp. 169,232 6,378
Northrop Grumman Corp. 80,000 4,790
23,382
Airlines (1.3%):
Southwest Airlines Co. 200,000 6,050
Apparel (1.3%):
VF Corp. 135,000 6,370
Beverages (2.0%):
Coors (Adolph) Co. 175,000 9,450
Building Materials (2.9%):
Armstrong World Industries, Inc. 100,000 4,519
Centex Corp. 160,000 5,339
Pulte Corp. 200,000 4,163
14,021
Chemicals (2.2%):
Air Products & Chemicals, Inc. 180,000 6,165
Englehard Corp. 255,000 4,319
10,484
Commercial Services (0.8%):
Pittston Brink's Group 156,000 3,666
Computers & Peripherals (5.5%):
Computer Sciences Corp. (b) 115,000 6,347
Sun Microsystems, Inc. (b) 160,000 20,000
26,347
Conglomerates (3.1%):
Crane Co. 210,000 5,079
Textron, Inc. 125,000 9,672
14,751
Consumer Products (1.8%):
Fortune Brands, Inc. 220,000 8,511
Electronic & Electrical -- General (4.4%):
Harris Corp. 180,000 5,153
Honeywell, Inc. 90,000 6,823
Johnson Controls, Inc. 148,000 9,231
21,207
Entertainment (0.8%):
Brunswick Corp. 190,000 3,622
Financial & Insurance (2.5%):
Ambac Financial Group, Inc. 110,000 5,940
MBIA, Inc. 100,000 5,800
11,740
Financial Services (10.8%):
Citigroup, Inc. 225,000 14,372
Fannie Mae 10,000 692
Household International, Inc. 450,000 20,530
Providian Financial Corp. 150,000 16,500
52,094
Food Distributors,
Supermarkets & Wholesalers (3.1%):
American Stores Co. 320,000 10,560
SUPERVALU, Inc. 200,000 4,125
14,685
Food Products (0.8%):
Earthgrains Co. 180,000 3,994
Forest Products -- Lumber & Paper (1.2%):
Bowater, Inc. 140,000 5,548
Health Care (1.3%):
WellPoint Health Networks, Inc. (b) 80,000 6,065
Heavy Machinery (2.6%):
Deere & Co. 110,000 4,249
Ingersoll Rand Co. 165,000 8,188
12,437
Household Goods -- Appliances,
Furnishings & Electronics (2.6%):
Premark International, Inc. 185,000 6,093
Whirlpool Corp. 115,000 6,254
12,347
Insurance -- Multi-Line (5.7%):
CIGNA Corp. 93,000 7,795
Hartford Financial Services Group, Inc. 84,000 4,772
Provident Cos., Inc. 150,000 5,184
Transamerica Corp. 140,000 9,940
27,691
Leisure -- Recreation, Gaming (1.6%):
Royal Caribbean Cruises Ltd. 200,000 7,800
Machine Tools (0.7%):
Milacron, Inc. 221,000 3,481
Manufacturing -- Capital Goods (2.3%):
Cooper Industries, Inc. 118,000 5,030
Parker Hannifin Corp. 175,950 6,026
11,056
Manufacturing -- Miscellaneous (1.0%):
Trinity Industries, Inc. 160,000 4,700
Newspapers (1.3%):
Gannett Co., Inc. 97,000 6,111
Oil & Gas Exploration,
Production & Services (6.3%):
Ashland, Inc. 109,000 4,462
Coastal Corp. 290,000 9,569
El Paso Energy Corp. 200,000 6,538
KN Energy, Inc. 208,500 4,157
Transocean Offshore, Inc. 210,000 6,051
30,777
Oil Marketing & Refining (1.2%):
Tosco Corp. 238,000 5,905
Publishing (0.8%):
World Color Press, Inc. (b) 185,000 3,931
Restaurants (2.9%):
Brinker International, Inc. (b) 250,000 6,453
Wendy's International, Inc. 254,000 7,223
13,676
Retail (5.1%):
Dayton Hudson Corp. 250,000 16,656
Kmart Corp. (b) 450,000 7,566
24,222
Retail -- Department Stores (1.6%):
Dillard's, Inc. 135,000 3,426
Federated Department Stores, Inc. (b) 110,000 4,413
7,839
Retail -- Specialty Stores (1.8%):
Lowe's Cos., Inc. 140,000 8,470
Staffing (0.7%):
Interim Services, Inc. (b) 218,000 3,270
Telecommunications (3.3%):
QUALCOMM, Inc. (b) 126,000 15,656
Tools & Hardware Manufacturing (1.4%):
Black & Decker Corp. 125,000 6,930
Transportation (1.4%):
Airborne Freight Corp. 222,000 6,910
Utilities -- Electric (1.2%):
Duke Energy Corp. 105,000 5,736
Utilities -- Telecommunications (0.8%):
SBC Communications, Inc. 80,000 3,770
Total Common Stocks (Cost $313,568) 464,702
Repurchase Agreements (3.0%)
First Union Capital Markets,
4.82%, 4/1/99, (Collateralized by $14,048
various U.S. Treasury Securities,
5.63%-7.75%, 11/30/99-11/30/00, market
value -- $14,619) 14,335 14,335
Total Repurchase Agreements (Cost $14,335) 14,335
Total Investments (Cost
$327,903) (a) -- 100.0% 479,037
Liabilities in
excess of other assets (0.0)% (53)
TOTAL NET ASSETS -- 100.0% $478,984
(a) Represents cost for federal tax purposes and differs from value by net
unrealized appreciation of securities as follows (amounts in thousands):
Unrealized appreciation $171,417
Unrealized depreciation (20,283)
--------
Net unrealized appreciation $151,134
(b) Non-income producing securities.
See notes to financial statements.
<PAGE>
THE VICTORY PORTFOLIOS Schedules of Investments
Small Company Opportunity Fund March 31, 1999
(Amounts in Thousands, Except Shares)
Shares or
Principal Market
Security Description Amount Value
Commercial Paper (6.1%)
General Electric Capital Corp., 5.12%, 4/1/99 11,534 $ 11,534
Total Commercial Paper (Cost $11,534) 11,534
Common Stocks (93.3%)
Aerospace/Defense (0.2%):
EDO Corp. 54,000 351
Airlines (1.8%):
Comair Holdings, Inc. 147,000 3,473
Apparel (2.2%):
Gerber Childrenswear, Inc. (b) 60,500 382
Gildan Activewear, Inc., Class A (b) 100,000 1,225
UniFirst Corp. 124,000 2,619
4,226
Automotive Parts (2.6%):
Borg-Warner Automotive, Inc. 25,000 1,195
Intermet Corp. 80,000 1,070
Wynn's International, Inc. 151,000 2,633
4,898
Banks (7.5%):
Andover Bancorp, Inc. 85,000 2,306
GBC Bancorp 82,000 1,230
HUBCO, Inc. 73,172 2,455
M & T Bank Corp. 4,000 1,916
Mercantile Bankshares Corp. 61,125 2,262
National City Bancorp (b) 60,000 1,260
Zions Bancorp 40,000 2,659
14,088
Beverages (0.2%):
Hansen Natural Corp. (b) 100,000 369
Brokerage Services (1.0%):
Knight/Trimark Group, Inc. (b) 28,000 1,876
Building Materials (5.1%):
Florida Rock Industries, Inc. 24,000 819
Hughes Supply, Inc. 108,000 2,457
Lone Star Industries, Inc. 20,000 620
LSI Industries, Inc. 119,000 2,008
Southdown, Inc. 48,000 2,577
Thomas Industries, Inc. 70,000 1,313
9,794
Chemicals (1.7%):
Cambrex Corp. 100,000 2,212
Ferro Corp. 45,000 1,114
3,326
Commercial Services (2.5%):
Affiliated Computer Services, Inc. (b) 70,000 3,203
Convergys Corp. (b) 50,000 856
NCO Group, Inc. (b) 20,000 740
4,799
Computers & Peripherals (3.7%):
BindView Development Corp. (b) 50,000 1,556
Computer Network Technology Corp. (b) 90,000 1,451
Kronos, Inc. (b) 28,500 698
MTS Systems Corp. 156,000 1,580
National Computer Systems, Inc. 25,000 613
Progress Software Corp. (b) 35,000 1,194
7,092
Construction & Housing (2.4%):
D.R. Horton, Inc. 82,000 1,374
NCI Building Systems, Inc. (b) 94,000 2,209
Toll Brothers, Inc. (b) 50,000 906
4,489
Cosmetics & Related (0.2%):
Stephan Co. 44,000 396
Data Processing/Management (0.9%):
Applied Graphics Technologies, Inc. (b) 11,400 86
Data Processing Resources Corp. (b) 115,000 1,574
1,660
Distribution/Wholesale (1.9%):
Advanced Marketing Services, Inc. 99,400 1,292
Savoir Technology Group, Inc. (b) 264,000 2,277
3,569
Electronic & Electrical -- General (2.7%):
CTS Corp. 60,500 2,990
Energy Conversion Devices, Inc. (b) 28,800 266
Jabil Circuit, Inc. (b) 23,000 932
Tweeter Home Entertainment Group, Inc. (b) 30,000 968
5,156
Electronic Components/Instruments (3.1%):
C&D Technologies, Inc. 100,000 2,487
Cable Design Technologies Corp. (b) 131,000 1,441
Encore Wire Corp. (b) 39,000 307
Technitrol, Inc. 75,000 1,730
5,965
Engineering, Industrial Construction (1.0%):
URS Corp. (b) 106,000 1,915
Entertainment (1.4%):
Anchor Gaming (b) 45,000 1,969
Harrah's Entertainment, Inc. (b) 39,000 743
2,712
Environmental Control (0.7%):
Met-Pro Corp. 55,000 619
Tetra Tech, Inc. (b) 33,000 695
1,314
Financial Services (6.2%):
AmeriCredit Corp. (b) 155,000 2,034
DVI, Inc. (b) 135,000 2,008
Lennar Corp. 43,000 962
M.D.C. Holdings, Inc. 49,000 704
Old Kent Financial Corp. 42,000 1,775
Raymond James Financial, Inc. 100,000 1,975
TCF Financial Corp. 50,000 1,300
Vermont Financial Services Corp. 35,000 989
11,747
Food Processing & Packaging (0.5%):
Balance Bar Co. (b) 100,000 981
Food Production -- Diversified (0.8%):
Michael Foods, Inc. 83,000 1,582
Health Care (2.3%):
Capital Senior Living Corp. (b) 80,000 565
Renal Care Group, Inc. (b) 22,600 444
Universal Health Services, Inc. (b) 76,000 3,287
4,296
Industrial Goods & Services (0.4%):
White Cap Industries, Inc. (b) 65,000 715
Insurance (1.2%):
ARM Financial Group, Inc., Class A 150,000 2,241
Insurance -- Multi-Line (4.0%):
Fremont General Corp. 134,000 2,554
HCC Insurance Holdings, Inc. 127,000 2,445
Protective Life Corp. 69,700 2,640
7,639
Insurance -- Property,
Casualty, Health (0.3%):
Unico American Corp. 50,000 506
Machinery -- Diversified (2.3%):
Cascade Corp. 32,000 340
Esterline Technologies Corp. (b) 125,000 1,618
Gehl Co. (b) 44,000 649
Gleason Corp. 30,000 508
United Dominion Industries, Ltd. 62,000 1,232
4,347
Medical Equipment & Supplies (2.0%):
Cooper Cos., Inc. (b) 105,000 1,615
Empi, Inc. (b) 55,000 1,189
West Pharmaceutical Services, Inc. 30,000 954
3,758
Medical Labs & Testing Services (1.0%):
Osteotech, Inc. (b) 37,500 1,289
Pharmaceutical Product Development, Inc. 20,000 671
1,960
Medical Services (0.7%):
HEALTHSOUTH Corp. (b) 60,000 623
Prime Medical Services, Inc. (b) 102,000 752
1,375
Metals -- Fabrication (3.4%):
Mueller Industries, Inc. (b) 105,000 2,348
Quanex Corp. 37,000 574
Reliance Steel & Aluminum Co. 80,000 2,305
TransTechnology Corp. 71,000 1,172
6,399
Mobile Homes (1.8%):
Coachmen Industries, Inc. 112,000 2,296
Thor Industries, Inc. 50,000 1,131
3,427
Oil & Gas Exploration,
Production & Services (2.3%):
Atwood Oceanics, Inc. (b) 69,700 2,091
Eagle Geophysical, Inc. (b) 91,000 347
SEACOR SMIT, Inc. (b) 20,000 1,076
World Fuel Services Corp. 70,000 814
4,328
Paper Products (2.2%):
Mail-Well, Inc. (b) 315,000 4,213
Pharmaceuticals (1.1%):
Alpharma, Inc., Class A 40,000 1,570
Barr Laboratories, Inc. (b) 20,000 610
2,180
Pollution Control
Services & Equipment (0.2%):
Farr Co. (b) 52,500 446
Publishing (0.6%):
Merrill Corp. 80,000 1,070
Real Estate (0.4%):
LNR Property Corp 43,000 849
Restaurants (0.4%):
O'Charley's, Inc. (b) 60,000 814
Retail (1.8%):
BJ's Wholesale Club, Inc. (b) 128,000 3,384
Retail -- Drug Stores (0.3%):
Duane Reade, Inc. (b) 20,000 558
Savings & Loans (2.7%):
D & N Financial Corp. 32,000 728
ITLA Capital Corp. (b) 150,000 2,175
Roslyn Bancorp, Inc. 135,300 2,283
5,186
Services (2.3%):
ABM Industries, Inc. 112,000 3,416
ServiceMaster Co. 51,150 1,039
4,455
Software & Computer Services (1.8%):
Acclaim Entertainment, Inc. (b) 105,000 938
Keane, Inc. (b) 75,000 1,599
Visio Corp. (b) 30,000 844
3,381
Staffing (0.8%):
On Assignment, Inc. (b) 20,000 513
Personnel Group of America, Inc. (b) 150,000 1,078
1,591
Telecommunications (2.8%):
Comdial Corp. (b) 100,000 650
EMS Technologies, Inc. (b) 19,500 275
International FiberCom, Inc. (b) 140,000 919
InterVoice, Inc. (b) 50,000 550
Norstan, Inc. (b) 100,000 925
Vertex Communications Corp. (b) 131,000 2,088
5,407
Textile Manufacturing (0.8%):
Interface, Inc. 160,000 1,540
Tools & Hardware Manufacturing (1.1%):
Applied Power Inc., Class A 75,000 2,044
Transportation Leasing & Trucking (2.0%):
Forward Air Corp. (b) 166,000 2,179
Landair Corp. (b) 55,000 275
USFreightways Corp. 40,000 1,315
3,769
Total Common Stocks (Cost $155,748) 177,656
Total Investments (Cost $167,282)
(a) -- 99.4% 189,190
Other assets in excess of liabilities 0.6% 1,158
TOTAL NET ASSETS -- 100.0% $190,348
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $233. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows (amounts in
thousands):
Unrealized appreciation $ 41,530
Unrealized depreciation (19,622)
-------
Net unrealized appreciation $ 21,908
(b) Non-income producing securities.
See notes to financial statements.
<PAGE>
Statements of Assets and Liabilities
THE VICTORY PORTFOLIOS March 31, 1999
(Amounts in Thousands, Except Per Share Amounts)
Small
Established Company
Value Opportunity
Fund Fund
ASSETS:
Investments, at value (cost $327,903; $167,282) $479,037 $189,190
Cash 2 278
Interest and dividends receivable 564 78
Receivable for capital shares issued -- 49
Receivable from brokers for investments sold 1,506 1,517
Prepaid expenses 9 9
Total Assets 481,118 191,121
LIABILITIES:
Payable for capital shares redeemed -- 4
Payable for investments purchased 1,664 665
Accrued expenses and other payables:
Investment advisory fees 203 51
Distribution fees 206 8
Shareholder service fees -- Class A -- 6
Custodian fees 6 10
Accounting fees 13 1
Transfer agency fees 29 9
Other 13 19
Total Liabilities 2,134 773
NET ASSETS:
Capital 302,544 176,316
Undistributed (distributions in excess
of) net investment income 124 (62)
Accumulated undistributed net realized
gain (loss) on investments 25,182 (7,814)
Net unrealized appreciation on investments 151,134 21,908
Net Assets $478,984 $190,348
Net Assets
Class A -- $ 64,587
Class G $478,984 125,761
Total $478,984 $190,348
Outstanding units of beneficial interest (shares)
Class A -- 3,119
Class G 15,282 6,073
Total 15,282 9,192
Net asset value
Redemption price per share -- Class A -- $ 20.71
Redemption price per share -- Class G $ 31.34 $ 20.71
Maximum sales charge -- Class A n/a 5.75%
Maximum offering price per share
(100%/(100% -- maximum sales charge)
of net asset value adjusted to nearest
cent) -- Class A n/a $ 21.97
See notes to financial statements.
<PAGE>
Statements of Operations
THE VICTORY PORTFOLIOS For the Year Ended March 31, 1999
(Amounts in Thousands)
Small
Established Company
Value Opportunity
Fund Fund
Investment Income:
Interest Income $ 4,890 $ 1,539
Dividend income 5,523 1,060
Total Income 10,413 2,599
Expenses:
Investment management fees 2,631 935
Administration fees -- 2
Shareholder service fees -- 1
Distribution fees 2,511 759
Legal and audit fees 17 17
Custodian fees 21 22
Fund accounting fees 82 41
Printing fees 10 7
Registration fees 22 30
Transfer agent fees 337 155
Trustees' fees 9 8
Miscellaneous expenses 14 3
Total expenses 5,654 1,980
Expenses voluntarily reduced -- (3)
Net Expenses 5,654 1,977
Net Investment Income 4,759 622
Realized/Unrealized Gains (Losses)
from Investments:
Net realized gains (losses) from
investment transactions 41,202 (7,458)
Change in unrealized appreciation/depreciation
from investments (54,160) (37,144)
Net realized/unrealized losses from investments (12,958) (44,602)
Change in net assets resulting from operations $ (8,199) $(43,980)
See notes to financial statements.
<PAGE>
THE VICTORY PORTFOLIOS Statements of Changes in Net Assets
(Amounts in Thousands)
<TABLE>
<CAPTION>
Established Value Fund Small Company Opportunity Fund
Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 4,759 $ 7,303 $ 622 $ 1,228
Net realized gains/(losses)
from investment transactions 41,202 41,231 (7,458) 20,508
Net change in unrealized
appreciation/depreciation from investments (54,160) 79,581 (37,144) 26,918
Change in net assets resulting from operations (8,199) 128,115 (43,980) 48,654
Distributions to Shareholders:
From net investment income
Class G (4,946) (7,489) (890) (1,401)
From net realized gains from investment transactions
Class G (30,865) (39,694) (6,817) (18,568)
Change in net assets from distributions to shareholders (35,811) (47,183) (7,707) (19,969)
Capital Transactions:
Proceeds from shares issued 315,787 177,661 163,831 97,739
Proceeds from shares issued in connection
with acquisition -- -- 70,516 --
Dividends reinvested 34,887 46,071 7,587 19,731
Cost of shares redeemed (394,935) (167,135) (175,583) (84,922)
Change in net assets from capital transactions (44,261) 56,597 66,351 32,548
Change in net assets (88,271) 137,529 14,664 61,233
Net Assets:
Beginning of year 567,255 429,726 175,684 114,451
End of year $ 478,984 $ 567,255 $ 190,348 $175,684
Share Transactions:
Issued 10,251 5,537 6,944 3,748
Issued in connection with acquisition -- -- 3,124 --
Reinvested 1,130 1,494 305 797
Redeemed (12,812) (5,225) (7,479) (3,273)
Change in shares (1,431) 1,806 2,894 1,272
</TABLE>
See notes to financial statements.
<PAGE>
Notes to Financial Statements
THE VICTORY PORTFOLIOS March 31, 1999
1. Organization:
The Victory Portfolios (collectively, the "Trust" and individually, a "Fund")
were organized on December 6, 1995 as a successor to a company of the same
name organized as a Massachusetts business trust on February 5, 1986. The
Trust is registered under the Investment Company Act of 1940, as amended,
(the "1940 Act") as an open-end investment company established as a Delaware
business trust. The Trust is authorized to issue an unlimited number of
shares, which are units of beneficial interest with a par value of $0.001. As
of March 31, 1999, the Trust offers shares of 30 active funds. The Trust
commenced offering shares of two additional Funds effective April 1, 1999 as
described below, in relevant part, under "Reorganization." The accompanying
financial statements and financial highlights are those of the Small Company
Opportunity Fund (previously the Special Growth Fund) and the Established
Value Fund.
The Small Company Opportunity Fund is authorized to issue two classes of
shares: Class A Shares and Class G Shares. Each class of shares in a Fund has
substantially identical rights and privileges except with respect to sales
charges, fees paid under shareholder servicing or distribution plans,
expenses allocable exclusively to each class of shares, voting rights on
matters affecting a single class of shares, and the exchange privilege of
each class of shares. The Established Value Fund is authorized to issue Class
G shares effective April 1, 1999, as described below under "Reorganization."
The Small Company Opportunity Fund seeks to provide capital appreciation. The
Established Value Fund seeks to obtain long-term capital growth by investing
primarily in common stocks.
2. Reorganization:
The Trust entered an Agreement and Plan of Reorganization and
Termination (the "Agreement") with Gradison Growth Trust, also registered as
an open-end investment management company under the 1940 Act, pursuant to
which all of the assets and liabilities of the Gradison Opportunity Value
Fund and the Gradison Established Value Fund (collectively, the "Gradison
Funds") were transferred individually to separate Funds of the Trust in
exchange for Class G shares, a new class of shares issued in connection with
the reorganization, of the corresponding Fund. The Gradison Opportunity Value
Fund transferred its assets and liabilities to the Victory Special Growth
Fund. Concurrent with the reorganization, the Victory Special Growth Fund was
renamed the Victory Small Company Opportunity Fund. Immediately prior to the
transfer of shares described above, the Victory Small Company Opportunity
Fund effected a reverse stock split to adjust the net asset value per share
such that its net asset value per share equaled that of the Gradison
Opportunity Value Fund. The Gradison Established Value Fund transferred its
assets and liabilities to the Victory Established Value Fund. The
reorganization, which qualified as a tax-free exchange for federal income tax
purposes, was completed on March 26, 1999 for the Victory Small Company
Opportunity Fund and April 1, 1999 for the Victory Established Value Fund
(collectively, the "Effective Dates of the Reorganization"), following
approval by shareholders of the Gradison Funds, at a special shareholder
meeting held on March 5, 1999.
For accounting purposes as a result of the reorganization, the historical
basis of assets and liabilities of the Victory Small Company Opportunity Fund
is that of the Gradison Opportunity Value Fund, and the historical basis of
assets and liabilities of the Victory Established Value Fund is that of the
Gradison Established Value Fund. The accompanying financial statements and
financial highlights of the Victory Small Company Opportunity Fund for the
year ended March 31, 1999 includes the operations of the Gradison Opportunity
Value Fund during the period April 1, 1998 through March 26, 1999. The
accompanying financial statements and financial highlights of the Victory
Established Value Fund reflects the operations of the Gradison Established
Value Fund for the year ended March 31, 1999. The following is a summary of
shares outstanding, net assets, net asset value per share and net unrealized
appreciation immediately before and after the reorganization:
Before After
Reorganization Reorganization
Gradison Victory Victory
Opportunity Special Small Company
Value Growth Opportunity
Fund Fund Fund
Class A Shares (000) -- 5,824 3,124
Class G Shares (000) -- -- 6,003
Total Shares (000) 6,003 5,824 9,127
Class A Shares (000) -- $ 63,18 $ 63,184
Class G Shares (000) -- -- 121,427
Total Net Assets (000) $121,427 $ 63,184 $184,611
Net Asset Value $ 20.23 -- --
Class A Shares -- $ 10.85 $ 20.23
Class G Shares -- -- $ 20.23
Unrealized Appreciation/
(Depreciation) (000) $ 20,262 $ (2,393) $ 17,869
Before After
Reorganization Reorganization
Gradison Victory Victory
Opportunity Special Small Company
Value Growth Opportunity
Fund Fund Fund
Class G Shares (000) -- N/A 15,233
Total Shares (000) 15,233 N/A 15,233
Class G Shares (000) -- N/A $479,568
Total Net Assets (000) $479,568 N/A $479,568
Net Asset Value $ 31.48 N/A --
Class G Shares -- N/A $ 31.48
Unrealized Appreciation/
(Depreciation) (000) $153,283 N/A $153,283
3. Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Funds in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
Securities Valuation:
Investments of the Funds are valued at their market values determined on the
basis of the latest available bid prices in the principal market (closing
sales prices if the principal market is an exchange) in which such securities
are normally traded or on the basis of valuation procedures approved by the
Board of Trustees. Short-term securities with remaining maturities of sixty
days or less are valued at amortized cost, which approximates market value.
Investments in investment companies are valued at their respective net assets
values as reported by such companies. The differences between the cost and
market values of investments held by the Funds are reflected as either
unrealized appreciation or depreciation.
Securities Transactions and Related Income:
Securities transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the accrual
basis and includes, where applicable, the pro rata amortization of premium or
accretion of discount. Dividend income is recorded on the ex-dividend date.
Gains or losses realized on sales of securities are determined by comparing
the identified cost of the security lot sold with the net sales proceeds.
Purchases (excluding securities acquired through the reorganization described
in Note 2 -- Reorganization above) and sales of securities (excluding
short-term securities) for the year ended March 31, 1999 were as follows
(amounts in thousands):
Purchases Sales
Small Company Opportunity Fund 65,668 38,195
Established Value Fund 220,242 159,072
Repurchase Agreements:
The Funds may acquire repurchase agreements from financial institutions such
as banks and broker-dealers which the Funds' investment adviser deems
creditworthy under guidelines approved by the Board of Trustees, subject to
the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price generally equals the price
paid by a Fund plus interest negotiated on the basis of current short-term
rates, which may be more or less than the rate on the underlying securities.
The seller, under a repurchase agreement, is required to maintain the value
of collateral held pursuant to the agreement at not less than the repurchase
price (including accrued interest). Securities subject to repurchase
agreements are held by the Funds' custodian or another qualified custodian or
in the Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by the Funds under the 1940 Act.
Dividends to Shareholders:
Dividends from net investment income are declared/paid
quarterly by the Funds. Distributable net realized capital gains, if any, are
declared and distributed at least annually.
The amounts of dividends from net investment income and of distributions from
net realized gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the components of net assets based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions to shareholders which exceed net investment
income and realized capital gains for financial reporting purposes but not
for tax purposes are reported as dividends in excess of net investment income
or distributions in excess of net realized gains. Dividends and distributions
which exceed net investment income and net realized gains for tax purposes,
are reported as distributions of capital.
As of March 31, 1999, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to
capital:
Undistributed
(distributions Accumulated
in excess) Net Realized
Net Investment Gain/(Loss)
Income/(loss) on Investments
Established Value Fund $5,016 $450
Federal Income Taxes:
It is the policy of the Funds to continue to qualify as a regulated
investment company by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of net investment income and net
realized capital gains sufficient to relieve it from all, or substantially
all, federal income taxes.
Other:
Expenses that are directly related to one of the Funds are charged directly
to that Fund. Other operating expenses of the Funds are prorated on the basis
of relative net assets or other appropriate basis. Fees paid under the Fund's
shareholder servicing or distribution plans are borne by the specific class
of shares to which they apply.
4. Related Party Transactions:
As of the Effective Dates of the Reorganization, investment advisory services
are provided to the Funds by Key Asset Management Inc. ("the Adviser"), a
wholly owned subsidiary of KeyCorp. Under the terms of the investment
advisory agreements, the Adviser is entitled to receive fees computed daily
and paid monthly based upon each Fund's average daily net assets, at the
annual rate of .65% on the first $100 million, .55% on the next $100 million
and .45% on any amounts in excess of $200 million. KeyTrust Company of Ohio,
serving as custodian for the Funds as of the Effective Dates of the
Reorganization, receives custodian fees in addition to reimbursement of
actual out-of-pocket expenses incurred.
As of the Effective Dates of the Reorganization, KeyBank National Association
("Key") and its affiliated brokerage and banking companies also serve as
Shareholder Servicing Agent for the Funds. As such, Key and its affiliates
provide support services to their clients who are shareholders, which may
include establishing and maintaining accounts and records, processing
dividend and distribution payments, providing account information, assisting
in processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and
addresses. For providing such services, Key and its affiliates may receive a
fee of up to 0.25% of the average daily net assets of the Class A shares of
the Small Company Opportunity Fund.
As of the Effective Dates of the Reorganization, BISYS Fund Services (the
"Administrator" or the "Distributor," as applicable), an indirect,
wholly-owned subsidiary of The BISYS Group, Inc. ("BISYS") serves as the
administrator and distributor to the Funds. Under the terms of the
administration agreement the Administrator's fee is computed at the annual
rate of 0.15% of each Fund's average daily net assets up to $300 million,
0.12% of each Fund's average daily net assets between $300 million and $600
million and 0.10% of each Fund's average daily net assets greater than $600
million. Under a Sub-Administration agreement, BISYS pays the Adviser a fee
of up to 0.05% of each Fund's average daily net assets to perform some of the
administrative duties for the Funds. Pursuant to the Trust's 12b-1 Plan, the
Distributor may receive a monthly service fee at an annual rate of 0.25% of
the average daily net assets of the Class G shares of the Funds. The service
fee is paid to securities broker dealers or other financial intermediaries
for providing personal services to shareholders of the Funds, including
responding to inquiries, providing information to shareholders about their
Fund accounts, establishing and maintaining accounts and records, processing
dividend and distribution payments, arranging for bank wires, assisting in
transactions, and changing account information. The Distributor may also
receive a fee for general distribution services and for its assistance in
selling Class G shares of the Funds. This fee is computed and paid at an
annual rate of 0.25% of the average daily net assets of the Class G shares of
the Funds. In addition, the Distributor is entitled to receive commissions on
sales of Class A shares of the Small Company Opportunity Fund. Effective
March 1, 1999, BISYS also serves the Funds as Mutual Fund Accountant and
receives a fee for these services under the terms of a Fund Accounting
Agreement.
Certain officers of the Trust are affiliated with BISYS. Such officers
receive no direct payments or fees from the Funds for serving as officers of
the Trust.
Fees may be voluntarily reduced or reimbursed to assist the Funds in
maintaining competitive expense ratios. The Adviser has agreed to waive its
management fee or to reimburse expenses, as allowed by law, to the extent
necessary to maintain the net operating expenses of the Class G shares of the
Small Company Opportunity Fund and the Established Value Fund at a maximum of
1.30% and 1.10%, respectively, until at least April 1, 2001. Further, the
Adviser has agreed to waive its management fee for Class A shares of the
Small Company Opportunity Fund to the same extent that the fee is waived for
Class G shares of that Fund until at least April 1, 2001.
Investment Administration
Advisory Fees Fees
Percentage
of Average Voluntary Voluntary
Daily Fee Fee
Net Assets Reductions Reductions
(000) (000)
Small Company Opportunity Fund 0.62% $2 $1
Established Value Fund 0.51% -- --
Prior to the Effective Dates of the Reorganization, investment advisory
services were provided by McDonald & Company Securities, Inc. ("McDonald"),
pursuant to an investment advisory agreement between the Gradison Funds and
McDonald under substantially the same terms as the Fund's investment advisory
agreement described above. Transfer agent services, including dividend
disbursing, fund accounting services and administrative services were
provided by McDonald prior to the Effective Dates of the Reorganization,
pursuant to the terms of a Transfer Agency, Accounting Services and
Administrative Services agreement between the Gradison Funds and McDonald.
Under the terms of that agreement, the Gradison Funds paid McDonald a monthly
fee for transfer agent and administrative services at an annual rate of
$18.50 per shareholder non-zero balance account and $5.00 per closed
shareholder account, as defined, plus out-of-pocket costs for statement
paper, statement and reply envelopes and reply postage. The Gradison Funds
paid fund accounting fees to McDonald under substantially the same terms
as the Funds. Distribution fees, prior to the Effective Dates of the
Reorganization, were paid by the Gradison Funds to McDonald pursuant to an
agreement under substantially the same terms as the Fund's agreement.
Prior to the Effective Dates of the Reorganization, officers of the Gradison
Funds were also officers of McDonald.
5. Capital Share Transactions:
Transactions in capital shares were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Established Value Fund Small Company Opportunity Fund
Year Year Year Year
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Capital Transactions:
Class A Shares:
Proceeds from shares issued -- -- $ 71,034 --
Dividends reinvested -- -- -- --
Cost of shares redeemed -- -- (609) --
Total -- -- $ 70,425 --
Class G Shares:
Proceeds from shares issued $ 315,787 $ 177,661 $ 163,313 $ 97,739
Dividends reinvested 34,887 46,071 7,587 19,731
Cost of shares redeemed (394,935) (167,135) (174,974) (84,922)
Total $ (44,261) $ 56,597 $ (4,074) $ 32,548
Share Transactions:
Class A Shares:
Issued -- -- 3,150 --
Reinvested -- -- -- --
Redeemed -- -- (30) --
Total -- -- 3,120 --
Class G Shares:
Issued 10,251 5,537 6,918 3,748
Reinvested 1,130 1,494 305 797
Redeemed (12,812) (5,225) (7,449) (3,273)
Total (1,431) 1,806 (226) 1,272
</TABLE>
6. Federal Income Tax Information (Unaudited):
For the Small Company Opportunity Fund, distributions of net realized gains
reflected on the accompanying statement of changes in net assets for the year
ended March 31, 1999, includes $5,964,000 of long-term capital gains paid to
shareholders of the Gradison Opportunity Value Fund prior to the Effective
Date of the Reorganization. An amount equivalent to 62.96% of the dividends
from net investment income reflected on the accompanying statement of changes
in net assets of the Small Company Opportunity Fund for the year ended March
31, 1999 qualified for the dividends received deduction available to certain
corporate shareholders of the Gradison Opportunity Value Fund.
For the Established Value Fund, the entire distribution of net realized gains
reflected on the accompanying statement of changes in net assets represents
long-term capital gains paid to shareholders of the Gradison Established
Value Fund prior to the Effective Date of the Reorganization. An amount
equivalent to 93.72% of the dividends from net investment income reflected on
the accompanying statement of changes in net assets of the Established Value
Fund for the year ended March 31, 1999 qualified for the dividends received
deduction available to certain corporate shareholders of the Gradison
Established Value Fund.
As of October 31, 1998, the most recent fiscal year end of the Small Company
Opportunity Fund for Federal income tax purposes, that Fund had capital loss
carryforwards totaling $9,811,000, expiring in 2006, available to offset
future capital gains. The fiscal year end of the Established Value Fund for
federal income tax purposes is March 31, 1999. The Established Value Fund had
no capital loss carryforwards as of that date.
7. Voting Results of a Special Meeting of the Gradison Fund Shareholders
(Unaudited):
A Special Meeting of Shareholders of the Gradison Funds was held on March 5,
1999. At the meeting, shareholders voted on the following matters with the
following results as indicated below:
Proposal 1
To approve an Agreement and Plan of Reorganization and Termination pursuant
to which the Gradison Opportunity Value Fund and the Gradison Established
Value Fund will transfer all of its assets and liabilities solely in exchange
(the "Exchange") for Class G Shares of the Victory Small Company Opportunity
Fund and the Victory Established Value Fund, respectively. The Gradison
Opportunity Value Fund will distribute Class G shares of the Victory Small
Company Opportunity Fund received in the Exchange to its shareholders in an
amount equal in net asset value to the shares of the Gradison Opportunity
Value Fund held by such shareholders as of the date of the exchange, after
which the Gradison Opportunity Value Fund will be terminated. The Gradison
Established Value Fund will distribute Class G shares of the Victory
Established Value Fund received in the exchange to its shareholders in an
amount equal in net asset value to the shares of the Gradison Established
Value Fund held by such shareholders as of the date of the exchange, after
which the Gradison Established Value Fund will be terminated.
For Against Abstain
Gradison Opportunity Value Fund 3,401,280 146,661 165,906
Gradison Established Value Fund 9,150,642 220,771 392,960
Proposal 2
To approve a new Investment Advisory Agreement between the Gradison Growth
Trust, on behalf of each of the Gradison Funds, and McDonald Investments,
Inc. because the merger of McDonald's corporate parent with KeyCorp caused
the previous agreement to terminate.
For Against Abstain
Gradison Opportunity Value Fund 3,384,334 156,140 166,780
Gradison Established Value Fund 9,013,177 209,306 393,279
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
(For a Share Outstanding Throughout Each Period)
<TABLE>
<CAPTION>
Established Value Fund
11 Months
Year Ended Year Ended Year Ended Year Ended Ended Year Ended
March 31, March 31, March 31, March 31, March 31, April 30,
1999<F1> 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 33.94 $ 28.83 $ 27.57 $ 23.38 $ 22.52 $ 21.38
Investment Activities
Net investment income 0.29 0.46 0.44 0.44 0.38 0.26
Net realized and unrealized
gains (losses) from investments (0.71) 7.70 3.62 5.19 1.52 2.10
Total from
Investment Activities (0.42) 8.16 4.06 5.63 1.90 2.36
Distributions
Net investment income (0.30) (0.48) (0.45) (0.43) (0.37) (0.22)
Net realized gains (1.88) (2.57) (2.35) (1.01) (0.66) (1.00)
Total Distributions (2.18) (3.05) (2.80) (1.44) (1.03) (1.22)
Net Asset Value, End of Period $ 31.34 $ 33.94 $ 28.83 $ 27.57 $ 23.39 $ 22.52
Total Return (1.01)% 29.67% 15.14% 24.84% 8.85%<F3> 11.30%
Ratios/Supplementary Data:
Net Assets, End of Period (000) $478,984 $567,255 $429,726 $366,417 $277,370 $253,292
Ratio of expenses to average
net assets 1.09% 1.10% 1.12% 1.15% 1.20%<F2> 1.22%
Ratio of net investment income
to average net assets 0.92% 1.44% 1.57% 1.70% 1.87%<F2> 1.15%
Portfolio turnover rate 37% 20% 31% 18% 24% 38%
<FN>
<F1> Effective 4/1/99 the Gradison Established Value Fund became the Victory
Established Value Fund. Financial highlights prior to 4/1/99 represent the
Gradison Established Value Fund.
<F2> Annualized.
<F3> Not annualized.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
THE VICTORY PORTFOLIOS Financial Highlights
(For a Share Outstanding Throughout Each Period)
<TABLE>
<CAPTION>
Small Company Opportunity Fund
Class A
Shares Class G Shares
March 26, 11 Months
1999 to Year Ended Year Ended Year Ended Year Ended Ended Year Ended
March 31, March 31, March 31, March 31, March 31, March 31, April 30,
1999<F1><F2> 1999<F2> 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 20.23 $ 27.89 $ 22.77 $ 22.26 $18.10 $18.35 $17.55
Investment Activities
Net investment income -- 0.10 0.23 0.20 0.19 0.13 0.08
Net realized and
unrealized gains
(losses) from investments 0.48 (6.06) 8.72 2.51 4.73 0.18 1.59
Total from
Investment Activities 0.48 (5.96) 8.95 2.71 4.92 0.31 1.67
Distributions
Net investment income -- (0.14) (0.27) (0.17) (0.18) (0.12) (0.07)
Net realized gains -- (1.08) (3.56) (2.04) (0.58) (0.44) (0.80)
Total Distributions -- (1.22) (3.83) (2.21) (0.76) (0.56) (0.87)
Net Asset Value, End of Period $ 20.71 $ 20.71 $ 27.89 $ 22.77 $22.26 $18.10 $18.35
Total Return
(excludes sales charge) 2.37%<F4> (22.08)% 42.02% 12.46% 28.00% 1.75%<F4> 9.75%
Ratios/Supplementary Data:
Net Assets, End of Period (000) $64,587 $125,761 $175,684 $114,451 $ 103 $ 85 $ 83
Ratio of expenses to
average net assets 0.98%<F5> 1.30%<F2> 1.31% 1.36% 1.41% 1.37%<F5> 1.38%
Ratio of net investment income
to average net assets 1.50%<F5> 0.41% 0.86% 0.90% 0.95% 0.84%<F5> 0.47%
Ratio of expenses to
average net assets 1.19%<F3><F5> 1.30%<F3> -- -- -- -- --
Ratio of net investment income
to average net assets 1.29%<F3><F5> 0.41%<F3> -- -- -- -- --
Portfolio turnover rate 30% 30% 42% 35% 24% 32% 40%
<FN>
<F1> Period from commencement of operations.
<F2> Effective March 26, 1999, the Gradison Opportunity Value Fund merged into the
Victory Special Growth Fund.Concurrent with the merger the Fund was renamed
Victory Small Company Opportunity Fund.Financial highlights prior to March 26,
1999 represent the Gradison Opportunity Value Fund.
<F3> Effective March 26, 1999, the Adviser agreed to waive its management fee
or to reimburse expenses, as allowed by law, to the extent necessary to
maintain the net operating expenses of the Class G shares of the Fund at
a maximum of 1.30% until at least April 1, 2001. The Adviser has also
agreed to waive its management fee for Class A shares to the same extent
the fee is waived for Class G shares until at least April 1, 2001.
<F3> Not annualized.
<F4> Annualized.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
of the Established Value Fund and the
Victory Small Company Opportunity Fund:
We have audited the accompanying statements of assets and liabilities of the
Established Value Fund and the Victory Small Company Opportunity Fund,
including the portfolios of investments, as of March 31, 1999, and the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years then ended and the financial
highlights for the periods indicated thereon. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of March 31, 1999, by correspondence with custodians and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of
the Established Value Fund and the Victory Small Company Opportunity Fund as
of March 31, 1999, the results of their operations for the year then ended,
the changes in their net assets for each of the two years then ended, and the
financial highlights for the periods indicated thereon, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
April 28, 1999
<PAGE>
The Victory Funds
127 Public Square
OH-01-27-1612
Cleveland, Ohio 44114
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
(LOGO) (R)
Victory Funds
Call Victory at: Or Call Gradison McDonald at:
800-539-FUND (800-539-3863) 800-869-5999 or 513-579-5999
1VF-EVSC-AR 3/99
