As filed with the Securities and Exchange Commission on January 26, 1999
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. 45 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 46
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:
Ellen F. Stoutamire, Esq. Carl Frischling, Esq.
BISYS Fund Services Kramer Levin Naftalis & Frankel LLP
3435 Stelzer Road 919 Third Avenue
Columbus, Ohio 43219 New York, New York 10022
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after this
registration statement becomes effective.
It is proposed that this filing will become effective:
<TABLE>
<CAPTION>
<S> <C>
|X| Immediately upon filing pursuant to paragraph (b) |_| on _____, 1998 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1) |_| on (date) pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2) |_| on (date) pursuant to paragraph (a)(2) of rule 485.
</TABLE>
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
CROSS-REFERENCE SHEET
THE VICTORY PORTFOLIOS
(Pursuant to Rule 404 showing location in the prospectus for
the Class G shares of the Fund for Income, Ohio Municipal Bond Fund, Diversified
Stock Fund, Special Growth Fund (to be renamed the "Small Company Opportunity
Fund") and the International Growth Fund, each a series of The Victory
Portfolios, of the responses to the Items in Part A and location in the
Statement of Additional Information for The Victory Portfolios of the responses
to the Items in Part B of Form N-1A).
Part A
------
Form N-1A,
Item Number Prospectus Caption
----------- ------------------
1(a) Front Cover Page
(b) Back Cover Page
2(a) Risk/Return Summary - Investment Objective
(b) Risk/Return Summary - Principal Investment Strategies
(c) Risk/Return Summary - Principal Risks
3 Risk/Return Summary - Fund Expenses
4(a) Risk/Return Summary - Investment Objective
(b) Risk/Return Summary - Principal Investment Strategies
(c) Risk Factors
5(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
6(a) Organization and Management of the Funds
(b) Not Applicable
7(a) Share Price
(b) How to Buy Shares
(c) How to Sell Shares
(d) Dividends, Distributions and Taxes
(e) Important Information about Taxes
(f) Not Applicable
8(a) Not Applicable
(b) Organization and Management of the Funds - Distribution
and Service Plan
(c) Not Applicable
9 Financial Highlights
<PAGE>
Part B
------
Form N-1A,
Item No. Statement of Additional Information Caption
-------- -------------------------------------------
10(a) Front Cover Page
(b) Table of Contents
11(a) Additional Information - Description of Shares
(b) Not Applicable
12(a) Statement of Additional Information
(b) Instruments in Which the Funds Can Invest
(c) Investment Policies and Limitations
(d) Temporary Defensive Measures - Short-Term Obligations
(e) Advisory and Other Contracts -- Portfolio Turnover
13(a) Trustees and Officers - Board of Trustees
(b) Trustees and Officers - Board of Trustees; Officers
(c) Trustees and Officers - Board of Trustees
(d) Trustees and Officers - Board of Trustees
(e) Trustees and Officers - Officers
14(a) Additional Information
(b) Additional Information
(c) Trustees and Officers - Officers
15(a) Advisory and Other Contracts - Investment Adviser
(b) Advisory and Other Contracts - Distributor
(c) Advisory and Other Contracts - Investment Adviser
(d) Transfer Agent; Other Servicing Plans; Distribution and
Service Plan; Fund Accountant; Legal Counsel
(e) Not Applicable
(f) Additional Purchase, Exchange, and Redemption
Information - Dealer Reallowances
(g) Distribution Plan
(h) Administrator; Transfer Agent; Custodian; Independent
Accountants; Legal Counsel
16(a) Portfolio Transactions
(b) Portfolio Transactions
(c) Portfolio Transactions
(d) Portfolio Transactions
<PAGE>
(e) Not Applicable
17(a) Additional Information - Description of Shares
(b) Not Applicable
18(a) Additional Purchase, Exchange, and Redemption
Information; Purchasing Shares
(b) Not Applicable
(c) Additional Purchase, Exchange, and Redemption
Information; Purchasing Shares
(d) Additional Purchase, Exchange, and Redemption
Information
19(a) Taxes
(b) Taxes
20(a) Distributor
(b) Not Applicable
(c) Not Applicable
21(a) Performance of the Money Market Funds
(b) Performance of the Non-Money Market Funds
22(a) Independent Accountants
(b) Independent Accountants
(c) Not Applicable
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
<PAGE>
<PAGE>
[LOGO]
VICTORY FUNDS
PROSPECTUS
Class G Shares
FUND FOR INCOME
OHIO MUNICIPAL BOND FUND
DIVERSIFIED STOCK FUND
SMALL COMPANY OPPORTUNITY FUND
INTERNATIONAL GROWTH FUND
Call Gradison-McDonald
513-527-5700 or 800-869-5999
Or Call Victory at:
800-539-FUND (800-539-3863)
As with all mutual funds, the Securities and Exchange Commission has not
approved any Fund's securities or determined whether this Prospectus is
accurate or complete. Anyone who tells you otherwise is committing a crime.
January 26, 1999
<PAGE>
TABLE OF CONTENTS
Introduction 2
RISK/RETURN SUMMARY FOR EACH OF THE FUNDS
AN ANALYSIS WHICH INCLUDES THE OBJECTIVE, STRATEGIES,
RISKS, PERFORMANCE AND EXPENSES OF EACH FUND
Fund for Income 4
Ohio Municipal Bond Fund 6
Diversified Stock Fund 8
Small Company Opportunity Fund 10
International Growth Fund 12
Risk Factors 14
Share Price 18
Dividends, Distributions, and Taxes 18
INVESTING WITH VICTORY 21
- How to Buy Shares 21
- How to Exchange Shares 24
- How to Sell Shares 25
Organization and
Management of the Funds 27
Additional Information 31
Other Securities and
Investment Practices 32
Financial Highlights 34
KEY TO
FUND INFORMATION
[GRAPHIC]
OBJECTIVE AND STRATEGY
The goals and the strategy that a Fund plans to use to pursue its investment
objective.
[GRAPHIC]
RISK FACTORS
The risks you may assume as an investor in a Fund.
[GRAPHIC]
PERFORMANCE
A summary of the historical performance of a Fund in comparison to an unmanaged
index.
[GRAPHIC]
EXPENSES
The costs you will pay, directly or indirectly, as an investor in a Fund,
including sales charges and ongoing expenses.
<PAGE>
THE VICTORY FUNDS
PROSPECTUS FOR:
FUND FOR INCOME
OHIO MUNICIPAL BOND FUND
DIVERSIFIED STOCK FUND
SMALL COMPANY
OPPORTUNITY FUND
INTERNATIONAL
GROWTH FUND
Gradison-McDonald
513-579-5700 or
800-869-5999
Victory
800-539-FUND
(800-539-3863)
CLASS G SHARES
THIS PROSPECTUS EXPLAINS THE OBJECTIVES, POLICIES, RISKS, PERFORMANCE,
STRATEGIES, AND EXPENSES OF THE G SHARES OF THE ABOVE FIVE VICTORY FUNDS (THE
FUNDS). AT A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON OR ABOUT MARCH 5,
1999, OR ANY SUBSEQUENT ADJOURNMENT, SHAREHOLDERS OF THE GRADISON FUNDS ARE
BEING ASKED TO VOTE TO REORGANIZE THE FOLLOWING GRADISON FUNDS INTO CLASS G
SHARES OF COMPARABLE VICTORY FUNDS AS FOLLOWS:
GRADISON GOVERNMENT INCOME FUND VICTORY FUND FOR INCOME
GRADISON OHIO TAX-FREE INCOME FUND VICTORY OHIO MUNICIPAL BOND FUND
GRADISON GROWTH & INCOME FUND VICTORY DIVERSIFIED STOCK FUND
GRADISON OPPORTUNITY VALUE FUND VICTORY SPECIAL GROWTH FUND
(WILL CHANGE ITS NAME TO "SMALL COMPANY
OPPORTUNITY FUND"
AFTER THE REORGANIZATION)
GRADISON INTERNATIONAL FUND VICTORY INTERNATIONAL GROWTH FUND
MCDONALD INVESTMENTS INC. (GRADISON-MCDONALD), FORMERLY KNOWN AS MCDONALD &
COMPANY SECURITIES INC., IS THE INVESTMENT ADVISER OF THE GRADISON FUNDS. SINCE
THE MERGER OF THE CORPORATE PARENT OF GRADISON-MCDONALD WITH KEYCORP,
GRADISON-MCDONALD HAS BEEN A SUBSIDIARY OF KEYCORP. IT IS ANTICIPATED THAT
GRADISON-MCDONALD'S INVESTMENT ADVISORY ACTIVITIES WILL BE ASSUMED BY KEY ASSET
MANAGEMENT INC.
IF SHAREHOLDERS OF YOUR GRADISON FUND APPROVE THE REORGANIZATION, YOUR GRADISON
FUND SHARES WILL BE EXCHANGED FOR CLASS G SHARES OF A CORRESPONDING VICTORY
FUND. EACH OF YOUR CLASS G SHARE HOLDINGS WILL HAVE A TOTAL MARKET VALUE EQUAL
TO THE MARKET VALUE OF THE SHARES OF GRADISON FUNDS YOU PREVIOUSLY OWNED ON THE
CLOSING DATE OF THE REORGANIZATION. YOU WILL NOT HAVE ANY FEDERAL INCOME TAX
LIABILITY SOLELY AS A RESULT OF THE REORGANIZATION. KEY ASSET MANAGEMENT INC.,
WHICH WE WILL REFER TO AS THE "ADVISER" OR "KAM" THROUGHOUT THIS PROSPECTUS,
WILL MANAGE THE FUNDS. PLEASE READ THIS PROSPECTUS BEFORE INVESTING IN THE FUNDS
AND KEEP IT FOR FUTURE REFERENCE.
Shares of the Funds are:
- - Not insured by the FDIC;
- - Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
- - Subject to possible investment risks, including possible loss of the
principal amount invested
[GRAPHIC] [GRAPHIC]
January 26, 1999
<PAGE>
[GRAPHIC] INVESTMENT OBJECTIVE AND STRATEGY
[GRAPHIC] OBJECTIVE
The FUND FOR INCOME seeks to provide a high level of current income consistent
with preservation of shareholders' capital.
The OHIO MUNICIPAL BOND FUND seeks to provide a high level of current interest
income which is exempt from both federal income tax and Ohio personal income
tax.
The DIVERSIFIED STOCK FUND seeks to provide long-term growth of capital.
The SMALL COMPANY OPPORTUNITY FUND seeks to provide capital appreciation.
The INTERNATIONAL GROWTH FUND seeks to provide capital growth consistent with
reasonable investment risk.
[GRAPHIC] STRATEGY
The Fund for Income and Ohio Municipal Bond Fund pursue their investment
objectives by investing primarily in debt securities. The Diversified Stock
Fund, Small Company Opportunity Fund, and International Growth Fund pursue their
investment objectives by investing primarily in equity securities. However, each
Fund has unique investment strategies and its own risk/reward profile. Please
review the "Risk/Return Summary" and "Other Securities and Investment Practices"
for an overview of each Fund.
[GRAPHIC] RISK FACTORS
AN INVESTMENT IN A FUND IS NOT A COMPLETE INVESTMENT PROGRAM.
The following risk factors distinguish these Funds from each other and
other funds with different investment policies and strategies. Certain Funds
also may share many of the same risk factors.
- Since the FUND FOR INCOME invests primarily in debt securities, it is
subject to interest rate, inflation and credit risks.
- The OHIO MUNICIPAL BOND FUND generally limits its investments to a
single state. Therefore, an investment in the Ohio Municipal Bond Fund
may involve economic, political, or credit risks specific to the state
of Ohio. It is subject to interest rate, inflation, and credit risks
also.
- The DIVERSIFIED STOCK FUND invests primarily in equity securities. The
value of equity securities may fluctuate in response to the activities
of an individual company, or in response to general market or economic
conditions.
- The SMALL COMPANY OPPORTUNITY FUND invests primarily in equity
securities of smaller companies. Smaller, less seasoned companies may
be subject to greater business risks than larger, established
companies.
- The INTERNATIONAL GROWTH FUND invests primarily in foreign equity
securities. An investment in a fund holding foreign securities may be
subject to more economic, currency, or political risks than an
investment in a domestic equity fund.
There are other potential risks discussed in "Risk/Return Summary"
and "Risk Factors."
2
<PAGE>
WHO MAY WANT TO INVEST IN THE FUNDS
- Investors who want a diversified portfolio
- Investors willing to accept the risk of price and dividend
fluctuations
- Investors willing to accept higher short-term risk along with higher
potential long-term returns
- Long-term investors with a particular goal, like saving for retirement
or a child's education
- - WHO MAY WANT TO INVEST IN THE:
FUND FOR INCOME: Investors seeking a high level of income who want a portfolio
of investment grade debt securities.
OHIO MUNICIPAL BOND FUND: Investors in higher tax brackets seeking income exempt
from federal income tax and Ohio personal income tax.
DIVERSIFIED STOCK FUND: Investors who want potential growth over time.
SMALL COMPANY OPPORTUNITY FUND: Investors who are comfortable with assuming the
added risks associated with small company stocks in return for the possibility
of long-term rewards.
INTERNATIONAL GROWTH FUND: Investors seeking exposure to international markets.
[GRAPHIC] FEES AND EXPENSES
The Fund for Income, the Ohio Municipal Bond Fund, and the Small Company
Opportunity Fund offer Class A and Class G Shares. The Diversified Stock Fund
and the International Growth Fund offer Class A, Class B and Class G Shares.
Class A and Class B Shares of each of the Funds are offered by a separate
prospectus. If shareholders approve the reorganization of the Gradison Funds and
the Victory Funds, you will own Class G Shares. As such, you will not have to
pay a sales charge for buying these shares. You will incur expenses for
management, administration, and distribution, all of which are included in the
Funds' expense ratios. Please refer to "Investing with Victory" for more
information.
THE FOLLOWING PAGES PROVIDE YOU WITH AN OVERVIEW OF EACH OF THE FUNDS. PLEASE
LOOK AT THE OBJECTIVE, POLICIES, STRATEGIES, AND RISKS TO DETERMINE WHICH FUND
WILL SUIT YOUR RISK TOLERANCE AND INVESTMENT NEEDS. YOU ALSO SHOULD REVIEW
"OTHER SECURITIES AND INVESTMENT PRACTICES" FOR ADDITIONAL INFORMATION ABOUT THE
INDIVIDUAL SECURITIES IN WHICH THE FUNDS CAN INVEST.
3
<PAGE>
[GRAPHIC] RISK/RETURN SUMMARY
THE FUND FOR INCOME
[GRAPHIC] INVESTMENT OBJECTIVE
The Fund for Income seeks to provide a high level of current income consistent
with preservation of shareholders' capital.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES
The Fund for Income pursues its investment objective by investing primarily in
securities issued by the U.S. Government and its agencies or instrumentalities.
The Fund for Income currently invests only in securities that are guaranteed by
the full faith and credit of the U.S. Government, and repurchase agreements
collateralized by such securities.
Under normal market conditions, the Fund for Income primarily invests in:
- Mortgage-backed obligations and collateralized mortgage obligations
(CMOs) issued by the Government National Mortgage Association (GNMA).
The Fund for Income will invest at least 65% of its total assets in
GNMA securities.
- Obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities with maturities generally in the range
of 2 to 30 years
The Fund for Income also may invest in repurchase agreements collateralized
by the securities described above.
The Fund for Income may, but is not required to, use derivative
instruments, including
o Writing covered call options
o Engaging in closing options transactions
Please see the definition of a derivative instrument in the "Other
Securities and Investment Practices" section at the end of this Prospectus.
[GRAPHIC] PRINCIPAL RISKS
The Fund for Income is subject to the following principal risks, more fully
described in "Risk Factors." The Fund for Income's net asset value, yield and/or
total return may be adversely affected if any of the following occurs:
- The market value of securities acquired by the Fund for Income
declines
- A particular strategy does not produce the intended result or the
portfolio manager does not execute the strategy effectively
- Interest rates rise
- An issuer's credit quality is downgraded
- The Fund for Income must reinvest interest or sale proceeds at lower
rates
- The rate of inflation increases
- The average life of a mortgage-related security is shortened or
lengthened
- A security on which the Fund for Income has written a call option
increases in value and is called away from the Fund.
4
<PAGE>
[GRAPHIC] INVESTMENT PERFORMANCE
THE FUND FOR INCOME
The chart and table shown below give an indication of the risks of investing in
the Fund for Income by showing changes in the Fund's performance from year to
year for the last ten years. The table below shows the Fund's average annual
returns for one year, five years and ten years. The figures shown assume
reinvestment of dividends and distributions. The performance information below
reflects the performance of Gradison Government Income Fund. At the time of the
reorganization, the Fund for Income will assume the performance and accounting
history of the Gradison Government Income Fund.
[GRAPH]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12.75% 8.79% 14.08% 6.29% 7.52% -3.69% 17.20% 3.51% 8.36% 7.37%
</TABLE>
PAST PERFORMANCE DOES NOT INDICATE FUTURE RESULTS.
During the period shown in the bar chart, the highest return for a quarter was
5.57% (quarter ending June 30, 1989) and the lowest return for a quarter was
- -3.05% (quarter ending March 31, 1994).
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURNS (FOR PAST PAST PAST
THE PERIODS ENDED ONE YEAR 5 YEARS 10 YEARS
DECEMBER 31, 1998)
- ------------------------------------------------------------
<S> <C> <C> <C>
Gradison Government
Income Fund 7.37% 6.33% 8.08%
- ------------------------------------------------------------
Lehman
GNMA Index* 6.91% 7.33% 9.24%
</TABLE>
*The Lehman GNMA Index is a broad-based unmanaged index that represents the
general performance of GNMA securities.
[GRAPHIC] FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Fund for Income.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(PAID DIRECTLY FROM YOUR INVESTMENT)* CLASS G
- ---------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases NONE
(AS A PERCENTAGE OF OFFERING PRICE)
- ---------------------------------------------------------
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
- ---------------------------------------------------------
Deferred Sales Charge NONE
- ---------------------------------------------------------
Redemption Fees NONE
- ---------------------------------------------------------
Exchange Fees NONE
</TABLE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent other than Gradison McDonald Investments
(Gradison-McDonald).
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Fund for Income.
THE FUND FOR INCOME PAYS THESE EXPENSES FROM ITS ASSETS.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS G
- ---------------------------------------------------------
<S> <C>
Management Fees 0.50%
- ---------------------------------------------------------
Distribution (12b-1) Fees 0.25%
- ---------------------------------------------------------
Other Expenses 0.30%
- ---------------------------------------------------------
Total Fund
Operating Expenses 1.05%
- ---------------------------------------------------------
Fee Waiver (0.16%)
-------
- ---------------------------------------------------------
Net Expenses(1) 0.89%
-----
-----
</TABLE>
(1)The expenses shown are estimated based on historical expenses of the Fund
adjusted to reflect anticipated expenses. The Adviser has agreed to waive its
management fee or to reimburse expenses, as allowed by law, to maintain the
net total operating expenses at a maximum of 0.89% until at least April 1, 2001.
EXAMPLE
The following Example is designed to help you compare the cost of investing in
the Fund for Income with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for Income for the time
periods shown and then redeem all of your shares at the end of those periods.
The Example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same.* Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------
<S> <C> <C> <C> <C>
Class G $91 $301 $547 $1253
</TABLE>
*This Example assumes that Total Annual Fund Operating Expenses will equal 0.89%
until April 1, 2001 and will equal 1.05% thereafter.
5
<PAGE>
[GRAPHIC] RISK/RETURN SUMMARY
OHIO MUNICIPAL BOND FUND
[GRAPHIC] INVESTMENT OBJECTIVE
The Ohio Municipal Bond Fund seeks to provide a high level of current interest
income which is exempt from both federal income tax and Ohio personal income
tax.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES
The Ohio 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 Ohio Municipal Bond Fund expects to invest at least
65% of its total assets in bonds that pay interest that is also exempt from Ohio
state income tax.
Under normal market conditions, the Ohio Municipal Bond Fund primarily
invests in:
- Municipal securities with fixed, variable, or floating interest rates
- Zero coupon, tax, revenue, and bond anticipation notes
- Tax-exempt commercial paper
Important characteristics of the Ohio Municipal Bond Fund's investments:
- QUALITY: Municipal securities rated A or above at the time of purchase
by Standard & Poor's, Fitch Investors Service, Moody's Investors
Service, Inc., or another NRSRO*, or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the
Statement of Additional Information (SAI).
- MATURITY: The dollar-weighted effective average maturity of the Ohio
Municipal Bond Fund generally will range from 5 to 15 years. Under
certain market conditions, the Portfolio Manager may go outside these
boundaries.
* An NRSRO is a nationally recognized statistical rating organization that
assigns credit ratings to securities based on the borrower's ability to meet
its obligation to make principal and interest payments.
Ohio's economic activity includes the service sector, durable goods
manufacturing, and agricultural industries. Manufacturing activity is
concentrated in cyclical industries; therefore, the Ohio economy may be more
cyclical than other states. The Ohio Municipal Bond Fund's high portfolio
turnover rate may result in higher expenses and taxable capital gain
distributions. The Fund may, but is not required to, use derivative instruments.
Please see the definition of a derivative instrument in the "Other Securities
and Investment Practices" section at the end of this Prospectus.
[GRAPHIC] PRINCIPAL RISKS
The Ohio Municipal Bond Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Ohio Municipal Bond Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
- Economic or political events take place in Ohio which make the market
value of Ohio obligations go down
- The market value of securities acquired by the Ohio Municipal Bond
Fund declines
- A particular strategy does not produce the intended result or the
portfolio manager does not execute the strategy effectively
- Interest rates rise,
- An issuer's credit quality is downgraded
- The Ohio Municipal Bond Fund must reinvest interest or sale proceeds
at lower rates
- The rate of inflation increases
- The average life of a mortgage-related security is shortened or
lengthened
- Hedges created by using derivative instruments, including futures or
options contracts do not respond to economic or market conditions as
expected.
The Ohio Municipal Bond Fund is a non-diversified fund. As a
non-diversified fund, the Ohio Municipal Bond Fund may devote a larger portion
of its assets to the securities of a single issuer than if it were diversified.
The Ohio Municipal Bond Fund also is subject to the risks associated with
investing in municipal debt securities, including the risk that certain
investments could lose their tax-exempt status. The Ohio 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. This could make the Ohio 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 Ohio municipal securities.
6
<PAGE>
[GRAPHIC] INVESTMENT PERFORMANCE
OHIO MUNICIPAL BOND FUND
The chart and table shown below give an indication of the risks of investing in
the Ohio Municipal Bond Fund by showing changes in the Fund's performance from
year to year since the inception of the Fund. The table below shows how the
Fund's average annual returns for one year, five years and since inception
compare to the returns of a broad-based securities market index. The figures
shown assume reinvestment of dividends and distributions. The performance
information below is for Class A Shares (without the sales charge) of the Ohio
Municipal Bond Fund. Returns for Class G Shares would be substantially similar
because the shares will be invested in the same portfolio of securities. The
annual returns would differ only to the extent that each class has a different
expense ratio.
[GRAPH]
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5.12%(1) 10.75% 7.76% 12.64% -4.46% 17.72% 4.32% 7.87% 6.56%
</TABLE>
(1) Inception date 5/18/90. Return is not annualized.
PAST PERFORMANCE DOES NOT INDICATE FUTURE RESULTS.
During the period shown in the bar chart, the highest return for a quarter was
6.68% (quarter ending March 31, 1995) and the lowest return for a quarter was
- -5.07% (quarter ending December 31, 1994).
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURNS (FOR PAST PAST SINCE
THE PERIODS ENDED ONE YEAR 5 YEARS INCEPTION**
DECEMBER 31, 1998)
- -------------------------------------------------------------
<S> <C> <C> <C>
Ohio Municipal Bond
Fund -- Class A Shares 6.56% 6.16% 7.77%
- -------------------------------------------------------------
Lehman 10 Yr.
Muni Index* 6.80% 6.30% 8.48%
</TABLE>
*The Lehman Brothers 10-Year Municipal Bond Index is a broad-based unmanaged
index that represents the general performance of investment-grade municipal
bonds with maturities of 8 to 12 years.
**Reflects performance since the Fund's inception on 5/18/90.
[GRAPHIC] FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Ohio Municipal Bond Fund.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(PAID DIRECTLY FROM YOUR INVESTMENT)* CLASS G
- ---------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases NONE
(AS A PERCENTAGE OF OFFERING PRICE)
- ---------------------------------------------------------
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
- ---------------------------------------------------------
Deferred Sales Charge NONE
- ---------------------------------------------------------
Redemption Fees NONE
- ---------------------------------------------------------
Exchange Fees NONE
</TABLE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent other than Gradison-McDonald.
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Ohio Municipal
Bond Fund. THE OHIO MUNICIPAL BOND FUND PAYS THESE EXPENSES FROM ITS ASSETS.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS G
- ---------------------------------------------------------
<S> <C>
Management Fees 0.60%
- ---------------------------------------------------------
Distribution (12b-1) Fees 0.25%
- ---------------------------------------------------------
Other Expenses 0.27%
- ---------------------------------------------------------
Total Fund
Operating Expenses 1.12%
- ---------------------------------------------------------
Fee Waiver (0.21%)
-------
- ---------------------------------------------------------
Net Expenses(1) 0.91%
-----
-----
</TABLE>
(1) The expenses shown are estimated based on historical expenses of the Fund
adjusted to reflect anticipated expenses. The Adviser has agreed to waive its
management fee or to reimburse expenses, as allowed by law, to maintain the net
total operating expenses at a maximum of 0.91% until at least April 1, 2001.
EXAMPLE
The following Example is designed to help you compare the cost of investing in
the Ohio Municipal Bond Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Ohio Municipal Bond Fund for
the time periods shown and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Ohio Municipal Bond Fund's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class G $93 $313 $575 $1324
</TABLE>
*This Example assumes that Total Annual Fund Operating Expenses will equal 0.91%
until April 1, 2001 and will equal 1.12% thereafter.
7
<PAGE>
[GRAPHIC] RISK/RETURN SUMMARY
DIVERSIFIED STOCK FUND
[GRAPHIC] INVESTMENT OBJECTIVE
The Diversified Stock Fund seeks to provide long-term growth of capital.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES
The Diversified Stock Fund pursues its investment objective by investing
primarily in equity securities and securities convertible into common stocks
traded on U.S. exchanges and issued by large, established companies.
The Adviser seeks to invest in both growth and value securities. In making
investment decisions, the Adviser may consider cash flow, book value, dividend
yield, growth potential, quality of management, adequacy of revenues, earnings,
capitalization, relation to historical earnings, the value of the issuer's
underlying assets, and expected future relative earnings growth. The Adviser
will pursue investments that provide above average dividend yield or potential
for appreciation.
Under normal market conditions, the Diversified Stock Fund:
- Will invest at least 80% of its total assets in equity securities of
large, established companies and securities convertible or
exchangeable into common stock, including:
- Growth stocks, which are stocks of companies that the Adviser
believes will regularly experience earnings growth; and
- Value stocks, which are stocks that the Adviser believes are
intrinsically worth more than their market value.
- May invest up to 20% of its total assets in:
- Preferred stocks
- Investment grade corporate debt securities
- Short-term debt obligations
- U.S. Government obligations
The Diversified Stock Fund may, but is not required to, use derivative
instruments. Please see the definition of a derivative instrument in the "Other
Securities and Investment Practices" section at the end of this Prospectus.
[GRAPHIC] PRINCIPAL RISKS
The Diversified Stock Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Diversified Stock Fund's net asset value,
yield and/or total return may be adversely affected if any of the following
occurs:
- The market value of securities acquired by the Diversified Stock Fund
declines
- Growth stocks fall out of favor because the companies' earnings
growth does not meet expectations
- Value stocks fall out of favor relative to growth stocks and
other types of stocks
- A particular strategy does not produce the intended result or the
portfolio manager does not execute the strategy effectively
- A company's earnings do not increase as expected
- Interest rates rise
- An issuer's credit quality is downgraded
- The Diversified Stock Fund must reinvest interest or sale proceeds at
lower rates,
- The rate of inflation increases
- Hedges created by using derivative instruments, including futures or
options contracts, do not respond to economic or market conditions as
expected.
By itself, the Diversified Stock 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.
8
<PAGE>
[GRAPHIC] INVESTMENT PERFORMANCE
DIVERSIFIED STOCK FUND
The chart and table shown below give an indication of the risks of investing in
the Fund by showing changes in the Fund's performance from year to year since
the inception of the Fund. The table below shows how the Fund's average annual
returns for one year, five years and since inception compare to the returns of a
broad-based securities market index. The figures shown assume reinvestment of
dividends and distributions. The performance information below is for Class A
Shares (without the sales charge) of the Diversified Stock Fund. Returns for
Class G Shares would be substantially similar because the shares will be
invested in the same portfolio of securities. The annual returns would differ
only to the extent that each class has a different expense ratio.
[GRAPH]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3.81%(1) 0.57% 23.98% 9.43% 9.97% 3.96% 35.37% 24.72% 28.28% 23.15%
</TABLE>
(1) Inception date 10/20/89. Return is not annualized.
PAST PERFORMANCE DOES NOT INDICATE FUTURE RESULTS.
During the period shown in the bar chart, the highest return for a quarter was
17.60% (quarter ending December 31, 1998) and the lowest return for a quarter
was -12.43% (quarter ending September 30, 1990).
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURNS (FOR PAST PAST SINCE
THE PERIODS ENDED ONE YEAR 5 YEARS INCEPTION**
DECEMBER 31, 1998)
- -------------------------------------------------------------
<S> <C> <C> <C>
Diversified Stock
Fund -- Class A Shares 23.15% 22.62% 17.24%
- -------------------------------------------------------------
S&P 500 Index* 28.58% 24.06% 17.63%
</TABLE>
*The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-sized companies.
**Reflects performance since the Fund's inception on 10/20/89.
[GRAPHIC] FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Diversified Stock Fund.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(PAID DIRECTLY FROM YOUR INVESTMENT)* CLASS G
- ----------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases NONE
(AS A PERCENTAGE OF OFFERING PRICE)
- ----------------------------------------------------------
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
- ----------------------------------------------------------
Deferred Sales Charge NONE
- ----------------------------------------------------------
Redemption Fees NONE
- ----------------------------------------------------------
Exchange Fees NONE
</TABLE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent other than Gradison-McDonald.
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Diversified Stock
Fund. THE DIVERSIFIED STOCK FUND PAYS THESE EXPENSES FROM ITS ASSETS.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS G
- ---------------------------------------------------------
<S> <C>
Management Fees 0.65%
- ---------------------------------------------------------
Distribution (12b-1) Fees 0.50%
- ---------------------------------------------------------
Other Expenses 0.37%
- ---------------------------------------------------------
Total Fund
Operating Expenses 1.52%
- ---------------------------------------------------------
Fee Waiver (0.08%)
-------
- ---------------------------------------------------------
Net Expenses(1) 1.44%
-----
-----
</TABLE>
(1)The expenses shown are estimated based on historical expenses of the Fund
adjusted to reflect anticipated expenses. The Adviser has agreed to waive its
management fee or to reimburse expenses, as allowed by law, to maintain the net
total operating expenses at a maximum of 1.44% until at least April 1, 2001.
EXAMPLE
The following Example is designed to help you compare the cost of investing in
the Diversified Stock Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods shown
and then redeem all of your shares at the end of those periods. The Example also
assumes that your investment has a 5% return each year and that the Diversified
Stock Fund's operating expenses remain the same.* Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class G $147 $464 $813 $1799
</TABLE>
*This Example assumes that Total Annual Fund Operating Expenses will equal 1.44%
until April 1, 2001 and will equal 1.52% thereafter.
9
<PAGE>
[GRAPHIC] RISK/RETURN SUMMARY
THE SMALL COMPANY OPPORTUNITY FUND
[GRAPHIC] INVESTMENT OBJECTIVE
The Small Company Opportunity Fund seeks to provide capital appreciation.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES
The Small Company Opportunity Fund invests primarily in common stocks of smaller
companies that are exhibiting the potential for high earnings growth in relation
to their price-earnings ratio. Of the 5,000 U.S. companies with the largest
market capitalizations, KAM considers those in the lower 80% to be "small
companies." Currently, the upper end of market capitalization of small companies
is approximately $1.2 billion, but this amount may increase or decrease over
time. The Adviser uses a computer model to select securities that appear
favorably priced.
Under normal market conditions, the Small Company Opportunity Fund:
- Will invest at least 80% of its total assets in equity securities of
small companies. These equity investments include:
- Common stock
- Convertible preferred stock
- Debt convertible or exchangeable into equity securities
- Securities convertible into common stock
- May invest up to 20% of its total assets in:
- Equity securities of larger companies (those with market
capitalizations in the top 20% of the 5,000 largest U.S.
companies)
- Investment-grade debt securities
- Preferred stocks
- Short-term debt obligations
- Repurchase agreements
[GRAPHIC] PRINCIPAL RISKS
The Small Company Opportunity Fund is subject to the following principal risks,
more fully described in "Risk Factors." The Small Company Opportunity Fund's net
asset value, yield and/or total return may be adversely affected if any of the
following occurs:
- The market value of securities acquired by the Small Company
Opportunity Fund declines
- Value stocks fall out of favor relative to growth stocks and
other types of stocks
- A particular strategy does not produce the intended result or the
portfolio manager does not execute the strategy effectively
- A company's earnings do not increase as expected
- Interest rates rise
- An issuer's credit quality is downgraded
- The Small Company Opportunity Fund must reinvest interest or sale
proceeds at lower rates
- The rate of inflation increases
By itself, the Small Company Opportunity 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.
10
<PAGE>
[GRAPHIC] INVESTMENT PERFORMANCE
THE SMALL COMPANY OPPORTUNITY FUND
The chart and table shown below give an indication of the risks of investing in
the Small Company Opportunity Fund by showing changes in the Fund's performance
from year to year for the last ten years. The table below shows the Small
Company Opportunity Fund's average annual returns for one year, five years and
ten years. The figures shown assume reinvestment of dividends and distributions.
The performance information below reflects the performance of Gradison
Opportunity Value Fund. At the time of the reorganization the Small Company
Opportunity Fund will assume the performance and accounting history of the
Gradison Opportunity Value Fund.
[GRAPH]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
23.13% -13.05% 35.92% 14.31% 11.07% -2.18% 26.76% 19.47% 31.18% -6.93%
</TABLE>
PAST PERFORMANCE DOES NOT INDICATE FUTURE RESULTS.
During the ten year period shown in the bar chart, the highest return for a
quarter was 20.24% (quarter ending March 31, 1991) and the lowest return for a
quarter was -19.96% (quarter ending September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURNS (FOR PAST PAST PAST
THE PERIODS ENDED ONE YEAR 5 YEARS 10 YEARS
DECEMBER 31, 1998)
- -------------------------------------------------------------
<S> <C> <C> <C>
Gradison Opportunity
Value Fund -6.93% 12.58% 12.82%
- -------------------------------------------------------------
Russell 2000 Index* -2.55% 11.87% 12.92%
</TABLE>
*The Russell 2000 Index is a broad-based unmanaged index that represents the
general performance of domestically traded common stocks of small- to mid-sized
companies.
[GRAPHIC] FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Small Company Opportunity Fund.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(PAID DIRECTLY FROM YOUR INVESTMENT)* CLASS G
- ---------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases NONE
(AS A PERCENTAGE OF OFFERING PRICE)
- ---------------------------------------------------------
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
- ---------------------------------------------------------
Deferred Sales Charge NONE
- ---------------------------------------------------------
Redemption Fees NONE
- ---------------------------------------------------------
Exchange Fees NONE
</TABLE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent other than Gradison-McDonald.
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Small Company
Opportunity Fund. THE SMALL COMPANY OPPORTUNITY FUND PAYS THESE EXPENSES FROM
ITS ASSETS.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS G
- ---------------------------------------------------------
<S> <C>
Management Fees 0.62%
- ---------------------------------------------------------
Distribution (12b-1) Fees 0.50%
- ---------------------------------------------------------
Other Expenses 0.31%
- ---------------------------------------------------------
Total Fund
Operating Expenses 1.43%
- ---------------------------------------------------------
Fee Waiver (0.13%)
-------
- ---------------------------------------------------------
Net Expenses(1) 1.30%
-----
-----
</TABLE>
(1)The expenses shown are estimated based on historical expenses of the Fund
adjusted to reflect anticipated expenses. The Adviser has agreed to waive its
management fee or to reimburse expenses, as allowed by law, to maintain the net
total operating expenses at a maximum of 1.30% until at least April 1, 2001.
EXAMPLE
The following Example is designed to help you compare the cost of investing in
the Small Company Opportunity Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the Fund for the time
periods shown and then redeem all of your shares at the end of those periods.
The Example also assumes that your investment has a 5% return each year and that
the Small Company Opportunity Fund's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class G $132 $426 $756 $1690
</TABLE>
*This Example assumes that Total Annual Fund Operating Expenses will equal 1.30%
until April 1, 2001 and will equal 1.43% thereafter.
11
<PAGE>
[GRAPHIC] RISK/RETURN SUMMARY
INTERNATIONAL GROWTH FUND
[GRAPHIC] INVESTMENT OBJECTIVE
The International Growth Fund seeks to provide capital growth consistent with
reasonable investment risk.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES
The International Growth Fund pursues its objective by investing primarily in
equity securities of foreign corporations, most of which are denominated in
foreign currencies.
The International Growth Fund will invest most of its assets in securities
of companies traded on exchanges outside of the U.S. including developed and
emerging countries. In making investment decisions, KAM and Indocam
International Investment Services, S.A., the International Growth Fund's
sub-adviser, may analyze the economies of foreign countries and the growth
potential for individual sectors and securities.
Under normal market conditions, the International Growth Fund:
- Will invest at least 65% of its total assets in:
- Securities (including "sponsored" and "unsponsored" American
Depositary Receipts) of companies that derive more than 50% of
their gross revenues from, or have more than 50% of their assets,
outside the United States.
- Securities for which the principal trading markets are located in
at least three different countries (excluding the United States).
- May invest up to 20% of its total assets in securities of companies
located in emerging countries.
- May invest up to 35% of its total assets in cash equivalents and fixed
income securities, including U.S. Government obligations.
The International Growth Fund's high portfolio turnover rate may result in
higher expenses and taxable gain distributions. The Fund may, but is not
required to, use derivative contracts. Please refer to the definition of a
derivative instrument in the "Other Securities and Investment Practices" section
at the end of this Prospectus.
[GRAPHIC] PRINCIPAL RISKS
The International Growth Fund is subject to the following principal risks,
more fully described in "Risk Factors." The International Growth Fund's net
asset value, yield and/or total return may be adversely affected if any of the
following occurs:
- Foreign securities experience more volatility than their domestic
counterparts, in part because of higher political and economic risks,
lack of reliable information, fluctuations in currency exchange rates,
and the risks that a foreign government may take over assets, restrict
the ability to exchange currency or restrict the delivery of
securities
- The prices of foreign securities issued in emerging countries
experience more volatility because the securities markets in these
countries may not be well established
- The market value of securities acquired by the International Growth
Fund declines
- A particular strategy does not produce the intended result or the
portfolio manager does not execute the strategy effectively
- Interest rates rise
- An issuer's credit quality is downgraded
- The International Growth Fund must reinvest interest or sale proceeds
at lower rates
- The rate of inflation increases
- The average life of a mortgage-related security is shortened or
lengthened
- Hedges created by using derivative instruments, including futures or
options contracts do not respond to economic or market conditions as
expected.
The International Growth Fund may be appropriate for investors who are
comfortable with assuming the added risks associated with stocks that do not pay
out significant portions of their earnings as dividends. The International
Growth Fund may be appropriate for investors who are comfortable with assuming
the added risks associated with investments in foreign countries and investments
denominated in foreign currencies. By itself, the International Growth 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 and do not require significant current income from their investments.
12
<PAGE>
[GRAPHIC] INVESTMENT PERFORMANCE
INTERNATIONAL GROWTH FUND
The chart and table shown below give an indication of the risks of investing in
the Fund by showing changes in the Fund's performance from year to year since
the inception of the Fund. The table below shows how the Fund's average annual
returns for one year, five years and since inception compare to the returns of a
broad-based securities market index. The figures shown assume reinvestment of
dividends and distributions. The performance information below is for Class A
Shares (without the sales charge) of the International Growth Fund. Returns for
Class G Shares would be substantially similar because the shares will be
invested in the same portfolio of securities. The annual returns would differ
only to the extent that each class has a different expense ratio.
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -6.56%(1) 9.75% -6.41% 35.91% 2.72% 7.71% 6.29% 2.33% 17.48%
</TABLE>
(1) Inception date 5/18/90. Return is not annualized.
PAST PERFORMANCE DOES NOT INDICATE FUTURE RESULTS.
During the period shown in the bar chart, the highest return for a quarter was
19.78% (quarter ending December 31, 1998) and the lowest return for a quarter
was -15.23% (quarter ending September 30, 1998).
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURNS (FOR PAST PAST SINCE
THE PERIODS ENDED ONE YEAR 5 YEARS INCEPTION**
DECEMBER 31, 1998)
- -------------------------------------------------------------
<S> <C> <C> <C>
International Growth
Fund -- Class A Shares 17.48% 7.17% 7.36%
- -------------------------------------------------------------
Morgan Stanley Capital International All
Country World Free ex
US Index* 14.46% 7.80% 6.30%
</TABLE>
* The Morgan Stanley Capital International All Country World Free ex US Index
is comprised of securities issued by foreign companies in developed
countries, other than the U.S., and emerging countries, and weighted by
market captializations of these companies.
** Reflects performance since the Fund's inception on 5/18/90.
[GRAPHIC] FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the International Growth Fund.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(PAID DIRECTLY FROM YOUR INVESTMENT)* CLASS G
- ---------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases NONE
(AS A PERCENTAGE OF OFFERING PRICE)
- ---------------------------------------------------------
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
- ---------------------------------------------------------
Deferred Sales Charge NONE
- ---------------------------------------------------------
Redemption Fees NONE
- ---------------------------------------------------------
Exchange Fees NONE
</TABLE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent other than Gradison-McDonald.
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the International
Growth Fund. THE INTERNATIONAL GROWTH FUND PAYS THESE EXPENSES FROM ITS ASSETS.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS G
- ---------------------------------------------------------
<S> <C>
Management Fees 1.10%
- ---------------------------------------------------------
Distribution (12b-1) Fees 0.50%
- ---------------------------------------------------------
Other Expenses 0.47%
- ---------------------------------------------------------
Total Fund
Operating Expenses 2.07%
- ---------------------------------------------------------
Fee Waiver (0.07%)
-------
- ---------------------------------------------------------
Net Expenses(1) 2.00%
-----
-----
</TABLE>
(1) The expenses shown are estimated based on historical expenses of the Fund
adjusted to reflect anticipated expenses. The Adviser has agreed to waive its
management fee or to reimburse expenses, as allowed by law, to maintain the net
total operating expenses at a maximum of 2.00% until at least April 1, 2001.
EXAMPLE
The following Example is designed to help you compare the cost of investing in
the International Growth Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the International Growth Fund for
the time periods shown and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the International Growth Fund's operating expenses remain the same.*
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------
<S> <C> <C> <C> <C>
Class G $203 $635 $1100 $2389
</TABLE>
*This Example assumes that Total Annual Fund Operating Expenses will equal 2.00%
until April 1, 2001 and will equal 2.07% thereafter.
13
<PAGE>
BY MATCHING YOUR INVESTMENT OBJECTIVE WITH AN ACCEPTABLE LEVEL OF RISK, YOU CAN
CREATE YOUR OWN CUSTOMIZED INVESTMENT PLAN.
[GRAPHIC] RISK FACTORS
This Prospectus describes all of the principal risks that you may assume as an
investor in the Funds. The "Other Securities and Investments Practices" section
in this Prospectus provides additional information on the securities mentioned
in the Risk/Return Summary for each Fund. As with any mutual fund, there is no
guarantee that the Funds will earn income or show a positive total return over
time. Each Fund's price, yield, and total return will fluctuate. You may lose
money if a Fund's investments do not perform well.
This table summarizes the principal risks, described in the following
pages, to which the Funds are subject.
<TABLE>
<CAPTION>
SMALL
OHIO COMPANY INTERNATIONAL
FUND FOR MUNICIPAL DIVERSIFIED OPPORTUNITY GROWTH
INCOME BOND FUND STOCK FUND FUND FUND
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market risk and
manager risk X X X X X
- -------------------------------------------------------------------------------------------------
Equity risk X X X
- -------------------------------------------------------------------------------------------------
Interest rate risk,
inflation risk,
reinvestment risk, X X X X X
and credit
(or default) risk
- -------------------------------------------------------------------------------------------------
Currency risk and
foreign issuer risk X
- -------------------------------------------------------------------------------------------------
Tax-exempt
status risk X
- -------------------------------------------------------------------------------------------------
Concentration and
diversification risk X
- -------------------------------------------------------------------------------------------------
Prepayment risk,
extension risk X
- -------------------------------------------------------------------------------------------------
Correlation risk X X X
</TABLE>
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.
14
<PAGE>
[GRAPHIC] RISK FACTORS (CONTINUED)
GENERAL RISKS:
- 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
more or less than the price a Fund originally paid for the security,
or more 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.
- MANAGER RISK is the risk that a Fund's portfolio manager may use a
strategy that does not produce the intended result. Manager risk also
refers to the possibility that the portfolio manager may fail to
execute the Fund's investment strategy effectively and, thus, fail to
achieve its objective.
RISKS ASSOCIATED WITH INVESTING IN EQUITY SECURITIES:
- 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 in case of liquidation, equity
securities are entitled to the residual value after the company meets
its other obligations. For example, in the event of bankruptcy,
holders of debt securities have priority over holders of equity
securities to a company's assets.
RISKS ASSOCIATED WITH INVESTING IN DEBT SECURITIES:
- INTEREST RATE RISK. The value of a debt security typically changes in
the opposite direction from a change in interest rates. When interest
rates go up, the value of a debt security typically goes down. When
interest rates go down, the value of a debt security typically goes
up. Generally, the market values of securities with longer maturities
are more sensitive to changes in interest rates.
- 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 or equity securities that have a record
of dividend growth.
- REINVESTMENT RISK is the risk that when interest rates are declining a
Fund that receives interest income or prepayments on a security will
have to reinvest these moneys at lower interest rates. Generally,
interest rate risk and reinvestment risk have offsetting effects.
- 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.
15
<PAGE>
[GRAPHIC] RISK FACTORS (CONTINUED)
RISKS ASSOCIATED WITH INVESTING IN FOREIGN SECURITIES:
- CURRENCY RISK is the risk that fluctuations in the exchange rates
between the U.S. dollar and foreign currencies may negatively affect
an investment. Adverse changes in exchange rates may erode or reverse
any gains produced by foreign currency denominated investments and may
widen any losses. On January 1, 1999 participating nations in the
European Economic and Monetary Union introduced a single currency, the
euro. This action may present unique uncertainties for securities
denominated in currencies that will become components of the euro.
Political and economic risks, along with other factors, such as the
introduction of the euro, could adversely affect the value of the
International Growth Fund's securities.
- FOREIGN ISSUER RISK. 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 issuers may not be subject to the uniform accounting,
auditing, and financial reporting standards and practices used by U.S.
issuers. In addition, foreign securities markets may be less liquid,
more volatile, and less subject to governmental supervision than in
the U.S. Investments in foreign countries 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.
RISKS ASSOCIATED WITH INVESTING IN MUNICIPAL DEBT SECURITIES:
- 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.
RISKS ASSOCIATED WITH INVESTING IN THE SECURITIES OF A SINGLE STATE:
- 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.
Concentration risk may result in a Fund being invested in securities
that are related in such a way that changes in economic, business, or
political circumstances that would normally affect one security could
also affect other securities within that particular segment of the
bond market.
RISKS ASSOCIATED WITH INVESTING IN MORTGAGE-RELATED SECURITIES:
- PREPAYMENT RISK. Prepayments of principal on mortgage-related
securities affect the average life of a pool of mortgage-related
securities. The level of interest rates and other factors may affect
the frequency of mortgage prepayments. 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.
16
<PAGE>
[GRAPHIC] RISK FACTORS (CONTINUED)
- 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 a Fund's Portfolio Manager anticipated that
it would be. The market value of securities with longer maturities
tend to be more volatile.
RISK ASSOCIATED WITH FUTURES AND OPTIONS CONTRACTS:
- CORRELATION RISK. Futures and options contracts can be used in an
effort to hedge against certain risks. Generally, an effective hedge
generates an offset to gains or losses of other investments made by a
Fund. Correlation risk is the risk that a hedge created using futures
or options contracts (or any derivative, for that matter) does not, in
fact, respond to economic or market conditions in the manner the
portfolio manager expected. In such a case, the futures or options
contract hedge may not generate gains sufficient to offset losses and
may actually generate losses.
17
<PAGE>
SHARE PRICE
Each Fund calculates its share price, called its "net asset value" (NAV), each
business day at the close of trading on the New York Stock Exchange Inc. (NYSE),
which is normally at 4:00 p.m. Eastern Time. The share price of Class G Shares
is equal to a Fund's Class G NAV. You may buy, exchange, and sell your shares at
the next share price calculated after the Fund receives and accepts your
investment instructions. A business day is a day on which the Federal Reserve
Bank of Cleveland and the NYSE are open or any day in which enough trading has
occurred in the securities held by a Fund to materially affect the NAV. You may
not be able to buy or sell shares on certain holidays when the Federal Reserve
Bank of Cleveland is closed, but the NYSE and other financial markets are open.
A Fund's NAV may change on days when shareholders will not be able to
purchase or redeem the Fund's shares if the Fund has portfolio securities that
are primarily listed on foreign exchanges that trade on weekends or other days
when a Fund does not price its shares.
The Funds value their investments based on market value. When market
quotations are not readily available, the Funds value their investments based on
fair value methods approved by the Board of Trustees of the Victory Portfolios.
Each Class of each Fund calculates its NAV by adding up the total value of its
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
You can find a Fund's net asset value each day in the WALL STREET JOURNAL
and other newspapers. Newspapers do not normally publish fund information until
a Fund reaches a specific number of shareholders or level of assets.
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.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments. The Funds pass their earnings along to investors in
the form of dividends. Dividend distributions are the net dividends or 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, the Fund for Income and the Ohio Municipal Bond Fund declare
and pay dividends monthly. The Diversified Stock Fund, Small Company Opportunity
Fund and the International Growth Fund declare and pay dividends quarterly.
Generally, each Fund pays realized capital gains, if any, at least once a year.
Each class of shares declares and pays dividends separately.
18
<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES (CONTINUED)
Distributions can be received in one of the following ways. Please check
with your Investment Professional to find out if these options are available to
you. An Investment Professional is an investment consultant, salesperson,
financial planner, investment adviser, or trust officer who provides you with
investment information.
REINVESTMENT OPTION
You can have distributions automatically reinvested in additional shares of
a Fund. If you do not indicate another choice on your Account Application,
you will be assigned this option automatically.
CASH OPTION
The Fund will send you a check no later than seven days after the pay date.
INCOME EARNED OPTION
You can automatically reinvest your dividends in your Fund and have your
capital gains paid in cash, or reinvest capital gains and have your
dividends paid in cash.
DIRECTED DIVIDENDS OPTION
In most cases, you can automatically reinvest distributions in shares of
another fund of The Victory Portfolios. If you reinvest your distributions
in a different class of another fund, you may pay a sales charge on the
reinvested distributions.
DIRECTED BANK ACCOUNT OPTION
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, the Fund will
transfer your distributions within seven days of the dividend payment date.
The bank account must have a registration identical to that of your Fund
account.
19
<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES (CONTINUED)
- - IMPORTANT INFORMATION ABOUT TAXES
Each Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
- Ordinary dividends from a Fund are taxable as ordinary income;
dividends from a Fund's long-term capital gains are taxable as capital
gain. Capital gains may be taxable at different rates depending upon
how long a Fund holds certain assets.
- Certain dividends from the Ohio Municipal Bond 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. Any capital gains distributed by the Ohio
Municipal Bond Fund may be taxable.
- Dividends are treated in the same manner for federal income tax
purposes whether you receive them in cash or in additional shares.
They also may be subject to state and local taxes.
- Dividends from a 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 these U.S. Government obligations will be provided on the tax
statements you receive from a Fund.
- An exchange of a Fund's shares for shares of another fund will be
treated as a sale. When you sell or exchange shares of a Fund, you
must recognize any gain or loss.
- Certain dividends paid to you in January will be taxable as if they
had been paid to you the previous December.
- Tax statements will be mailed from each Fund every January showing the
amounts and tax status of distributions made to you.
- Certain dividends from the Ohio Municipal Bond Fund will be exempt
from certain Ohio state and local taxes. Those same dividends may be
subject to federal alternative minimum taxes.
- Under certain circumstances, the International Growth Fund may be in a
position to (in which case it would) "pass through" to you the right
to a credit or deduction for income or other tax credits earned from
foreign investments.
- 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
- 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 TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN A FUND
20
<PAGE>
ALL YOU NEED TO DO TO GET STARTED IS TO FILL OUT AN APPLICATION.
INVESTING WITH VICTORY
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 BUY,
EXCHANGE AND SELL 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
OR GRADISON-MCDONALD AT 513-579-5700 OR 800-869-5999.
THEY WILL BE HAPPY TO ASSIST YOU.
HOW TO BUY SHARES
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum investment required to open
an account is $500 ($100 for IRAs), with additional investments of at least $25.
You can send in your payment by check, wire transfer, exchange from another
Victory Fund, or through arrangements with Gradison-McDonald, or your Investment
Professional. Sometimes an Investment Professional will charge you for these
services. This fee will be in addition to, and unrelated to, the fees and
expenses charged by a Fund. If you maintain a brokerage account with
Gradison-McDonald you may buy or sell Fund shares without incurring any fees.
If you buy shares directly from the Funds and your investment is received
and accepted by the close of trading on the NYSE (usually 4:00 p.m. Eastern
Time), your purchase will be processed the same day using that day's share
price.
Make your check payable to:
THE
VICTORY
FUNDS
21
<PAGE>
FAX NUMBER:
800-529-2244
TELECOMMUNICATION
DEVICE FOR THE DEAF
(TDD):
800-970-5296
HOW TO BUY SHARES (CONTINUED)
Keep the following addresses handy for purchases, exchanges, or redemptions:
[GRAPHIC] REGULAR U.S. MAIL ADDRESS
Send completed Account Applications with your check, bank draft, or money order
to:
THE VICTORY FUNDS
P.O. BOX 8527
BOSTON, MA 02266-8527
OR:
GRADISON-MCDONALD INVESTMENTS
580 WALNUT STREET
CINCINNATI, OH 45202
[GRAPHIC] OVERNIGHT MAIL ADDRESS
Use the following address ONLY for overnight packages.
THE VICTORY FUNDS
C/O BOSTON FINANCIAL DATA SERVICES
66 BROOKS DRIVE
BRAINTREE, MA 02184
PHONE: 800-539-FUND
OR:
GRADISON-MCDONALD INVESTMENTS
580 WALNUT STREET
CINCINNATI, OH 45202
PHONE: 513-579-5700
OR: 800-869-5999
[GRAPHIC] 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 or
Gradison-McDonald at 513-579-5700 or 800-869-5999 BEFORE wiring funds to obtain
a control number.
[GRAPHIC] TELEPHONE NUMBER
Gradison-McDonald at:
513-579-5700
or 800-869-5999
OR:
Victory at:
800-539-FUND
(800-539-3863)
22
<PAGE>
HOW TO BUY SHARES (CONTINUED)
- - 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 your account
statements. Share certificates are not issued. Twice a year, you will receive
the financial reports of the Funds. By January 31 of each year, you will be
mailed an IRS form reporting distributions for the previous year, which also
will be filed with the IRS.
- - SYSTEMATIC INVESTMENT PLAN
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual, or
annual investments. You should attach a voided personal check so the proper
information can be obtained. You must first meet the minimum investment
requirement of $500, then we will make automatic withdrawals of the amount you
indicate ($25 or more) from your bank account and invest it in shares of a Fund.
- - RETIREMENT PLANS
You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Funds for
details regarding an IRA or other retirement plan that works best for your
financial situation. Generally, since the Ohio Municipal Bond Fund pays tax-free
income, it may not be an appropriate investment for a retirement plan.
IF YOU WOULD LIKE TO MAKE ADDITIONAL INVESTMENTS AFTER YOUR ACCOUNT IS ALREADY
ESTABLISHED, USE THE INVESTMENT STUB ATTACHED TO YOUR CONFIRMATION STATEMENT AND
SEND IT WITH YOUR CHECK TO THE ADDRESS INDICATED.
YOU MUST MAKE ALL
PURCHASES 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 WILL BE CHARGED FOR ANY RESULTING FEES AND/OR
LOSSES. THIRD PARTY CHECKS WILL NOT BE ACCEPTED.
YOU MAY ONLY BUY 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.
23
<PAGE>
YOU CAN OBTAIN A LIST OF FUNDS AVAILABLE FOR EXCHANGE BY CALLING THE TRANSFER
AGENT AT 800-539-FUND OR GRADISON-MCDONALD AT 513-579-5700 OR 800-869-5999.
HOW TO EXCHANGE SHARES
You can sell shares of one fund of the Victory Portfolios to buy shares of
another. This is considered an exchange. 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 a Fund by writing or calling the Transfer Agent
at 800-869-FUND or Gradison-McDonald at 513-579-5700 or 800-869-5999. When
you exchange shares of a Fund, you should keep the following in mind:
- Shares of the Fund selected for exchange must be available for sale in
your state of residence.
- The Fund whose shares you would like to exchange and the fund whose
shares you want to buy must offer the exchange privilege.
- Shares of a Fund may be exchanged at relative net asset value.
- If you own Class G Shares, you can exchange into Class G Shares,
Select Shares, or any single class money market fund shares of a
Victory Fund without paying a sales charge. If a Victory Fund has both
Class G and Class A Shares, you can exchange into only Class G Shares.
However, if you owned Class G Shares on the reorganization date, you
can exchange into Class A Shares of any Victory Fund that does not
offer Class G Shares without paying a sales charge.
- 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 seven days before you can exchange them; after the account is
open seven days, you can exchange shares on any business day.
- Before exchanging, read the prospectus of the fund you wish to
purchase by exchange.
24
<PAGE>
THERE ARE A NUMBER OF CONVENIENT WAYS TO SELL YOUR SHARES. YOU CAN USE THE SAME
MAILING AND WIRING ADDRESSES LISTED FOR PURCHASES. YOU WILL EARN DIVIDENDS UP
TO AND INCLUDING THE DATE THE FUND PROCESSES YOUR REDEMPTION REQUEST.
HOW TO SELL SHARES
If your request is received and accepted by the close of trading on the NYSE
(usually 4:00 p.m. Eastern Time), your redemption will be processed the same
day.
[GRAPHIC] BY TELEPHONE
The easiest way to sell shares is by calling 800-539-FUND or Gradison-McDonald
at 513-579-5700 or 800-869-5999. When you fill out your original application, be
sure to check the box marked "Telephone Authorization." Then when you are ready
to sell, call and tell us which one of the following options you would like to
use:
- Mail a check to the address of record;
- Wire funds to a domestic financial institution;
- Mail to a previously designated alternate address; or
- Electronically transfer your redemption via the Automated Clearing
House (ACH).
The Transfer Agent records all telephone calls for your protection and
takes measures to verify the identity of the caller. If the Transfer Agent
properly acts on telephone instructions and follows 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 the Transfer Agent does not follow these procedures, it 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 or your Investment Professional by telephone, consider placing
your order by mail.
[GRAPHIC] 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. A signature guarantee is required for the
following redemption requests:
- Redemptions over $10,000;
- Your account registration has changed within the last 15 days;
- The check is not being mailed to the address on your account;
- The check is not being made payable to the owner of the account; or
- The redemption proceeds are being transferred to another Victory Group
account with a different registration.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
[GRAPHIC] BY WIRE
If you want to sell shares by wire, you must establish a Fund account that will
accommodate wire transactions. If you call by 4:00 p.m. Eastern time, your funds
will be wired on the next business day.
[GRAPHIC] 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.
25
<PAGE>
HOW TO SELL SHARES (CONTINUED)
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. 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
balance falls below $500, we may ask you to bring the account back to the
minimum balance. If you decide not to increase your account to the minimum
balance, your account may be closed and the proceeds mailed to you.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
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, the Fund will include any dividends
accrued with the redemption proceeds.
A Fund may suspend your right to redeem your shares in the following
circumstances:
- - During non-routine closings of the NYSE, or when trading on the NYSE is
restricted;
- - When an emergency prevents the sale or valuation of the Fund's securities; or
- - When the Securities and Exchange Commission (SEC) orders a suspension to
protect the Fund's shareholders.
Each Fund will pay redemptions by any one shareholder during any 90-day period
in cash up to the lesser of $250,000 or 1% of the Fund's net assets. Each Fund
reserves the right to pay the remaining portion "in kind," that is, in portfolio
securities rather than cash.
26
<PAGE>
[GRAPHIC]
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
PROVIDE SERVICES TO THEIR SHAREHOLDERS. THESE ORGANIZATIONS ARE PAID A FEE FOR
THEIR SERVICES.
ORGANIZATION AND MANAGEMENT OF THE FUNDS
ABOUT VICTORY
Each Fund is a member of the Victory Portfolios, a group of over 30 distinct
investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Funds.
THE INVESTMENT ADVISER AND SUB-ADMINISTRATOR
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc., a New York corporation registered as an
investment adviser with the SEC, is the Adviser to each of the Funds. KAM, a
subsidiary of KeyCorp, oversees the operations of the Funds according to
investment policies and procedures adopted by the Board of Trustees. Affiliates
of the Adviser manage approximately $62 billion for a limited number of
individual and institutional clients. KAM's address is 127 Public Square,
Cleveland, Ohio 44114. McDonald & Co. Securities Inc. was the former adviser of
the Gradison Funds. Since the merger with KeyCorp, Gradison-McDonald became a
subsidiary of KeyCorp.
KAM will be paid management fees based upon the average daily net assets
of each Fund as shown in the following table. These fees are subject to certain
waivers described earlier in this Prospectus.
<TABLE>
<S> <C>
Fund for Income 0.50%
Ohio Municipal
Bond Fund 0.60%
Diversified Stock Fund 0.65%
Small Company
Opportunity Fund 0.62%
International
Growth Fund 1.10%
</TABLE>
Under a Sub-Administration Agreement, BISYS Fund Services, Inc. pays KAM a
fee at the annual rate of up to 0.05% of each Fund's average daily net assets to
perform some of the administrative duties for the Funds.
PORTFOLIO MANAGEMENT
Effective upon the reorganization, Thomas M. Seay will be the the Portfolio
Manager of the FUND FOR INCOME. Mr. Seay has been a Portfolio Manager of the
Fund for Income since January 1999. Mr. Seay, a Senior Vice President of
Gradison-McDonald, served as Portfolio Manager of the Gradison Government Income
Fund since April, 1998. From March 1987 to April 1998 he served as Vice
President and Fixed Income Portfolio Manager of Lexington Management
Corporation.
Paul A. Toft is the Portfolio Manager of the OHIO MUNICIPAL BOND FUND. Mr.
Toft, a Senior Portfolio Manager and Managing Director of KAM, has served as the
Portfolio Manager of the Ohio Municipal Bond Fund since 1994. Stephen C. Dilbone
will be the Co-Portfolio Manager of the Ohio Municipal Bond Fund after the
reorganization. A Chartered Financial Analyst, he has served as Portfolio
Manager of the Gradison Ohio Tax-Free Income Fund since its inception in 1992.
Lawrence G. Babin is the Portfolio Manager of the DIVERSIFIED STOCK FUND,
a position he has held since its inception in 1989. A Chartered Financial
Analyst, Mr. Babin is a Portfolio Manager and Managing Director of KAM.
27
<PAGE>
ORGANIZATION AND MANAGEMENT OF THE FUNDS (CONTINUED)
William J. Leugers, Jr., Daniel R. Shick and Gary H. Miller have been
the Co-Portfolio Managers of the SMALL COMPANY OPPORTUNITY FUND since
November 1998, and together are primarily responsible for the day-to-day
management of the Fund's portfolio. Messrs. Leugers and Shick have served as
Co-Portfolio Managers of the Gradison Opportunity Value Fund since 1984 and
1993, respectively. They also are Co-Portfolio Managers of the Gradison
Established Value Fund. Mr. Leugers is a Managing Director of Gradison-McDonald
and has been associated with Gradison-McDonald or its affiliates since 1975.
Mr. Shick is a Managing Director of Gradison-McDonald and has been with
Gradison-McDonald or its affiliates since 1972. Mr. Miller is a Vice-President
and Portfolio Manager of Gradison-McDonald, and has been associated with
Gradison-McDonald since 1987.
Conrad R. Metz and Leslie Globits are primarily responsible for the
management of the INTERNATIONAL GROWTH FUND. Mr. Metz is a Managing Director of
KAM, and formerly served as the Portfolio Manager of the International Growth
Fund. He previously was Senior Vice President, International Equities, at
Bailard Biehl & Kaiser, and has over 20 years experience in global equity
research and portfolio management. Mr. Globits, a Director of KAM, was
previously a Senior Financial Analyst and Assistant Vice President in Key Corp's
Corporate Treasury Department, and has been with KAM or an affiliate since 1987.
THE INVESTMENT SUB-ADVISER TO THE INTERNATIONAL GROWTH FUND
MANAGER OF MANAGERS. KAM, the investment adviser, serves as a Manager of
Managers of the INTERNATIONAL GROWTH FUND. As Manager of Managers, KAM may
select one or more sub-advisers to manage the International Growth Fund's
assets. KAM evaluates each sub-adviser's skills, investment styles and
strategies in light of KAM's analysis of the international securities markets.
Under its Advisory Agreement with Victory, KAM oversees the investment advisory
services that a sub-adviser provides to the International Growth Fund. If KAM
engages more than one sub-adviser, KAM may reallocate assets among sub-advisers
when it believes it is appropriate. KAM provides investment advice regarding
short-term debt securities. KAM has the ultimate responsibility for the
International Growth Fund's investment performance because it is responsible
for overseeing all sub-advisers and recommending to the Fund's Board of Trustees
that it hire, terminate or replace a particular sub-adviser.
Victory and KAM have obtained an order from the Securities and Exchange
Commission that allows KAM, subject to certain conditions, to select additional
sub-advisers with the approval of the Funds' Board of Trustees, without
obtaining shareholder approval. The order also allows KAM to change the terms of
agreements with the sub-advisers or to keep a sub-adviser even if certain events
would otherwise require that sub-advisory agreement to terminate.
28
<PAGE>
ORGANIZATION AND MANAGEMENT OF THE FUNDS (CONTINUED)
The Funds will notify shareholders of any sub-adviser change. Shareholders,
however, also have the right to terminate an agreement with a particular
sub-adviser. If KAM hires more than one sub-adviser, the order also allows the
International Growth Fund to disclose only the aggregate amount of fees paid to
all sub-advisers.
INDOCAM INTERNATIONAL INVESTMENT SERVICES, S.A. KAM currently has a
Portfolio Management Agreement with Indocam International Investment Services,
S.A. (IIIS), a French corporation located in Paris, France. IIIS has served as
sub-adviser for all of the International Growth Fund's assets (other than
short-term debt instruments) since June 1998. IIIS and its advisory affiliates
(Indocam) are the global asset management component of the Credit Agricole
banking and financial services group. Indocam manages approximately $147 billion
for its clients.
Ayaz Ebrahim, Didier Le Conte, and Jean-Claude Kaltenbach together are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mr. Ebrahim is the Director and Portfolio Manager of IIIS, Hong Kong. Mr.
Ebrahim has been employed by IIIS (or its affiliates) since 1991. Mr. Le Conte
is the Senior Portfolio Manager responsible for European Equities at IIIS and
has been employed by IIIS (or its affiliates) since 1966. Mr. Kaltenbach is the
Head of Equity Management at IIIS and has been employed by IIIS (or its
affiliates) since 1994.
DISTRIBUTION AND SERVICE PLAN
Under the terms of a Distribution and Service Plan adopted according to Rule
12b-1 under the 1940 Act, Class G shares of each Fund pay to the Distributor a
monthly service fee at an annual rate of 0.25% of the average daily net assets
of the Fund. 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. Each Fund may enter
into agreements with various shareholder servicing agents, including KeyCorp and
its affiliates, and with other financial institutions that provide such
services.
Class G shares of the Diversified Stock Fund, Small Company Opportunity
Fund and International Growth Fund each also annually pays the Distributor a
monthly distribution fee in an additional amount up to 0.25% of the Fund's
average daily net assets. The distribution fee is paid to the Distributor for
general distribution services and for selling shares of the Funds. The
Distributor makes payments to agents who provide these services.
Because Rule 12b-1 fees are paid out of a Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
29
<PAGE>
ORGANIZATION AND MANAGEMENT OF THE FUNDS (CONTINUED)
<TABLE>
<CAPTION>
<S><C>
----------------------------------------------------
OPERATIONAL STRUCTURE OF THE FUNDS
----------------------------------------------------
---------------- ----------------
TRUSTEES --------------------- ADVISER
---------------- ----------------
|
----------------
------------- 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 SERVICING AGENT
| 225 Franklin Street Gradison-McDonald
| Boston, MA 02110 Investments,
| a division of
| Boston Financial Data Services McDonald
----------- Two Heritage Drive -------- Investments Inc.
Quincy, MA 02171
WILL CONTINUE TO
HANDLES SERVICES SUCH AS RECORD-KEEPING, PROVIDE SERVICES TO
STATEMENTS, PROCESSING OF BUY AND SELL CERTAIN
REQUESTS, DISTRIBUTION OF DIVIDENDS, SHAREHOLDERS.
AND SERVICING OF SHAREHOLDER ACCOUNTS. --------------------
---------------------------------------
|
-------------------------------------- | ---------------------------------
|
ADMINISTRATOR, DISTRIBUTOR, | CUSTODIAN
AND FUND ACCOUNTANT | Key Trust Company of Ohio, N.A.
BISYS Fund Services | 127 Public Square
and its affiliates |-------- Cleveland, OH 44114
3435 Stelzer Road |
Columbus, OH 43219 -------- PROVIDES FOR SAFEKEEPING OF THE
FUNDS' INVESTMENTS AND CASH, AND
MARKETS THE FUNDS, DISTRIBUTES SHARES SETTLES TRADES MADE BY THE FUNDS.
THROUGH INVESTMENT PROFESSIONALS, ---------------------------------
AND CALCULATES THE VALUE OF SHARES.
AS ADMINISTRATOR, HANDLES THE
DAY-TO-DAY ACTIVITIES OF THE FUNDS.
--------------------------------------
|
--------------------------------------
SUB-ADMINISTRATOR
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
PERFORMS CERTAIN
SUB-ADMINISTRATIVE SERVICES.
--------------------------------------
</TABLE>
30
<PAGE>
SOME ADDITIONAL INFORMATION YOU SHOULD KNOW ABOUT THE FUNDS.
IF YOU WOULD LIKE TO RECEIVE ADDITIONAL COPIES OF ANY MATERIALS, PLEASE CALL
THE FUNDS AT 800-539-FUND OR GRADISON-MCDONALD AT 513-579-5900 OR 800-869-5999.
ADDITIONAL INFORMATION
SHARE CLASSES
The Funds offer only Class G Shares in this Prospectus. Class A Shares are
available for all Funds, and Class B Shares are offered for the Diversified
Stock Fund and the International Growth Fund in separate prospectuses. At some
future date, the Funds may offer additional classes of shares through a separate
prospectus. The Funds will be the successors to the following Gradison Funds
after the completion of a reorganization into Victory Funds:
Gradison Government Income Fund - Victory Fund for Income
Gradison Ohio Tax-Free Income Fund - Victory Ohio Municipal Bond Fund
Gradison Growth & Income Fund - Victory Diversified Stock Fund
Gradison Opportunity Value Fund - Victory Special Growth Fund
(to assume the name of Small
Company Opportunity Fund
after the reorganization)
Gradison International Fund - Victory International Growth Fund
- --------------------------------------------------------------------------------
CODE OF ETHICS
The Fund and the Adviser have each adopted a Code of Ethics to which all
investment personnel and all other access persons of 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
The Adviser is a subsidiary of a bank holding company. Banking laws, including
the Glass-Steagall Act, currently 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 an
investment adviser, transfer agent, custodian, or shareholder servicing agent.
They also may pay third parties for performing these functions and buy shares of
such an investment company for their customers. Should these laws change in the
future, the Trustees would consider selecting another qualified firm so that all
services would continue.
[GRAPHIC] PERFORMANCE
The Victory Funds may advertise the performance of each 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.
Advertising information will include the average annual total return of each
Fund calculated on a compounded basis for specified periods of time. Total
return information will be calculated according to rules established by the SEC.
Such information may include performance rankings and similar information from
independent organizations, such as Lipper Analytical Services, Inc., and
industry publications such as Morningstar, Business Week, or Forbes. You also
should see the "Investment Performance" section for the Fund in which you would
like to invest.
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.
31
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists the types of securities the Funds may purchase under
normal market conditions. All Funds will not buy all of the securities listed
below. For cash management or for temporary defensive purposes in response to
market conditions, each Fund may hold all of its assets in cash or short-term
money market instruments. This may reduce the benefit from any upswing in the
market and may cause a Fund to fail to meet its investment objective. For more
information on ratings and detailed descriptions of each of the investments,
see the SAI. For a more complete description of which Funds can invest in
certain types of securities, see the SAI.
U.S. EQUITY SECURITIES
Can include common stock, preferred stock, and securities that are convertible
or exchangeable into common stock of U.S. corporations.
EQUITY SECURITIES OF COMPANIES TRADED ON FOREIGN EXCHANGES
Can include common stock and securities and securities convertible into stock of
non-U.S. corporations.
EQUITY SECURITIES OF FOREIGN COMPANIES TRADED ON U.S. EXCHANGES
Can include common stock, preferred stock, and convertible preferred stock of
non-U.S. corporations. Also may include American Depositary Receipts (ADRs) and
Global Depositary Receipts (GDRs).
U.S. CORPORATE DEBT OBLIGATIONS
Debt instruments issued by U.S. corporations. They may be secured or unsecured.
* MORTGAGE-BACKED SECURITIES
Instruments secured by a mortgage or pools of mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS
Debt obligations that are secured by mortgage-backed certificates. Some are
issued by U.S. government agencies and instrumentalities.
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 U.S. agency.
SHORT-TERM DEBT OBLIGATIONS
Includes bankers' acceptances, certificates of deposit, prime quality commercial
paper, Eurodollar obligations, variable and floating rate notes, cash, and cash
equivalents.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
A security that is purchased for delivery at a later time. The market value may
change before the delivery date, and the value is included in the NAV of a Fund.
* RECEIPTS
Separately traded interest or principal components of U.S. Government
securities.
REPURCHASE AGREEMENTS
An agreement to sell and repurchase a security at a stated price plus interest.
The seller's obligation to a Fund is secured by collateral. Subject to the
receipt of an exemptive order from the SEC, the Adviser may combine repurchase
transactions among one or more Victory funds into a single transaction.
* FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Contracts involving the right or obligation to deliver or receive assets or
money depending on the performance of one or more assets or an economic index.
To reduce the effects of leverage, liquid assets equal to the contract
commitment are set aside to cover the commitment. A Fund may invest in futures
in an effort to hedge against market risk, or as a temporary substitute for
buying or selling securities, foreign currencies or for temporary
cash management purposes.
ZERO COUPON BONDS
These securities are purchased at a discount from face value. The bond's face
value is received at maturity, with no interest payments before then. These
securities may be subject to greater risks of price fluctuation than securities
that periodically pay interest.
* VARIABLE & FLOATING RATE SECURITIES
Investment grade instruments, some of which may be illiquid, with interest rates
that reset periodically.
* DERIVATIVE INSTRUMENTS: Indicates a "derivative instrument," whose value is
linked to, or derived from another security, instrument, or index. Certain Funds
may, but are not required to, use derivative instruments for any of the
following reasons:
- - To hedge against adverse changes in the market value of securities
- - As a temporary substitute for purchasing or selling securities or foreign
currencies
- - In limited situations, to attempt to profit from anticipated market
developments
32
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES (CONTINUED)
INVESTMENT COMPANY SECURITIES
Shares of other mutual funds with similar investment objectives. The following
limitations apply: (1) No more than 5% of a Fund's total assets may be invested
in one mutual fund, (2) the Fund and its affiliates may not own more than 3% of
the securities of any one mutual fund, and (3) no more than 10% of a Fund's
total assets may be invested in combined mutual fund holdings.
SECURITIES LENDING
To generate additional income, a Fund may lend its portfolio securities. A Fund
will receive collateral for the value of the security plus any interest due.
A Fund only will enter into loan arrangements with entities that the Adviser has
determined are creditworthy. Subject to the receipt of an exemptive order from
the SEC, Key Trust Company of Ohio, N.A., the Funds' Custodian and lending
agent, may earn a fee based on the amount of income earned on the investment of
collateral. The Ohio Municipal Bond Fund does not participate in securities
lending.
In addition to some of the above investments, the Ohio Municipal Bond Fund may
invest in the following securities in order to maintain the tax-exempt status of
the portfolio:
TAX, REVENUE, AND BOND ANTICIPATION NOTES
Issued in expectation of future revenues. Only purchased when their yields are
competitive with taxable obligations.
GENERAL OBLIGATION BONDS
Secured by the issuer's full faith, credit, and taxing power for payment of
interest and principal.
REVENUE BONDS
Payable only from the proceeds of a specific revenue source, such as the users
of a municipal facility.
MUNICIPAL LEASE OBLIGATIONS
Issued to acquire land, equipment, or facilities. They may become taxable if the
lease is assigned. The lease could terminate, resulting in default.
CERTIFICATES OF PARTICIPATION
A certificate that states that an investor will receive a portion of the lease
payments from a municipality.
REFUNDING CONTRACTS
Issued to refinance an issuer's debt. The Fund buys these at a stated price and
yield on a future settlement date.
ASSET BACKED SECURITIES
Debt securities backed by loans or accounts receivable originated by banks,
credit card companies, student loan issuers, or other providers of credit. These
securities may be enhanced by a bank letter of credit or by insurance coverage
provided by a third party.
*MORTGAGE-BACKED SECURITIES, TAX-EXEMPT
Tax-exempt investments secured by a mortgage or pools of mortgages.
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."
INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS
Secured by lease payments made by a corporation, these bonds are issued for
financing large industrial projects; i.e., building industrial parks or
factories.
TAX EXEMPT COMMERCIAL PAPER
Short-term obligations that are exempt from state and federal income tax.
33
<PAGE>
FINANCIAL HIGHLIGHTS
FUND FOR INCOME
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND THE FUND'S
FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS. CERTAIN INFORMATION SHOWS THE
RESULTS OF AN INVESTMENT IN ONE SHARE OF THE FUND. THE TOTAL RETURNS IN THE
TABLE REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED ON AN INVESTMENT IN
THE FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS).
IT IS EXPECTED THAT AFTER THE REORGANIZATION OF GRADISON FUNDS INTO VICTORY
FUNDS, THE VICTORY FUND FOR INCOME WILL ADOPT THE FINANCIAL INFORMATION OF THE
GRADISON GOVERNMENT INCOME FUND. ACCORDINGLY, THESE FINANCIAL HIGHLIGHTS REFLECT
HISTORICAL INFORMATION ABOUT THE GRADISON GOVERNMENT INCOME FUND. THE FINANCIAL
HIGHLIGHTS FOR THE FIVE FISCAL YEARS ENDED DECEMBER 31, 1997 WERE AUDITED BY
ARTHUR ANDERSEN LLP, WHOSE REPORT, ALONG WITH THE FINANCIAL STATEMENTS OF THE
GRADISON GOVERNMENT INCOME FUND, ARE INCLUDED IN THAT FUND'S ANNUAL REPORT,
WHICH IS AVAILABLE BY CALLING GRADISON-MCDONALD AT 513-579-5700 OR 800-869-5999.
<TABLE>
<CAPTION>
6 MONTHS YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996 1995 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $13.139 $12.884 $13.214 $12.018 $13.373 $13.327
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income .371 .775 .778 .786 .755 .749
Net realized and unrealized gain
(loss) on investments .039 .256 (.340) 1.232 (1.244) .239
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations .410 1.031 .438 2.018 (.489) .988
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
Dividends from net investment income (.391) (.776) (.768) (.787) (.779) (.738)
Dividends in excess of net
investment income -- -- -- -- (.013) --
Dividends from realized capital gains -- -- -- -- (.053) (.204)
Distributions from paid-in capital -- -- -- (.035) (.021) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions
to Shareholders (.391) (.776) (.768) (.822) (.866) (.942)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.158 $13.139 $12.884 $13.214 $12.018 $13.373
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return 3.25%(a) 8.36% 3.51% 17.20% (3.69%) 7.52%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in millions) $ 159.7 $ 155.1 $ 162.9 $ 185.4 $ 184.0 $ 266.0
Ratio of gross expenses to average
net assets(b) .90%(c) .90% .90% .92% -- --
Ratio of net investment income
to average net assets .90%(c) .90% .90% .92% .90% .90%
Ratio of net investment income
to average net assets 5.77%(c) 6.04% 6.06% 6.19% 6.03% 5.48%
Portfolio turnover rate 25% 12% 13% 16% 21% 134%
</TABLE>
(a) Total return represents the actual return over that period and has not been
annualized.
(b) Effective December 31, 1995, this ratio reflects gross expenses before
reduction for earnings credits on cash balances; such reductions are
included in the ratio of net expenses.
(c) Annualized.
34
<PAGE>
FINANCIAL HIGHLIGHTS
OHIO MUNICIPAL BOND FUND
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND THE FUND'S
FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS. CERTAIN INFORMATION SHOWS THE
RESULTS OF AN INVESTMENT IN ONE SHARE OF THE FUND. THE TOTAL RETURNS IN THE
TABLE REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED ON AN INVESTMENT IN
THE FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS).
THESE FINANCIAL HIGHLIGHTS REFLECT HISTORICAL INFORMATION ABOUT CLASS A SHARES
OF THE OHIO MUNICIPAL BOND FUND. THE FINANCIAL HIGHLIGHTS FOR THE FIVE FISCAL
YEARS ENDED OCTOBER 31, 1998 WERE AUDITED BY PRICEWATERHOUSECOOPERS LLP, WHOSE
REPORT, ALONG WITH THE FINANCIAL STATEMENTS OF THE FUND, ARE INCLUDED IN THE
FUND'S ANNUAL REPORT, WHICH IS AVAILABLE BY CALLING THE FUND AT 800-539-FUND OR
GRADISON-MCDONALD AT 513-579-5700 OR 800-869-5999.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.72 $ 11.43 $ 11.32 $ 10.33 $ 11.52
- ---------------------------------------------------------------------------------------------------------------------------------
Investment Activities
Net investment income 0.51 0.53 0.54 0.52 0.49
Net realized and unrealized gains
(losses) from investments 0.42 0.29 0.11 1.00 (0.94)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.93 0.82 0.65 1.52 (0.45)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.51) (0.53) (0.54) (0.52) (0.49)
In excess of net investment income -- -- -- (0.01) --
Net realized gains (0.10) -- -- -- (0.25)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.61) (0.53) (0.54) (0.53) (0.74)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.04 $ 11.72 $ 11.43 $ 11.32 $ 10.33
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 8.18% 7.37% 5.87% 15.03% (4.08%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $82,704 $78,043 $73,463 $60,031 $57,704
Ratio of expenses to average
net assets 0.91% 0.89% 0.89% 0.66% 0.51%
Ratio of net investment income
to average net assets 4.31% 4.60% 4.72% 4.78% 4.58%
Ratio of expenses to average
net assets* 1.13% 0.99% 1.05% 0.94% 1.09%
Ratio of net investment income
to average net assets* 4.09% 4.50% 4.56% 4.49% 4.01%
Portfolio turnover 95% 74% 81% 125% 53%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
35
<PAGE>
FINANCIAL HIGHLIGHTS
DIVERSIFIED STOCK FUND
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND THE FUND'S
FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS. CERTAIN INFORMATION SHOWS THE
RESULTS OF AN INVESTMENT IN ONE SHARE OF THE FUND. THE TOTAL RETURNS IN THE
TABLE REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED ON AN INVESTMENT IN
THE FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS).
THESE FINANCIAL HIGHLIGHTS REFLECT HISTORICAL INFORMATION ABOUT CLASS A AND
CLASS B SHARES OF THE DIVERSIFIED STOCK FUND. THE FINANCIAL HIGHLIGHTS FOR THE
FIVE FISCAL YEARS ENDED OCTOBER 31, 1998 WERE AUDITED BY PRICEWATERHOUSECOOPERS
LLP, WHOSE REPORT, ALONG WITH THE FINANCIAL STATEMENTS OF THE FUND, ARE INCLUDED
IN THE FUND'S ANNUAL REPORT, WHICH IS AVAILABLE BY CALLING THE FUND AT
800-539-FUND OR GRADISON-MCDONALD AT 513-579-5700 OR 800-869-5999.
<TABLE>
<CAPTION>
[PRIOR TO DESIGNATION OF
CLASS A SHARES CLASS B SHARES CLASS A AND CLASS B]
YEAR YEAR YEAR YEAR YEAR MARCH 1, YEAR YEAR
ENDED ENDED ENDED ENDED ENDED 1996 TO ENDED ENDED
OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31,
1998 1997 1996(a) 1998 1997 1996(a) 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 17.76 $ 15.75 $ 13.62 $ 17.62 $ 15.71 $14.18 $ 12.68 $ 13.39
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Investment Activities
Net investment income (loss) 0.11 0.16 0.20 (0.08) (0.06) 0.07 0.27 0.25
Net realized and unrealized gains
(losses) on investments 3.07 3.84 3.21 (3.04) 3.85 1.57 2.33 0.64
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 3.18 4.00 3.41 2.96 3.79 1.64 2.60 0.89
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.11) (0.16) (0.19) -- -- (0.07) (0.27) (0.23)
In excess of net investment income -- -- -- -- (0.05) (0.04) (0.01) --
Net realized gains (1.98) (1.83) (1.09) (1.98) (1.83) -- (1.38) (1.37)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.09) (1.99) (1.28) (1.98) (1.88) (0.11) (1.66) (1.60)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.85 $ 17.76 $ 15.75 $ 18.60 $ 17.62 $15.71 $ 13.62 $ 12.68
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return (excludes sales charge) 19.60% 27.96% 27.16% 18.34% 26.48% 26.61%(c) 23.54% 7.39%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $933,158 $762,270 $571,153 $50,962 $30,198 $8,228 $409,549 $263,227
Ratio of expenses to average
net assets 1.02% 1.03% 1.05% 2.08% 2.19% 2.07%(b) 0.92% 0.89%
Ratio of net investment income
to average net assets 0.64% 0.97% 1.40% (0.42%) (0.29%) 0.11%(b) 2.11% 2.06%
Ratio of expenses to average
net assets* 1.13% (e) 1.08% 2.18% (e) 2.08%(b) 0.95% 1.10%
Ratio of net investment income
to average net assets* 0.53% (e) 1.37% (0.52%) (e) 0.10%(b) 2.07% 1.86%
Portfolio turnover(d) 84% 63% 94% 84% 63% 94% 75% 104%
</TABLE>
* During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Effective March 1, 1996, the Diversified Stock Fund designated the existing
shares as Class A Shares and commenced offering Class B Shares.
(b) Annualized.
(c) Represents total return for the Diversified Stock Fund for the period
November 1, 1995 through February 29, 1996 plus total return for Class B
Shares for the period March 1, 1996 through October 31, 1996. The total
return of the Class B Shares for the period from March 1, 1996 through
October 31, 1996 was 11.62%.
(d) Portfolio turnover is calculated on the basis of the Diversified Stock Fund
as a whole without distinguishing between the classes of shares issued.
(e) There were no voluntary fee reductions during the period.
36
<PAGE>
FINANCIAL HIGHLIGHTS
SMALL COMPANY OPPORTUNITY FUND
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND THE FUND'S
FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS. CERTAIN INFORMATION SHOWS THE
RESULTS OF AN INVESTMENT IN ONE SHARE OF THE FUND. THE TOTAL RETURNS IN THE
TABLE REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED ON AN INVESTMENT IN
THE FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS).
IT IS EXPECTED THAT AFTER THE REORGANIZATION OF GRADISON FUNDS INTO VICTORY
FUNDS, THE SMALL COMPANY OPPORTUNITY FUND WILL ADOPT THE FINANCIAL INFORMATION
OF THE GRADISON OPPORTUNITY VALUE FUND. ACCORDINGLY, THESE FINANCIAL HIGHLIGHTS
REFLECT HISTORICAL INFORMATION ABOUT THE GRADISON OPPORTUNITY VALUE FUND. THE
FINANCIAL HIGHLIGHTS FOR THE FOUR FISCAL YEARS OR PERIOD ENDED MARCH 31, 1998
AND THE FISCAL YEAR ENDED APRIL 30, 1994 WERE AUDITED BY ARTHUR ANDERSEN LLP,
WHOSE REPORT, ALONG WITH THE FINANCIAL STATEMENTS OF THE GRADISON OPPORTUNITY
VALUE FUND, ARE INCLUDED IN THAT FUND'S ANNUAL REPORT, WHICH IS AVAILABLE BY
CALLING GRADISON-MCDONALD AT 513-579-5700 OR 800-869-5999.
<TABLE>
<CAPTION>
6 MONTHS YEAR YEAR YEAR 11 MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
SEPT. 30, MAR. 31, MAR. 31, MAR. 31, MAR. 31, APR. 30,
1998 1998 1997 1996 1995(a) 1994
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $27.893 $22.771 $22.264 $18.100 $18.348 $17.547
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations
Net investment income .107 .227 .203 .193 .136 .086
Net realized and unrealized gain
(loss) on investments (6.309) 8.725 2.509 4.731 .176 1.585
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from
Investment Operations (6.202) 8.592 2.712 4.924 .312 1.671
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
Dividends from net
investment income (.090) (.270) (.165) (.185) (.120) (.070)
Distributions from realized
capital gains (1.030) (3.560) (2.040) (.575) (.440) (.800)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions
to Shareholders (1.120) (3.830) (2.205) (.760) (.560) (.870)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $20.571 $27.893 $22.771 $22.264 $18.100 $18.348
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return (22.96%)(b) 42.02% 12.46% 28.00% 1.75%(c) 9.75%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in millions) $ 137.0 $ 175.7 $ 114.5 $ 103.0 $ 84.7(b) $ 83.3
Ratio of gross expenses to average
net assets(d) 1.29%(c) 1.31% 1.36% 1.41% -- --
Ratio of net expenses to average
net assets 1.29%(c) 1.31% 1.36% 1.41% 1.37%(c) 1.38%
Ratio of net investment income
to average net assets .84%(c) .86% .90% .95% .84%(c) .47%
Portfolio turnover rate 12% 42% 35% 24% 32% 40%
</TABLE>
(a) The Gradison Opportunity Value Fund changed its fiscal year to March 31.
(b) Total return represents the actual return over the period and has not been
annualized.
(c) Annualized.
(d) Effective March 31, 1996, this ratio reflects gross expenses before
reduction for earnings credits; such reductions are included in the ration
of net expenses.
37
<PAGE>
FINANCIAL HIGHLIGHTS
INTERNATIONAL GROWTH FUND
THE FINANCIAL HIGHLIGHTS TABLE IS INTENDED TO HELP YOU UNDERSTAND THE FUND'S
FINANCIAL PERFORMANCE FOR THE PAST FIVE YEARS. CERTAIN INFORMATION SHOWS THE
RESULTS OF AN INVESTMENT IN ONE SHARE OF THE FUND. THE TOTAL RETURNS IN THE
TABLE REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED ON AN INVESTMENT IN
THE FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS).
THESE FINANCIAL HIGHLIGHTS REFLECT HISTORICAL INFORMATION ABOUT CLASS A AND
CLASS B SHARES OF THE INTERNATIONAL GROWTH FUND. THE FINANCIAL HIGHLIGHTS FOR
THE FIVE FISCAL YEARS ENDED OCTOBER 31, 1998 WERE AUDITED BY
PRICEWATERHOUSECOOPERS LLP, WHOSE REPORT, ALONG WITH THE FINANCIAL STATEMENTS OF
THE FUND, ARE INCLUDED IN THE FUND'S ANNUAL REPORT, WHICH IS AVAILABLE BY
CALLING THE FUND AT 800-539-FUND OR GRADISON-MCDONALD AT 513-579-5700 OR
800-869-5999.
<TABLE>
<CAPTION>
[PRIOR TO DESIGNATION OF
CLASS A SHARES CLASS B SHARES CLASS A AND CLASS B]
YEAR YEAR YEAR YEAR YEAR MARCH 1, YEAR YEAR
ENDED ENDED ENDED ENDED ENDED 1996 TO ENDED ENDED
OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31, OCT. 31,
1998 1997 1996(e) 1998 1997 1996(a) 1995(b) 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 13.31 $ 13.01 $ 12.33 $13.07 $12.93 $12.79 $ 13.32 $ 11.93
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Investment Activities
Net investment income (loss) 0.07* 0.09 0.08 (0.13) (0.06) -- 0.05 (0.01)
Net realized and unrealized gains
(losses) on investments and
foreign currencies 0.65 0.67 0.62 0.66 0.65 0.14 (0.42) 1.40
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.72 0.76 0.70 0.53 0.59 0.14 (0.37) 1.39
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.06) (0.01) (0.02) -- -- -- -- --
Net realized gains (0.78) (0.45) -- (0.78) (0.45) -- (0.55) --
Tax return of capital -- -- -- -- -- -- (0.07) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.84) (0.46) (0.02) (0.78) (0.45) -- (0.62) --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.19 $ 13.31 $ 13.01 $12.82 $13.07 $12.93 $ 12.33 $ 13.32
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return (Excludes Sales Charge) 5.79% 6.04% 5.65% 4.44% 4.68% 4.89%(c) (2.50%) 11.65%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $134,491 $106,189 $121,517 $ 352 $ 184 $ 118 $106,477 $81,307
Ratio of expenses to average
net assets 1.71% 1.69% 1.73% 2.98% 3.07% 2.91%(d) 1.53% 1.48%
Ratio of net investment income
(loss) to average net assets 0.55% 0.63% 0.64% (0.80%) (0.68%) (0.10%)(d) 0.75% (0.51%)
Ratio of expenses to average
net assets** 1.82% 1.69% 1.75% 6.44% 10.01% 6.46%(d) 1.65% 1.83%
Ratio of net investment loss
to average net assets** 0.44% 0.63% 0.62% (4.26%) (7.62%) (3.65%)(d) 0.63% (0.86%)
Portfolio turnover(e) 86% 116% 178% 86% 116% 178% 68% 51%
</TABLE>
* Calculated using average shares for the period.
** During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.
(a) Effective March 1, 1996, the Fund designated the existing shares as Class A
Shares and commenced offering Class B Shares.
(b) Effective June 5, 1995, the Victory Foreign Markets Portfolio merged into
the Fund. Financial highlights for the periods prior to June 5, 1995
represent the International Growth Portfolio.
(c) Represents total return for the Fund for the period November 1, 1995
through February 29, 1996 plus total return for Class B Shares for the
period March 1, 1996 through October 31, 1996. The total return for the
Class B shares for the period from March 1, 1996 through October 31, 1996
was 1.11%.
(d) Annualized.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
38
<PAGE>
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39
<PAGE>
This page is intentionally left blank.
40
<PAGE>
IF YOU WOULD LIKE A FREE COPY OF ANY OF THE FOLLOWING REPORTS OR WOULD LIKE TO
REQUEST OTHER INFORMATION REGARDING THE FUNDS, YOU CAN CALL OR WRITE THE FUNDS
OR A FINANCIAL AGENT SUCH AS GRADISON-MCDONALD.
- - STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more details describing the Funds and their policies. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated by
reference in this Prospectus.
- - ANNUAL AND SEMI-ANNUAL REPORTS
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected Fund's
performance during its last fiscal year.
- - HOW TO OBTAIN INFORMATION
BY TELEPHONE: Call Gradison-McDonald at 513-579-5700 or 800-869-5999 or Victory
Funds at 800-539-FUND. You also may obtain copies of materials from the SEC's
Public Reference Room in Washington, D.C. (Call 800-SEC-0330 for information on
the operation of the SEC's Public Reference Room).
BY MAIL: Write: The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
OR
Gradison-McDonald
580 Walnut Street
Cincinnati, OH 45202
You also may write the Public Reference Section of the SEC, 450 Fifth St., N.W.,
Washington, D.C. 20549-6009, and pay the costs of duplication.
ON THE INTERNET: Text only versions of Fund documents can be viewed on-line or
downloaded from the SEC at http://www.sec.gov.
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 COPIES OF THE ANNUAL AND SEMI-ANNUAL REPORTS AND/OR
THE SAI AT NO CHARGE, PLEASE CALL THE FUNDS AT 800-539-FUND OR GRADISON-MCDONALD
AT 513-579-5700 OR 800-869-5999.
[LOGO]
VICTORY FUNDS
Investment Company Act File Number 811-4852
PRINTED ON RECYCLED PAPER VF-CLG-PRO (1/99)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
<TABLE>
<CAPTION>
<S> <C> <C>
Balanced Fund International Growth Fund Ohio Municipal Money Market Fund
Convertible Securities Fund Investment Quality Bond Fund Ohio Regional Stock Fund
Diversified Stock Fund Lakefront Fund Prime Obligations Fund
Federal Money Market Fund LifeChoice Conservative Investor Fund Real Estate Investment Fund
Financial Reserves Fund LifeChoice Growth Investor Fund Small Company Opportunity Fund
Fund for Income LifeChoice Moderate Investor Fund Special Value Fund
Government Mortgage Fund Limited Term Income Fund Stock Index Fund
Growth Fund National Municipal Bond Fund Tax-Free Money Market Fund
Institutional Money Market Fund New York Tax-Free Fund U.S. Government Obligations Fund
Intermediate Income Fund Ohio Municipal Bond Fund Value Fund
</TABLE>
January 26, 1999
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the prospectuses of The Victory Portfolios listed below
(individually, a "Prospectus," and collectively, the "Prospectuses") as amended
or supplemented from time to time. The Prospectuses are dated as follows:
March 1, 1998: Financial Reserves Fund, Fund for Income (Class A and Class
B), Government Mortgage Fund, Institutional Money Market
Fund, Intermediate Income Fund, Investment Quality Bond Fund,
Lakefront Fund, Limited Term Income Fund, National Municipal
Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund
(Class A), Ohio Municipal Money Market Fund, Prime
Obligations Fund, Tax-Free Money Market Fund and U.S.
Government Obligations Fund.
March 23, 1998: Convertible Securities Fund, Federal Money Market Fund,
LifeChoice Conservative Investor Fund, LifeChoice Growth
Investor Fund and LifeChoice Moderate Investor Fund.
March 1, 1998 as Balanced Fund, Diversified Stock Fund (Class A and Class B),
supplemented Growth Fund, International Growth Fund (Class A and Class B),
August 1, 1998: Ohio Regional Stock Fund, Special Growth Fund (Class A) (to
be renamed Small Company Opportunity Fund, as described
herein), Real Estate Investment Fund, Special Value Fund,
Stock Index Fund and Value Fund.
January 25, 1999: Diversified Stock Fund (Class G), Fund for Income (Class G),
International Growth Fund (Class G), Ohio Municipal Bond Fund
(Class G) and Small Company Opportunity Fund (Class G)
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 (800-539-3863) or Gradison McDonald at
513-579-5700 or 800-869-5999.
INVESTMENT ADVISER and SUB-ADMINISTRATOR DIVIDEND DISBURSING AGENT
Key Asset Management Inc. and SERVICING AGENT
Boston Financial Data Services, Inc.
ADMINISTRATOR and DISTRIBUTOR
BISYS Fund Services CUSTODIAN
Key Trust Company of Ohio, N.A.
TRANSFER AGENT
State Street Bank and Trust Company INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
COUNSEL
Kramer Levin Naftalis & Frankel LLP
<PAGE>
Table of Contents
INVESTMENT POLICIES AND LIMITATIONS.......................................... 2
FUNDAMENTAL RESTRICTIONS OF THE FUNDS........................................ 4
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS.................................... 12
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST.................................... 16
Eligible Securities for Money Market Funds.......................... 23
U.S. Corporate Debt Obligations..................................... 24
Temporary Defensive Measures -- Short-Term Obligations.............. 24
Short-Term Corporate Obligations.................................... 24
Demand Features..................................................... 24
Bankers' Acceptances................................................ 24
Bank Deposit Instruments............................................ 25
Eurodollar Certificates of Deposit.................................. 25
Yankee Certificates of Deposit...................................... 25
Eurodollar Time Deposits............................................ 25
Canadian Time Deposits.............................................. 25
Commercial Paper.................................................... 25
International Bonds................................................. 25
Foreign Debt Securities............................................. 25
Repurchase Agreements............................................... 26
Reverse Repurchase Agreements....................................... 26
Short-Term Funding Agreements....................................... 26
Variable Amount Master Demand Notes................................. 26
Variable Rate Demand Notes.......................................... 27
Variable and Floating Rate Notes.................................... 27
Extendible Debt Securities.......................................... 28
Receipts............................................................ 28
Zero-Coupon Bonds................................................... 28
High-Yield Debt Securities.......................................... 28
Loans and Other Direct Debt Instruments............................. 29
Securities of Other Investment Companies............................ 29
U.S. Government Obligations......................................... 29
Municipal Securities................................................ 29
Ohio Tax-Exempt Obligations......................................... 32
Municipal Lease Obligations......................................... 33
Lower-Rated Municipal Securities.................................... 34
Federally Taxable Obligations....................................... 34
Refunded Municipal Bonds............................................ 34
When-Issued Securities.............................................. 34
Delayed-Delivery Transactions....................................... 35
Mortgage-Backed Securities.......................................... 35
In General................................................. 35
U.S. Government Mortgage-Backed Securities................. 35
GNMA Certificates.......................................... 36
FHLMC Securities........................................... 36
FNMA Securities............................................ 36
Collateralized Mortgage Obligations........................ 36
Non-Government Mortgage-Backed Securities.................. 36
Asset-Backed Securities............................................. 37
Futures and Options................................................. 37
Futures Contracts.......................................... 37
Restrictions on the Use of Futures Contracts............... 38
<PAGE>
Risk Factors in Futures Transactions..................... 39
Options.................................................. 40
Puts..................................................... 40
Illiquid Investments..................................... 41
Restricted Securities.................................... 41
Securities Lending Transactions.......................... 42
Short Sales Against-the-Box....................................... 42
Investment-Grade and High Quality Investments..................... 42
Participation Interests........................................... 42
Warrants.......................................................... 42
Convertible Securities............................................ 42
Synthetic Securities.............................................. 43
Refunding Contracts............................................... 43
Standby Commitments............................................... 43
Foreign Investments............................................... 43
Miscellaneous Securities.......................................... 44
Additional Information Concerning Ohio Issuers.................... 45
Additional Information Concerning New York Issuers................ 48
DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS..................... 67
VALUATION OF PORTFOLIOS SECURITIES FOR THE MONEY MARKET FUNDS.............. 68
VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS AND THE
TAX-FREE BOND FUNDS........................................................ 69
VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS..................... 69
PERFORMANCE OF THE MONEY MARKET FUNDS...................................... 69
PERFORMANCE OF THE NON-MONEY MARKET FUNDS.................................. 72
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION.................. 82
DIVIDENDS AND DISTRIBUTIONS................................................ 87
TAXES...................................................................... 88
TRUSTEES AND OFFICERS...................................................... 95
ADVISORY AND OTHER CONTRACTS............................................... 99
ADDITIONAL INFORMATION..................................................... 117
APPENDIX................................................................... 125
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Trust") is an open-end management investment
company. The Trust consists of 36 series (each a "Fund," and collectively, the
"Funds") of units of beneficial interest ("shares"). The outstanding shares
represent interests in the 36 separate investment portfolios. The following
Funds are non-diversified: the Ohio Municipal Bond Fund, Ohio Municipal Money
Market Fund, New York Tax-Free Fund, National Municipal Bond Fund and Real
Estate Investment Fund. All other Funds are diversified mutual funds.
This Statement of Additional Information (the "SAI") relates to the shares of 30
of the 36 Funds and their respective classes, and are listed below. Much of the
information contained in this SAI 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:
<TABLE>
<CAPTION>
- ------------------------------------- ---------------------------------------- ---------------------------------------
<S> <C> <C>
Balanced Fund International Growth Fund Ohio Municipal Money Market Fund
Class A Shares Class A Shares Class A Shares
Class B Shares Class G Shares
Ohio Regional Stock Fund
Convertible Securities Fund Investment Quality Bond Fund Class A Shares
Class A Shares Class A Shares Class B Shares
Diversified Stock Fund Lakefront Fund Prime Obligations Fund
Class A Shares Class A Shares Class A Shares
Class B Shares
Class G Shares LifeChoice Conservative Investor Fund Real Estate Investment Fund
Class A Shares Class A Shares
Federal Money Market Fund
Select Shares LifeChoice Moderate Investor Fund Small Company Opportunity Fund+
Investor Shares Class A Shares Class A Shares
Class G Shares
Financial Reserves Fund LifeChoice Growth Investor Fund
Class A Shares Class A Shares Special Value Fund
Class A Shares
Fund for Income Limited Term Income Fund Class B Shares
Class A Shares Class A Shares
Class G Shares Stock Index Fund
National Municipal Bond Fund Class A Shares
Government Mortgage Fund Class A Shares
Class A Shares Class B Shares Tax-Free Money Market Fund
Class A Shares
Growth Fund New York Tax-Free Fund
Class A Shares Class A Shares U.S. Government Obligations Fund
Class B Shares Select Shares
Institutional Money Market Fund Investor Shares
Select Shares Ohio Municipal Bond Fund
Investor Shares Class A Shares Value Fund
Class G Shares Class A Shares
Intermediate Income Fund
Class A Shares
- ------------------------------------- ---------------------------------------- ---------------------------------------
</TABLE>
- ------------------------------------
+ This Fund is currently known as the "Special Growth" Fund. After the
reorganization described in this SAI at "Purchasing Shares -- Class G Shares --
The Gradison Fund Reorganization," the Special Growth Fund will change its name
to the "Small Company Opportunity" Fund.
<PAGE>
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.
The LifeChoice Funds.
The LifeChoice Conservative Investor Fund, LifeChoice Growth Investor Fund and
LifeChoice Moderate Investor Fund (the "LifeChoice Funds") are separately
managed, diversified mutual funds, each with its own investment objective and
policies. Each LifeChoice Fund has been constructed as a "fund of funds," which
means that it pursues its investment objective primarily by allocating its
investments among funds of the Trust (the "Proprietary Portfolios"). The
LifeChoice Funds also may invest a portion of their assets in shares of
investment companies that are not part of the same group of investment companies
as the Trust (the "Other Portfolios"). (Proprietary Portfolios and Other
Portfolios are sometimes referred to herein as "Underlying Portfolios.")
The Investment Company Act of 1940, as amended (the "1940 Act"), permits the
LifeChoice Funds to invest without limitation in other investment companies that
are part of the same "group of investment companies" (as defined in the 1940
Act) as the Trust, provided that certain limitations are observed. Generally,
these limitations require that a fund of funds (a) limit its investments to
shares of other investment companies that are part of the same "group of
investment companies" (as defined in the 1940 Act) as the fund of funds,
government securities, and short-term paper; (b) observe certain limitations on
the amount of sales loads and distribution-related fees that are borne by
shareholders of the fund of funds; and (c) do not invest in other funds of
funds. Pursuant to an exemptive order issued by the Securities and Exchange
Commission (the "SEC"), the LifeChoice Funds may invest in investment portfolios
of the Proprietary Portfolios and in shares of the Other Portfolios that are not
part of the same group of investment companies as the LifeChoice Funds. A
LifeChoice Fund and its affiliates, collectively, may acquire no more than 3% of
the total outstanding stock of any Other Portfolio.
Because of their investment objectives and policies, the LifeChoice Funds will
concentrate (i.e., invest 25% or more of their total assets) in the mutual fund
industry. In addition, a LifeChoice Fund may invest in a Proprietary Portfolio
or Other Portfolio that concentrates 25% or more of its total assets in any one
industry. Investments by a LifeChoice Fund in securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities or in repurchase
agreements collateralized by the foregoing equalling 25% or more of the Fund's
total assets will not be considered "concentration" by such Fund in the industry
of the issuer(s) of such securities.
The LifeChoice Funds' Prospectus more fully addresses the subject of each Fund's
and each Proprietary Portfolio's investment objectives, as well as the
investment policies that the Funds apply in seeking to meet those objectives.
"Additional Information Regarding Fund Investments," below, will supplement that
information more specifically by detailing the types of securities and other
instruments in which the Proprietary Portfolios may invest, the strategies
behind, and the risks associated with, such investing. Note that there can be no
assurance given that the respective investment objectives of the LifeChoice
Funds or the Proprietary Portfolios will be achieved.
The LifeChoice Funds may invest in the following Proprietary Portfolios, each of
which is described in this SAI: the Convertible Securities Fund, Diversified
Stock Fund, Financial Reserves Fund, Fund for Income, Government Mortgage Fund,
Growth Fund, Intermediate Income Fund, International Growth Fund, Investment
Quality Bond Fund, Limited Term Income Fund, Real Estate Investment Fund,
Special Growth Fund (to be renamed the Small Company Opportunity Fund), Special
Value Fund and Value Fund.
Other Portfolios. The LifeChoice Funds do not pay any front end sales loads or
contingent deferred sales charges in connection with the purchase or redemption
of shares of the Other Portfolios. In addition, to the extent required by the
1940 Act or the terms of any exemptive order received by the Funds from the SEC,
the sales charges, distribution related fees and service fees related to shares
of the Funds will not exceed the limits set forth in the Conduct Rules of the
National Association of Securities Dealers, Inc. when aggregated with any sales
charges, distribution related fees and service fees that the Funds pay relating
to Other Portfolio shares.
2
<PAGE>
The LifeChoice Funds may invest in the following Other Portfolios: the PBHG
Growth Fund, the Neuberger&Berman Genesis Fund and the Loomis Sayles Bond Fund.
Other Investments -- Short-Term Obligations. Normally, each of the LifeChoice
Funds will be predominantly invested in shares of other mutual funds. Under
certain circumstances, however, a LifeChoice Fund may invest in short-term
obligations. To the extent that a LifeChoice Fund's assets are so invested, they
will not be invested so as to meet its investment objective. The instruments may
include high-quality liquid debt securities such as commercial paper,
certificates of deposit, bankers' acceptances, repurchase agreements with
maturities of less than seven days, and debt obligations backed by the full
faith and credit of the U.S. Government. These instruments are described below
in the following section of this SAI describing the permissible investments of
the Proprietary Portfolios.
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 1940 Act). Accordingly, any subsequent change in
values, net assets, or other circumstances will not be considered when
determining whether the investment complies with a Fund's investment policies
and limitations. If the value of a Fund's holdings of illiquid securities at any
time exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Trustees will consider
what actions, if any, are appropriate to maintain adequate liquidity.
The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of that Fund's outstanding voting securities unless
(1) a policy expressly is deemed to be a fundamental policy of the Fund or (2) a
policy expressly is deemed to be changeable only by such majority vote. A Fund
may, following notice to its shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Fund or which
currently are not available but which may be developed to the extent such
investment practices are both consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus.
The following sections list each Fund's investment policies, limitations, and
restrictions. The securities in which the Funds can invest and the risks
associated with these securities are discussed in the section "Instruments in
Which the Funds Can Invest."
Defined Terms. All capitalized terms listed in a Fund's Investment Policies and
Limitations section referring to permissible investments are described in the
section "Instruments in Which the Funds Can Invest."
The following terms are used throughout the Investment Policies and Limitations
sections.
S&P: Standard & Poor's
Moody's: Moody's Investors Service, Inc.
NRSRO: Nationally recognized statistical ratings organization
3
<PAGE>
FUNDAMENTAL RESTRICTIONS OF THE FUNDS
- -------------------------------------
1. Senior Securities
No Fund (except the Convertible Securities Fund and the Federal Money Market
Fund) may:
Issue any senior security (as defined in the 1940 Act), except that (a) each
Fund may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) each Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
2. Underwriting
The Funds may not:
Underwrite securities issued by others, except to the extent that a Fund (or,
with respect to the LifeChoice Funds, an Underlying Portfolio) may be considered
an underwriter within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), in the disposition of restricted securities.
3. Borrowing
The Balanced Fund, Convertible Securities Fund, Diversified Stock Fund,
Government Mortgage Fund, Growth Fund, Intermediate Income Fund, International
Growth Fund, Investment Quality Bond Fund, Lakefront Fund, Limited Term Income
Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund, Ohio Regional Stock
Fund, Prime Obligations Fund, Real Estate Investment Fund, Small Company
Opportunity Fund, Special Value Fund, Stock Index Fund, Tax-Free Money Market
Fund, U.S. Government Obligations Fund and Value Fund may not:
Borrow money, except that (a) each Fund may enter into commitments to purchase
securities 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 for temporary or emergency purposes
in an amount not exceeding 5% of the value of its total assets at the time when
the loan is made. Any borrowings representing more than 5% of a Fund's total
assets must be repaid before the Fund may make additional investments.
The Financial Reserves Fund, Institutional Money Market Fund and the LifeChoice
Funds may not:
Borrow money, except (a) from a bank for temporary or emergency purposes (not
for leveraging or investment) or (b) by engaging in reverse repurchase
agreements, provided that (a) and (b) in combination ("borrowings") do not
exceed an amount equal to one third of the current value of its total assets
(including the amount borrowed) less liabilities (not including the amount
borrowed) at the time the borrowing is made.
This fundamental limitation is construed in conformity with the 1940 Act, and if
at any time Fund borrowings exceed an amount equal to 33 1/3 of the current
value of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) at the time the borrowing is made due to a
decline in net assets, such borrowings will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the 33
1/3% limitation.
The Fund for Income may not:
Borrow money, except for temporary or emergency purposes and not for investment
purposes, and then only in an amount not exceeding 5% of the value of its total
assets at the time of the borrowing.
4
<PAGE>
The National Municipal Bond Fund may not:
Borrow money, except that the Fund may borrow money from banks for temporary or
emergency purposes (not for leveraging or investment) and engage in reverse
repurchase agreements in an amount not exceeding 33 1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed this amount will be reduced
within three days (exclusive of Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation.
The Ohio Municipal Money Market Fund may:
(a) Borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of the Fund's net assets including the amounts borrowed,
and (b) purchase securities on a when-issued or delayed delivery basis. The Fund
will not borrow money or engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary, or emergency measure or to
facilitate management of the Fund by enabling the Fund to meet redemption
requests when the liquidation of Fund securities would be inconvenient or
disadvantageous. The Fund will not purchase any securities while any such
borrowings (including reverse repurchase agreements) are outstanding.
4. Real Estate
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, the LifeChoice Funds, Limited Term Income Fund, Ohio
Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations Fund, Small
Company Opportunity Fund, Special Value Fund, Stock Index Fund, Tax-Free Money
Market Fund and Value Fund 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.
The National Municipal Bond Fund 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).
The Financial Reserves Fund may not:
Buy or sell real estate, commodities, or commodities (futures) contracts.
The Institutional Money Market Fund may not:
Buy or sell real estate, commodities, or commodity (futures) contracts or invest
in oil, gas or other mineral exploration or development programs.
The Intermediate Income Fund 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).
The Ohio Municipal Money Market Fund will not:
Purchase or sell real estate, although it may invest in Ohio Municipal
Securities secured by real estate or interests in real estate.
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The U.S. Government Obligations Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments.
The Real Estate Investment Fund may not:
Purchase or sell real estate, except that the Fund may purchase securities
issued by companies in the real estate industry and will, as a matter of
fundamental policy, concentrate its investments in such securities.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Purchase or hold any real estate, including real estate limited partnerships,
except that the Funds may invest in securities secured by real estate or
interests therein or issued by persons which deal in real estate or interests
therein.
5. Lending
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, National Municipal Bond
Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations
Fund, Real Estate Investment Fund, Small Company Opportunity Fund, Special Value
Fund, Stock Index Fund, Tax-Free Money Market Fund, U.S. Government Obligations
Fund and Value 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 Financial Reserves Fund and Institutional Money Market Fund may not:
Make loans to other persons, except (a) by the purchase of debt obligations in
which the Fund is authorized to invest in accordance with its investment
objective, and (b) by engaging in repurchase agreements. In addition, each Fund
may lend its portfolio securities to broker-dealers or other institutional
investors, provided that the borrower delivers cash or cash equivalents as
collateral to the Fund and agrees to maintain such collateral so that it equals
at least 100% of the value of the securities loaned. Any such securities loan
may not be made if, as a result thereof, the aggregate value of all securities
loaned exceeds 33 1/3% of the total assets of the Fund.
The Fund for Income may not:
Make loans to other persons except through the use of repurchase agreements or
the purchase of commercial paper. For these purposes, the purchase of a portion
of an issue of debt securities which is part of an issue to the public shall not
be considered the making of a loan.
The New York Tax-Free Fund may not:
Make loans to other persons except through the use of repurchase agreements, the
purchase of commercial paper or by lending portfolio securities. For these
purposes, the purchase of a portion of an issue of debt securities which is part
of an issue to the public shall not be considered the making of a loan.
The Ohio Municipal Money Market Fund will not:
Lend any of its assets, except through the purchase of a position of publicly
distributed debt instruments or repurchase agreements and through the lending of
its portfolio securities. The Fund may lend its securities if collateral values
are continuously maintained at no less than 100% of the current market value of
such securities by marking to market daily.
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The Convertible Securities Fund and the Federal Money Market Fund may not:
Lend any cash except in connection with the acquisition of a portion of an issue
of publicly distributed bonds, debentures, notes or other evidences of
indebtedness or in connection with the purchase of securities subject to
repurchase agreements, except as outlined under "Additional Information on Fund
Investments" and the sub-section, "Securities Lending." The Funds will not lend
any other assets except as a special investment method. See "Investment
Objectives and Policies" herein and "Investment Objectives" in the Prospectus.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Make a loan of its portfolio securities if, immediately thereafter and as a
result thereof, portfolio securities with a market value of 10% or more of the
total assets of any of the Funds would be subject to such loans.
The LifeChoice Funds may not:
Lend any security or make any other loan if, as a result, more than 33-1/3% of a
Fund's total assets would be lent to other parties, except that a Fund may
invest in Underlying Portfolios that lend portfolio securities consistent with
their investment objectives and policies, but this limitation does not apply to
purchases of publicly issued debt securities or to repurchase agreements.
6. Commodities
The Diversified Stock Fund, Government Mortgage Fund, Intermediate Income Fund,
International Growth Fund, Investment Quality Bond Fund, Lakefront Fund, the
LifeChoice Funds, Limited Term Income Fund, Ohio Municipal Bond Fund, Ohio
Regional Stock Fund, Prime Obligations Fund, Real Estate Investment Fund, Small
Company Opportunity Fund, Stock Index Fund and Tax-Free Money Market Fund 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).
The New York Tax-Free Fund and Ohio Municipal Money Market Fund may not:
Purchase or sell commodities or commodity contracts.
The Balanced Fund, Growth Fund, Special Value Fund, U.S. Government Obligations
Fund and Value Fund may not:
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments.
The Fund for Income may not:
Purchase or sell commodities or commodity contracts, oil, gas or other mineral
exploration or development programs.
The National Municipal Bond Fund may not:
Purchase or sell physical commodities (but this shall not prevent the Fund from
purchasing or selling futures contracts and options on futures contracts or from
investing in securities or other instruments backed by physical commodities).
The Convertible Securities Fund and the Federal Money Market Fund may not:
Deal in commodities or commodity contracts.
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7. Joint Trading Accounts
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Limited Term Income Fund, Ohio Municipal Bond Fund, Ohio Regional
Stock Fund, Prime Obligations Fund, Small Company Opportunity Fund, Special
Value Fund, Stock Index Fund, Tax-Free Money Market Fund and Value Fund may not:
Participate on a joint or joint and several basis in any securities trading
account.
8. Diversification
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, Ohio Regional Stock Fund,
Small Company Opportunity Fund, Special Value Fund, Stock Index Fund, U.S.
Government Obligations Fund and Value Fund may not:
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 Prime Obligations Fund may not:
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. (Note: In accordance with Rule 2a-7 under the 1940 Act, the Fund may
invest up to 25% of its total assets in securities of a single issuer for a
period of up to three days.)
The New York Tax-Free Fund may not:
Purchase the securities of any issuer (except the United States government, its
agencies and instrumentalities, and the State of New York and its
municipalities) if as a result more than 25% of its total assets are invested in
the securities of a single issuer, and with regard to 50% of total assets, if as
a result more than 5% of its total assets would be invested in the securities of
such issuer. In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state and each
multi-state agency, of which such state is a member, is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
With respect to non-municipal bond investments, in addition to the foregoing
limitations, the Fund will not purchase securities (other than securities of the
United States government, its agencies or instrumentalities), if as a result of
such purchase 25% or more of the total Fund's assets would be invested in any
one industry, or enter into a repurchase agreement if, as a result thereof, more
than 10% of its total assets would be subject to repurchase agreements maturing
in more than seven days.
The National Municipal Bond Fund:
To meet federal tax requirements for qualification as a "regulated investment
company," the Fund limits its investments so that at the close of each quarter
of its taxable year: (a) with regard to at least 50% of total assets, no more
than 5% of total assets are invested in the securities of a single issuer, and
(b) no more than 25% of total assets are invested in the securities of a single
issuer. Limitations (a) and (b) do not apply to "Government Securities" as
defined for federal tax purposes. (For such purposes, municipal obligations are
not treated as "Government Securities," and consequently they are subject to
limitations (a) and (b).)
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<PAGE>
The Ohio Municipal Money Market Fund will limit:
With respect to 75% of the Fund's total assets, investments in one issuer to not
more than 10% of the value of its total assets. The total amount of the
remaining 25% of the value of the Fund's total assets could be invested in a
single issuer if the Adviser believes such a strategy to be prudent. Under Rule
2a-7 under the 1940 Act, the Fund is also subject to certain diversification
requirements.
The Tax-Free Money Market Fund may not:
Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities if,
immediately after such purchase, more than 5% of the value of its total assets
would be invested in such issuer, except that up to 25% of the value of the
Tax-Free Money Market Fund's total assets may be invested without regard to such
5% limitation. For purposes of this limitation, a security is considered to be
issued by the government entity (or entities) whose assets and revenues
guarantee or back the security; with respect to a private activity bond that is
backed only by the assets and revenues of a non-governmental issuer, a security
is considered to be issued by such non-governmental issuer.
The Fund for Income may not:
Purchase the securities of any issuer (except the United States government, its
agencies and instrumentalities), with regard to 75% of total assets, if as a
result more than 5% of its total assets would be invested in the securities of
such issuer. In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state and each
multi-state agency of which such state is a member is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
The Convertible Securities Fund and the Federal Money Market Fund may not:
As to 75% of their respective total assets, invest more than 5% in the
securities of any one issuer except securities of the U.S. Government, its
agencies or its instrumentalities.
9. Concentration
The Balanced Fund, Diversified Stock Fund, Growth Fund, Intermediate Income
Fund, International Growth Fund, Investment Quality Bond Fund, Lakefront Fund,
Limited Term Income Fund, Ohio Regional Stock Fund, Special Value Fund, Stock
Index Fund and Value 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 Prime Obligations 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. Notwithstanding the
foregoing, there is no limitation with respect to certificates of deposit and
banker's acceptances issued by domestic banks, or repurchase agreements secured
thereby. 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.
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<PAGE>
The Tax-Free Money Market 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 by the assets and revenues of a non-governmental user shall not
be deemed to be Municipal Securities.
Notwithstanding the foregoing, there is no limitation with respect to
certificates of deposit and banker's acceptances issued by domestic banks, or
repurchase agreements secured thereby. 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 Ohio 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.
The National Municipal Bond Fund may not:
Purchase securities (other than those issued or guaranteed by the U.S.
government or any securities of its agencies or instrumentalities or tax-exempt
obligations issued or guaranteed by a U.S. territory or possession or a state or
local government, or a political subdivision of the foregoing) if, as a result,
more than 25% of the Fund's total assets would be invested in securities of
companies whose principal business activities are in the same industry; for the
purpose of this restriction, utility companies will be divided according to
their services, for example, gas, gas transmission, electric and gas and
telephone will each be considered a separate industry. Industrial development
revenue bonds which are issued by non-governmental entities within the same
industry shall be subject to this industry limitation.
The Ohio Municipal Money Market Fund will not:
Purchase securities (other than securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities) if, as a result of such
purchase, 25% or more of the value of the Fund's total assets would be invested
in any one industry. The Fund will not invest 25% or more of its assets in
securities, the interest upon which is paid from revenues of similar type
projects. The Fund may invest 25% or more of its assets in industrial
development bonds.
The Financial Reserves Fund and Institutional Money Market Fund may not:
Purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States government, its
agencies or instrumentalities) if, as a result thereof: (i) more than 5% of its
total assets would be invested in the securities of such issuer, provided,
however, that in the case of certificates of deposit, time deposits and bankers'
acceptances, up to 25% of the Fund's total assets may be invested without regard
to such 5% limitation, but shall instead be subject to a 10% limitation; (ii)
more than 25% of its total assets would be invested in the securities of one or
more issuers having their principal business activities in the same industry,
provided, however, that it may invest more than 25% of its total assets in the
obligations of domestic banks. Neither finance companies as a group nor utility
companies as a group are considered a single industry for purposes of this
policy (i.e., finance
10
<PAGE>
companies will be considered a part of the industry they finance and utilities
will be divided according to the types of services they provide).
The Real Estate Investment 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. Notwithstanding the foregoing, the Fund will concentrate its
investments in securities in the real estate industry.
The New York Tax-Free Fund may not:
With respect to non-municipal investments, purchase securities (other than
securities of the United States government, its agencies or instrumentalities),
if as a result of such purchase 25% or more of the Fund's total assets would be
invested in any one industry, or enter into a repurchase agreement if, as a
result thereof, more than 15% of its net assets would be subject to repurchase
agreements maturing in more than seven days.
The Small Company Opportunity 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.
The Fund for Income and New York Tax-Free Fund may not:
Invest more than 25% of the Fund's total assets in securities whose interest
payments are derived from revenue from similar projects.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Purchase securities if such purchase would cause more than 25% of any of the
Funds' total assets to be invested in the securities of issuers in any one
industry, provided however that the Federal Money Market Fund reserves the right
to concentrate in securities issued or guaranteed as to principal and interest
by the United States Government, its agencies or instrumentalities or U.S. bank
obligations. The Federal Money Market Fund, however, will not exercise its right
to concentrate in U.S. bank obligations.
10. Miscellaneous
a. Tax-exempt income
The Ohio Municipal Money Market Fund may not:
Invest its assets so that less than 80% of its annual interest income is exempt
from the federal income tax and Ohio taxes.
b. Use of assets as security
The Fund for Income may not:
Pledge, mortgage, or hypothecate its assets, except that, to secure borrowings
permitted by its fundamental restriction on borrowing, it may pledge securities
having a market value at the time of pledge not exceeding 10% of the value of
its total assets.
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<PAGE>
c. Investing to influence management or to exercise control.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Invest in companies for the purpose of influencing management or exercising
control, and will not purchase more than 10% of the voting securities of any one
issuer. This will not preclude the management of the Funds from voting proxies
in their discretion.
The LifeChoice Funds may not:
Make investments for the purpose of exercising control or management (but this
shall not prevent a Fund from purchasing a controlling interest in one or more
Underlying Portfolios consistent with its investment objectives and policies).
d. Margin purchases and short selling.
The Convertible Securities Fund and the Federal Money Market Fund may not
purchase securities on margin or sell securities short.
e. Securities of other investment companies.
The Convertible Securities Fund and the Federal Money Market Fund may not
purchase the securities of other investment companies except in the open market
and at the usual and customary brokerage commissions or except as part of a
merger, consolidation or other acquisition.
f. Restricted Securities.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Invest more than 15% of any of the Convertibles Securities Funds' net assets or
more than 10% of the Federal Money Market Fund's net assets in (i) securities
restricted as to disposition under the Federal securities laws, (ii) securities
as to which there are no readily available market quotations, or (iii)
repurchase agreements with a maturity in excess of 7 days.
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. Illiquid Securities
The Balanced Fund, Diversified Stock Fund, Fund for Income, Government Mortgage
Fund, Growth Fund, Intermediate Income Fund, International Growth Fund,
Investment Quality Bond Fund, Lakefront Fund, the LifeChoice Funds, Limited Term
Income Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Bond Fund, Ohio Regional Stock Fund, Real Estate Investment Fund,
Small Company Opportunity Fund, Special Value Fund, Stock Index Fund and Value
Fund may not:
Invest more than 15% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under the Securities Act
("Restricted Securities") shall not be deemed illiquid solely by reason of being
unregistered. Key Asset Management Inc., the Trust's investment adviser ("KAM"
or the "Adviser") determines whether a particular security is deemed to be
liquid based on the trading markets for the specific security and other factors.
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The Financial Reserves Fund, Institutional Money Market Fund, Ohio Municipal
Money Market Fund, Prime Obligations Fund, Tax-Free Money Market Fund and U.S.
Government Obligations Fund may not:
Invest more than 10% 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. Restricted Securities shall not be deemed
illiquid solely by reason of being unregistered. The Adviser determines whether
a particular security is deemed to be liquid based on the trading markets for
the specific security and other factors.
2. Short Sales and Purchases on Margin
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, the LifeChoice Funds, Limited Term Income Fund, Ohio Municipal Bond
Fund, Ohio Regional Stock Fund, Prime Obligations Fund, Small Company
Opportunity Fund, Special Value Fund, Stock Index Fund, Tax-Free Money Market
Fund, U.S. Government Obligations Fund and Value Fund may 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, and, with respect to the International Growth
Fund, provided that this restriction shall not limit that Fund's ability to make
margin payments in connection with transactions in currency future options.
The Financial Reserves Fund and Institutional Money Market Fund may not:
1. Purchase securities on margin (but the Fund may obtain such credits as may be
necessary for the clearance of purchases and sales of securities).
2. Make short sales of securities.
The Fund for Income and New York Tax-Free Fund may not:
Make short sales of securities or purchase any securities on margin, except for
such short-term credits as are necessary for the clearance of transactions.
The National Municipal Bond Fund may not:
1. Sell securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions.
The Ohio Municipal Money Market Fund may not:
Sell any securities short or purchase any securities on margin but may obtain
such short-term credits as may be necessary for clearance of purchases and sales
of securities.
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<PAGE>
The LifeChoice Funds and the Small Company Opportunity Fund:
Do not currently intend to purchase securities on margin, except that the Funds
may obtain such short-term credits as are necessary for the clearance of
transactions and provided that margin payments in connection with futures
contracts shall not constitute purchasing securities on margin.
3. Other Investment Companies
The Balanced Fund, Convertible Securities Fund, Diversified Stock Fund,
Financial Reserves Fund, Fund for Income, Government Mortgage Fund, Growth Fund,
Institutional Money Market Fund, Intermediate Income Fund, International Growth
Fund, Investment Quality Bond Fund, Lakefront Fund, Limited Term Income Fund,
National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund,
Ohio Municipal Money Market Fund, Ohio Regional Stock Fund, Prime Obligations
Fund, Real Estate Investment Fund, Small Company Opportunity Fund, Special Value
Fund, Stock Index Fund, Tax-Free Money Market Fund, U.S. Government Obligations
Fund and Value Fund 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 Trust from
the SEC, the Funds may invest in the other money market funds of the Trust. 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 (except for the LifeChoice 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."
The National Municipal Bond Fund may not:
Purchase securities of other investment companies, except in the open market
where no commission except the ordinary broker's commission is paid. Such
limitation does not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
The Ohio Municipal Money Market Fund will not:
Invest any of its assets in the securities of other investment companies, except
by purchase in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than the customary broker's commission,
or except when the purchase is part of a plan of merger, consolidation,
reorganization or acquisition.
4. Miscellaneous
a. Investment grade obligations
The National Municipal Bond Fund, New York Tax-Free Fund and Ohio Municipal Bond
Fund may not:
Hold more than 5% of its total assets in securities that have been downgraded
below investment grade.
b. Concentration
The Fund for Income may not:
With respect to non-municipal bond investments, purchase securities (other than
securities of the United States government, its agencies or instrumentalities),
if as a result of such purchase 25% or more of the total Fund's assets would be
invested in any one industry.
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c. Diversification.
The Convertible Securities Fund and the Federal Money Market Fund may not:
With respect to 75% of a Fund's total assets, purchase the securities of any one
issuer (except in securities of the United States Government, its agencies or
its 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. Rule
2a-7 of the 1940 Act permits the Federal Money Market Fund to invest up to 25%
of its total assets in securities of a single issuer for a period of up to three
days.
d. Foreign issuers.
The Convertible Securities Fund may not invest in excess of 10% of its total
assets in the securities of foreign issuers, excluding from such limitation
securities listed on any United States securities exchange.
The Federal Money Market Fund may not invest in foreign securities.
e. Unseasoned issuers.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Invest in excess of 5% of its total assets in securities of issuers which,
including predecessors, do not have a record of at least three years' operation.
The LifeChoice Funds may not:
Invest more than 5% of its total assets in the securities of issuers which,
together with any predecessors, have a record of less than three years of
continuous operation (except for the Proprietary Portfolios, but a LifeChoice
Fund may invest in Underlying Portfolios that do so invest).
f. Pledge of assets.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Pledge or hypothecate any of the Fund's assets. For the purpose of this
limitation, collateral arrangements with respect to stock options are not deemed
to be a pledge of assets.
g. Portfolio securities owned by Trustees and officers.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Purchase or retain the securities of any issuer if those officers and Trustees
of the Funds, or of its Investment Adviser, who own individually more than
one-half of one percent of the securities of such issuer, together own more than
5% of the securities of such issuer.
h. Federal Money Market Fund.
The Federal Money Market Fund may not (a) lend portfolio securities, (b) borrow
money, or (c) invest in shares of other investment companies.
i. The LifeChoice Funds
The LifeChoice Funds may not participate on a joint or joint and several basis
in any securities trading account.
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Investment Restrictions of Certain Underlying Portfolios of the LifeChoice Funds
Notwithstanding the foregoing restrictions, the Other Portfolios in which the
Funds may invest have adopted certain investment restrictions which may be more
or less restrictive than those listed above, thereby allowing a Fund to
participate in certain investment strategies indirectly that are prohibited
under the fundamental and non-fundamental investment restrictions listed above.
The investment restrictions of the Proprietary Portfolios are set forth in this
SAI and the investment restrictions of the Other Portfolios are set forth in
their respective statements of additional information.
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST
- -----------------------------------------
The following tables list some of the types of securities each of the Funds may
choose to purchase under normal market conditions. Unless otherwise stated, the
indicated percentage relates to a Fund's total assets that may be committed to
the stated investment. Permissible investments for the three LifeChoice Funds
will correspond to the Underlying Portfolios comprising the particular
LifeChoice Fund, some of which, the Proprietary Portfolios, are described in
this SAI. For information on the Underlying Portfolios, see the LifeChoice
Funds' Prospectus dated March 23, 1998.
<TABLE>
<CAPTION>
<S> <C>
Investments common to all of the Funds
(except the Federal Money Market Fund)
----------------------------------------------- ----------------------------
Borrowing from Banks o 5%
----------------------------------------------- ----------------------------
Reverse Repurchase Agreements o 33 1/3%
----------------------------------------------- ----------------------------
When-Issued and Delayed Delivery o 33 1/3%
----------------------------------------------- ----------------------------
Money Market Funds(1)
- ----------------------------------------------------------------------------------------------------------------------
Commercial Paper o No limit: Financial Reserves, Short-Term o 10% of net assets:
Institutional Money Market, Prime Funding Financial Reserves,
Obligations, U.S. Government Agreements Institutional Money Market,
Obligations Prime Obligations
o No limit/up to 20% taxable:
Ohio Municipal Money Market,
Tax-Free Money Market
- ------------------ ------------------------------------------ ------------------ -------------------------------------
- ------------------------------------
1 The Federal Money Market Fund, Financial Reserves Fund, Institutional
Money Market Fund, Ohio Municipal Money Market Fund, Prime Obligations
Fund, Tax-Free Money Market Fund and U.S. Government Obligations Fund.
16
<PAGE>
- ------------------ ------------------------------------------ ------------------ -------------------------------------
Repurchase o No limit: Federal Money U.S. Government o No limit: Federal Money
Agreements Market, Financial Reserves, Securities Market, Financial Reserves,
Institutional Money Market, Prime Institutional Money Market,
Obligations Prime Obligations
o No limit, collateralized by o Only direct U.S. Treasury
U.S. Treasurys: U.S. Government Obligations: U.S. Government
Obligations Obligations
o 20%: Ohio Municipal Money o 20%: Ohio Municipal Money
Market Market, Tax-Free Money Market
- ------------------ ------------------------------------------ ------------------ -------------------------------------
Bank Deposit o No limit: Financial Reserves, Restricted o No limit: Financial
Instruments Institutional Money Market, Prime Securities Reserves, Institutional Money
Obligations Market, Prime Obligations
o 20%: Ohio Municipal Money o No limit/20% taxable:
Market, Tax-Free Money Market Ohio Municipal Money Market,
Tax-Free Money Market
- ------------------ ------------------------------------------ ------------------ -------------------------------------
Master Demand o No limit: Financial Time Deposits o No limit: Financial
Notes Reserves, Institutional Money Reserves, Institutional Money
Market, Prime Obligations Market, Prime Obligations
o 20%: Ohio Municipal Money o 20%: Ohio Municipal Money
Market, Tax-Free Money Market Market, Tax-Free Money Market
- ------------------ ------------------------------------------ ------------------ -------------------------------------
Tax and Bond o No limit: Ohio Municipal Money Variable and o No limit: Federal Money
Anticipation Market, Tax-Free Money Market Floating Rate Market, Financial Reserves,
Notes Securities Institutional Money Market,
Ohio Municipal Money Market,
Prime Obligations, Tax-Free
Money Market
- ------------------ ------------------------------------------ ------------------ -------------------------------------
Tax-Exempt o No limit: Financial Reserves, Eurodollar o 25%: Financial Reserves,
Commercial Paper Ohio Municipal Money Market, Prime Obligations Institutional Money Market,
Obligations, Tax-Free Money Market Tax-Free Money
o 20%: Ohio Municipal Money
Market, Tax-Free Money Market
- ------------------ ------------------------------------------ ------------------ -------------------------------------
Zero Coupon Bonds o No limit: Financial Reserves, Mortgage-Backed o No limit: Financial
Institutional Money Market, Prime Securities Reserves, Institutional Money
Obligations Market, Prime Obligations
o No limit/only U.S. Treasurys: o No limit/only U.S.
U.S. Government Obligations Treasurys: U.S. Government
Obligations
o No limit/tax-exempt: Ohio
Municipal Money Market, Tax-Free o No limit/tax-exempt: Ohio
Money Market Municipal Money Market,
Tax-Free Money Market
- ------------------ ------------------------------------------ ------------------ -------------------------------------
17
<PAGE>
- ------------------ ------------------------------------------ ------------------ -------------------------------------
Illiquid o 10% of net assets: Financial Securities of o With respect to 75%, no
Securities Reserves, Institutional Money Any One Issuer more than 5%: Ohio Municipal
Market, Ohio Municipal Money Money Market
Market, Prime Obligations, Tax-Free
Money Market o 5%: Financial Reserves,
Institutional Money Market
Prime Obligations, Tax-Free
Money Market, U.S. Government
Obligations
- ------------------ ------------------------------------------ ------------------ -------------------------------------
Securities o 33 1/3%: Financial Reserves, Investment o 5% in any one mutual fund
Lending Institutional Money Market, Prime Company
Obligations, U.S. Government Securities o 3% of the assets of any
Obligations one mutual fund
o None: Federal Money Market, o 10% in combined mutual
Ohio Municipal Money Market, even fund holdings
though Fundamental Restriction
No. 7 permits the Fund All Money Market Funds except the
to lend portfolio securities. Federal Money Market Fund.
- ------------------ ------------------------------------------ ------------------ -------------------------------------
Investments common to all of the Municipal Bond Funds(2)
- ------------------------------ ---------------------------- ---------------------------- -----------------------------
Revenue Bonds o No Resource o No Illiquid o 15% General o No
limit Recovery Bonds limit Securities of net Obligation Bonds limit
assets
- ------------------------------ ---------------------------- ---------------------------- -----------------------------
Zero Coupon Bonds o No Refunding o No Municipal o 30% Tax-Exempt o No
limit Contracts limit Lease Commercial Paper limit
Obligations
- ------------------------------ ---------------------------- ---------------------------- -----------------------------
Tax, Revenue and o Lower-Rated o 5% U.S. o 20% Variable and o No
Bond No Municipal Government Floating Rate limit
Anticipation limit Securities Securities Securities
Notes
- ------------------------------ ---------------------------- ---------------------------- -----------------------------
Asset-Backed o 35% Taxable o 20% Tax o 20% Repurchase o 20%
Securities Obligations Preference Agreements
Items
- ------------------------------ ---------------------------- ---------------------------- -----------------------------
Demand Features o No Mortgage-Backed o 35% Restricted o No Certificates of o 20%
or "Puts" limit Securities, Securities limit Participation
Tax-Exempt
- ------------------------------ ---------------------------- ---------------------------- -----------------------------
Futures Contracts and Options on Futures Contracts o 5% in margins and premiums; 33-1/3% subject to
futures or options on futures
- ----------------------------------------------------------------------------------------------------------------------
- -----------------------------
2 The National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Bond Fund.
18
<PAGE>
- ----------------------------------------------------------- ----------------------------------------------------------
Collateralized Mortgage o 25% Industrial Development Bonds o 25%
Obligations, Tax-Exempt and Private Activity Bonds
- ----------------------------------------------------------- ----------------------------------------------------------
Investment Company Securities o 5% in any one Dollar Weighted Effective o 5 to 11 years:
mutual fund Average Maturity National Municipal
Bond
o 3% of the assets o 5 to 15 years:
of any one mutual fund Ohio Municipal Bond
o 10% in combined
mutual fund holdings
- ----------------------------------------------------------- ----------------------------------------------------------
Marturity at the o 20 to 30 years
Time of Purchse New York Tax Free
Investments common to all of the Taxable Bond Funds(3)
--------------------------------------------------------------------------------------------------
Illiquid Securities o 15% of net Securities Lending o 33 1/3%
assets
--------------------------------------------------------------------------------------------------
Taxable Bond Funds
- --------------------------------------------------------------- ------------------------------------------------------
U.S. Government o No limit: Fund for Income, Corporate o No limit: Intermediate
Securities Intermediate Income, Investment Debt Income, Investment Quality
Quality Bond, Limited Term Income Obligations Bond, Limited Term Income
o 20%: Government Mortgage o 20%: Government Mortgage
- --------------------------------------------------------------- ------------------------------------------------------
Convertible or o No limit: Intermediate Income Preferred o 20%: Intermediate
Exchangeable Fund, Investment Quality Bond, and Convertible Income Fund, Investment
Corporate Debt Limited Term Income Preferred Stock Quality Bond, Limited Term
Obligations of U.S. Income
o 20%: Government Mortgage Corporations
- --------------------------------------------------------------- ------------------------------------------------------
Mortgage-Backed o No limit: Intermediate Income Short-Term o No limit: Limited Term
Securities and Fund, Investment Quality Bond, Debt Obligations Income
Collateralized Limited Term Income
Mortgage o 35%: Intermediate
Obligations o 80 to 100% (U.S. Gov't): Income Fund, Investment
Government Mortgage Fund Quality Bond
o 65 to 100%: Fund for Income o 20% Government Mortgage
- --------------------------------------------------------------- ------------------------------------------------------
- ------------------------------
3 The Fund for Income, Government Mortgage Fund, Intermediate Income
Fund, Investment Quality Bond Fund and Limited Term Income Fund.
19
<PAGE>
- --------------------------------------------------------------- ------------------------------------------------------
Zero Coupon Bonds o 20%: Intermediate Income, Variable and o No limit: Intermediate
Investment Quality Bond, Limited Floating Rate Income, Investment Quality
Term Income Securities Bond, Limited Term Income
o 20% (U.S. Gov't): Fund for o 35% (U.S. Gov't): Fund
Income, Government Mortgage for Income
o 20% (U.S. Gov't):
Government Mortgage
- --------------------------------------------------------------- ------------------------------------------------------
Yankee Securities o 20%: Intermediate Income Fund, Foreign o 20%: Intermediate
Investment Quality Bond, Limited Securities Income, Investment Quality
Term Income Bond, Limited Term Income
- --------------------------------------------------------------- ------------------------------------------------------
Receipts o 20%: Intermediate Income, Repurchase o 35%: Fund for Income,
Investment Quality Bond, Limited Agreements Intermediate Income,
Term Income Investment Quality Bond,
Limited Term Income
o 20% (U.S. Gov't): Fund for
Income o 20%: Government Mortgage Fund
- --------------------------------------------------------------- ------------------------------------------------------
Tax, Revenue and o No limit: Intermediate Income, Restricted o No limit: Intermediate
Bond Anticipation Investment Quality Bond, Limited Securities Income, Investment Quality
Notes Term Income Bond, Limited Term Income
o 20%: Government Mortgage o 20%: Government Mortgage
- --------------------------------------------------------------- ------------------------------------------------------
Futures Contracts o 5% in margins and premiums; Dollar o 2 to 30 years: Fund for
and Options on 33-1/3% subject to futures or Weighted Income
Futures Contracts options on futures: Fund for Effective
Income, Intermediate Income, Average Maturity o 5 to 15 years:
Investment Quality Bond, Limited Investment Quality Bond
Term Income
o Up to 12 years: Government
Mortgage
o 3 to 10 years: Intermediate Income
o 1 to 5 years: Limited
Term Income
- --------------------------------------------------------------- ------------------------------------------------------
20
<PAGE>
Investments common to all of the Equity Funds(4)
- ------------------------------------------------------- ------------------------------------------------------------
Illiquid Securities. o 15% of net assets Securities Lending o 33 1/3%
- ------------------------------------------------------- ------------------------------------------------------------
Futures Contracts and o 5% in margins and Investment Company o 5% in any one mutual
Options on Futures premiums; 33-1/3% Securities fund
Contracts subject to futures or
options on futures o 3% of the assets of
any one mutual fund
o 10% in combined
mutual fund holdings
- ----------------------------------------------------------------------------------------------------------------------
Warrants. o 10%: All Equity Funds (except Convertible Securities)
o 5%: Convertible Securities
- ----------------------------------------------------------------------------------------------------------------------
Equity Funds
- ----------------------------------------------------------------------------------------------------------------------
U.S. Equity o 80 to 100%: Diversified Stock, Repurchase o 35%: Balanced,
Securities Growth, Lakefront, Ohio Regional Agreements Convertible Securities,
Stock, Real Estate Investment, International Growth
Special Value, Stock Index, Value
o 80 to 100%: Small Company
Opportunity o 20%: Diversified Stock,
Growth, Lakefront, Ohio Regional
o 45 to 70%: Balanced, Growth Stock, Real Estate Investment, Small
Opportunity, Special Value, Stock
Index, Value
o 35%: Convertible Securities
- --------------------------------------------------------------- ------------------------------------------------------
Foreign Equity o No limit: International Growth Foreign Debt o 20%: International Growth
Securities Traded Securities
on a Foreign o 10%: Convertible Securities o 10%: Balanced, Convertible
Exchange Securities
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------
4 The Balanced Fund, Convertible Securities Fund, Diversified Stock Fund,
Growth Fund, International Growth Fund, Lakefront Fund, Ohio Regional
Stock Fund, Real Estate Investment Fund, Small Company Opportunity
Fund, Special Value Fund, Stock Index Fund and Value Fund.
21
<PAGE>
- --------------------------------------------------------------- ------------------------------------------------------
Foreign Equity o No limit: Stock Index Options o 25% in covered calls and
Securities Traded puts: Real Estate Investment
on U.S. Exchanges o 65 to 100%: International
Growth o 25% in covered calls and
5% in call or put options:
o 20%: Real Estate Investment Small Company Opportunity
o 10%: Balanced, Convertible o 25% in covered calls:
Securities, Diversified Stock, Balanced, Diversified Stock,
Growth, Lakefront, Growth, International Growth,
Small Company Opportunity, Lakefront, Ohio Regional Stock,
Special Value, Value Special Value, Stock
Index, Value
o 5% in calls: Convertible
Securities
- --------------------------------------------------------------- ------------------------------------------------------
Preferred Stock. o 35%: International Growth Short-Term o 35%: Balanced,
Debt Convertible Securities,
o 25%: Balanced Obligations International Growth
o 20%: Diversified Stock, o 33 1/3%: Stock Index
Growth, Real Estate Investment,
Lakefront, Small Company o 20%: Diversified Stock,
Opportunity, Special Value Growth, Lakefront, Ohio
Regional Stock, Real Estate
Investment, Small Company
Opportunity, Special Value,
Value,
- --------------------------------------------------------------- ------------------------------------------------------
U.S. Corporate o 60%: Balanced* Restricted o 35%: Balanced,
Debt Obligations Securities International Growth, Small
o 35%: Convertible Securities, Company Opportunity
International Growth
o 20%: Diversified Stock,
o 20%: Diversified Stock, Growth, Lakefront, Ohio
Growth, Lakefront, Small Company Regional Stock, Special Value,
Opportunity, Ohio Regional Stock, Stock Index, Value
Special Value, Value
o 15%: Convertible Securities,
Real Estate Investment
- --------------------------------------------------------------- ------------------------------------------------------
Real Estate o No limit: Real Estate Investment Receipts o 20%: Diversified Stock,
Investment Trusts Growth, International Growth,
Lakefront, Ohio Regional Stock,
Real Estate Investment,
o 25%: Balanced, Diversified Small Company Opportunity,
Stock, Growth, International Special Value, Value
Growth, Ohio Regional Stock, Small
Company Opportunity, Special Value, o 10%: Balanced
Stock Index, Value
- --------------------------------------------------------------- ------------------------------------------------------
- ----------------------------
* The Balanced Fund may invest up to 20% of its total assets in
asset-backed securities, including securities backed by commercial
mortgages, automobile loan receivables, credit card receivables, and
rate reduction bonds.
22
<PAGE>
- --------------------------------------------------------------- ------------------------------------------------------
Convertible o 65 to 100%: Convertible Securities U.S. o 35%: Convertible Securities
Securities Government
Securities
- --------------------------------------------------------------- ------------------------------------------------------
Variable and o 35%: Convertible Securities Short-Term o No limit: Convertible
Floating Rate Trading Securities, Lakefront
Securities o 20%: Lakefront
- --------------------------------------------------------------- ------------------------------------------------------
When-Issued and Delayed Delivery Securities o 33 1/3%: Convertible Securities, Lakefront
- --------------------------------------------------------------- ------------------------------------------------------
U.S. Government o 60%: Balanced
Securities
o 35%: Convertible Securities, International Growth
o 20%: Diversified Stock, Growth, Lakefront, Ohio Regional Stock, Real Estate
Investment, Small Company Opportunity, Special Value, Stock Index**, Value
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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 the risk factors related to these securities. 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 SAI.
Eligible Securities for Money Market Funds. High-quality investments are those
obligations which, at the time of purchase, (i) possess one of the two highest
short-term ratings from an NRSRO or (ii) possess, in the case of multiple-rated
securities, one of the two highest short-term ratings by at least two NRSROs; or
(iii) do not possess a rating (i.e. are unrated) but are determined by the
Adviser to be of comparable quality to the rated instruments described in (i)
and (ii). For purposes of these investment limitations, a security that has not
received a rating will be deemed to possess the rating assigned to an
outstanding class of the issuer's short-term debt obligations if determined by
the Adviser to be comparable in priority and security to the obligation selected
for purchase by a Fund. (The above described securities which may be purchased
by the money market Funds are hereinafter referred to as "Eligible Securities.")
A security subject to a tender or demand feature will be considered an Eligible
Security only if both the demand feature and the underlying security possess a
high quality rating, or, if such do not possess a rating, are determined by the
Adviser to be of comparable quality; provided, however, that where the demand
feature would be readily exercisable in the event of a default in payment of
principal or interest on the underlying security, this obligation may be
acquired based on the rating possessed by the demand feature or, if the demand
feature does not possess a rating, a determination of comparable quality by the
Adviser. A security which at the time of issuance had a maturity exceeding 397
days but, at the time of purchase, has remaining maturity of 397 days or less,
is not considered an Eligible Security if it does not possess a high quality
rating and the long-term rating, if any, is not within the two highest rating
categories.
Pursuant to Rule 2a-7 under the 1940 Act, the Money Market Funds maintain a
dollar-weighted average portfolio maturity which does not exceed 90 days.
- -----------------------------------
** Only U.S. Treasury obligations. The Stock Index Fund may hold
short-term debt obligations and may enter into Repurchase Agreements
for liquidity.
23
<PAGE>
The weighted average maturity of the U.S. Government Obligations Fund will
usually be 60 days or less since rating agencies normally require shorter
maturities. However, the permitted weighted average maturity for the U.S.
Government Obligations Fund is 90 days.
The Appendix of this SAI identifies each NRSRO which may be utilized by the
Adviser with regard to portfolio investments for the Funds and provides a
description of relevant ratings assigned by each such NRSRO. A rating by an
NRSRO may be utilized only where the NRSRO is neither controlling, controlled
by, or under common control with the issuer of, or any issuer, guarantor, or
provider of credit support for, the instrument.
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 NRSROs 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.
Temporary Defensive Measures. For temporary defensive purposes in response to
market conditions, each Fund may hold up to 100% of its assets in cash or 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.) These temporary defensive measures may result in
performance that is inconsistent with a Fund's investment objective.
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. A 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. A Fund uses these arrangements to obtain liquidity and not to protect
against changes in the market value of the underlying securities. The
bankruptcy, receivership or default by the issuer of the demand feature, or a
default on the underlying security or other event that terminates the demand
feature before its exercise, will adversely affect the liquidity of the
underlying security. Demand features that are exercisable even after a payment
default on the underlying security may be treated as a form of credit
enhancement.
Bankers' Acceptances. Bankers' Acceptances are negotiable drafts or bills of
exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' Acceptances will be those guaranteed by domestic and foreign banks, if
at the time of purchase such banks have capital, surplus, and undivided profits
in excess of $100,000,000 (as of the date of their most recently published
financial statements).
24
<PAGE>
Bank Deposit Instruments. 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 comprised of unsecured promissory notes,
usually 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. In addition to corporate
issuers, tax-exempt commercial paper may also be issued by borrowers that issue
municipal securities. See "Municipal Securities" below.
The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by an NRSRO or, if not rated, found by the
Trustees to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by an NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments. For a description of the rating symbols of
each NRSRO see the Appendix to this SAI.
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
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.
25
<PAGE>
Repurchase Agreements.
General. 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.
Convertible Securites Fund and Federal Money Market Fund. With respect to
repurchase agreement transactions entered into by the Convertible Securities
Fund, the underlying securities are ordinarily U.S. Treasury or other
governmental obligations or high quality money market instruments. With respect
to repurchase agreement transactions entered into by the Federal Money Market
Fund, the underlying securities are bonds, notes or other obligations of or
guaranteed by the United States, or those for which the faith of the United
States is pledged for the payment of principal and interest thereon, and bonds,
notes, debentures or any other obligations or securities in which the Fund may
invest.
The Funds will not enter into repurchase agreements with maturities of more than
7 days if, taken together with illiquid securities and other securities for
which there are no readily available quotations, more than 10% of their
respective total assets would be so invested. Repurchase agreements are
considered to be loans by the Funds collateralized by the underlying securities.
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 or 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 liquid 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 guaranteed interest contracts or "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
26
<PAGE>
the issuer defaulted on its payment obligations, and the Fund could, for this or
other reasons, suffer a loss to the extent of the default. While the notes
typically are not rated by credit rating agencies, issuers of Variable Amount
Master Demand Notes must satisfy the same criteria as set forth above for
unrated commercial paper, and the Adviser will monitor continuously the issuer's
financial status and ability to make payments due under the instrument. Where
necessary to ensure that a note is of "high quality," a Fund will require that
the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
For purposes of a Fund's investment policies, a Variable Amount Master Demand
Note will be deemed to have a maturity equal to the longer of the period of time
remaining until the next readjustment of its interest rate or the period of time
remaining until the principal amount can be recovered from the issuer through
demand.
Variable Rate Demand Notes. Variable Rate Demand Notes are tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed 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.
The maturities of Variable or Floating Rate Notes are determined as follows:
1. A Variable or Floating Rate Note that is issued or guaranteed by the United
States government or any agency thereof and which has a variable rate of
interest readjusted no less frequently than annually will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A Variable or Floating Rate Note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A Variable or Floating Rate Note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A Variable or Floating Rate Note that is subject to a demand feature will be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where a Fund is entitled
to receive the principal amount of the note either at any time on no more than
30 days' notice or at specified intervals not exceeding one year and upon no
more than 30 days' notice.
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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. This 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
Trust's 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.
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 by 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.
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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.
The Convertible Securities Fund. The Convertible Securities Fund will purchase
convertible securities that may or may not be rated by an NRSRO. When purchasing
rated securities, the Convertible Securities Fund may make substantial
investments in securities rated Baa, Ba B or Caa by Moody's and BB, BB, B or CCC
by S&P.
The Convertible Securities Fund is not restricted from investing in the
lower-rated categories of securities. However, the Fund will not invest in
securities rated Ba or lower by Moody's or BB or lower by S&P or unrated
securities, unless the Adviser believes that positive factors mitigate or reduce
the investment risks and that the investment is expected to provide a return
commensurate with such risks. Positive factors would include operating strengths
or improvements, such as growing market share or improved cost structure or
margins, that would enable a company to service its debt with a wider margin of
comfort than anticipated by rating agencies.
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 (other than the LifeChoice
Funds) may invest up to 5% of its total assets in the securities of any one
investment company, but may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets in the securities
of other investment companies. Pursuant to an exemptive order received by the
Trust from the SEC, a Fund may invest in the money market funds of the Trust.
The Adviser will waive its investment advisory fee with respect to assets of a
Fund invested in any of the Money Market Funds of the Trust, and, to the extent
required by the laws of any state in which a Fund's shares are sold, the Adviser
will waive its investment advisory fee as to all assets invested in other
investment companies. The LifeChoice Funds may invest in the Proprietary
Portfolios without limitation.
See "Investment Policies and Limitations -- The LifeChoice Funds" in this SAI.
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.
Two specific types of Municipal Securities are "Ohio Tax-Exempt Obligations" and
"New York Tax-Exempt Obligations." Ohio Tax-Exempt Obligations are Municipal
Securities issued by the State of Ohio 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 Ohio personal income tax. New York Tax-Exempt Obligations are
Municipal Securities issued by the State of New York 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 New York personal income tax.
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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 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.
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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.
Funds that invest in private activity bonds may not be a desirable investment
for "substantial users" of facilities financed by private activity bonds or
industrial development bonds or for "related persons" of substantial users.
Project notes are secured by the full faith and credit of the United States
through agreements with the issuing authority which provide that, if required,
the U.S. government will lend the issuer an amount equal to the principal of and
interest on the project notes, although the issuing agency has the primary
obligation with respect to its project notes.
Some municipal securities are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. Insured investments are covered by an insurance policy applicable to a
specific security, either obtained by the issuer of the security or by a third
party from a private insurer. Insurance premiums for the municipal bonds are
paid in advance by the issuer or the third party obtaining such insurance. Such
policies are noncancellable and continue in force as long as the municipal bonds
are outstanding and the respective insurers remain in business.
The insurer unconditionally guarantees the timely payment of the principal of
and interest on the insured municipal bonds when and as such payments become due
but shall not be paid by the issuer, except that in the event of any
acceleration of the due date of the principal by reason of mandatory or optional
redemption (other than acceleration by reason of a mandatory sinking fund
payment), default, or otherwise, the payments guaranteed will be made in such
amounts and at such times as payments of principal would have been due had there
not been such acceleration. The insurer will be responsible for such payments
less any amounts received by the bondholder from any trustee for the municipal
bond issuers or from any other source. The insurance does not guarantee the
payment of any redemption premium, the value of the shares of a Fund, or
payments of any tender purchase price upon the tender of the municipal bonds.
With respect to small issue industrial development municipal bonds and pollution
control revenue municipal bonds, the insurer guarantees the full and complete
payments required to be made by or on behalf of an issuer of such municipal
bonds if there occurs any change in the tax-exempt status of interest on such
municipal bonds, including principal, interest, or premium payments, if any, as
and when required to be made by or on behalf of the issuer pursuant
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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 investment objective and policies of each Fund that
invests in Municipal Securities ("Municipal Funds"). In meeting its investment
policies, a Municipal Fund may invest all or any part of its total assets in
Municipal Securities which are private activity bonds. Moreover, although no
Municipal Fund currently intends to do so on a regular basis, each such Fund 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.
Ohio Tax-Exempt Obligations. As used in the Prospectuses and this SAI, the term
"Ohio Tax-Exempt Obligations" refers to debt obligations issued by or on behalf
of the State of Ohio and its political subdivisions, the interest on which is,
in the opinion of the issuer's bond counsel, rendered on the date of issuance,
excluded from gross income for purposes of both federal income taxation and Ohio
personal income tax (as used herein the terms "income tax" and "taxation" do not
include any possible incidence of any alternative minimum tax). Ohio Tax-Exempt
Obligations are issued to obtain funds for various public purposes, including
the construction of a wide range of public facilities such as bridges, highways,
roads, schools, water and sewer works, and other utilities. Other public
purposes for which Ohio Tax-Exempt Obligations may be issued include refunding
outstanding obligations and obtaining funds to lend to other public institutions
and facilities. In addition, certain debt obligations known as "private activity
bonds" may be issued by or on behalf of municipalities and public authorities to
obtain funds to provide certain water, sewage and solid waste facilities,
qualified residential rental projects, certain local electric, gas and other
heating or cooling facilities, qualified hazardous waste facilities, high-speed
inter-city rail facilities, government-owned airports, docks and wharves and
mass commuting facilities, certain qualified mortgages, student loan and
redevelopment bonds and bonds used for certain organizations exempt from federal
income taxation. 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 Ohio
Tax-Exempt Obligations, 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 Ohio Tax-Exempt Obligations if the interest paid
thereon is, in the opinion of bond counsel, rendered on the date of issuance,
excluded from gross income for purposes of both federal income taxation
(including any alternative minimum tax) and Ohio personal income tax. A Fund
which invests in Ohio Tax-Exempt Obligations 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. See
"Dividends, Distributions, and Taxes" in the Prospectuses.
Prices and yields on Ohio Tax-Exempt Obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the market for tax-exempt obligations, the
size of a particular offering, the maturity of the obligation and ratings of
particular issues, and are subject to change
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from time to time. Current information about the financial condition of an
issuer of tax-exempt bonds or notes is usually not as extensive as that which is
made available by corporations whose securities are publicly traded.
Obligations of subdivision issuers of tax-exempt bonds and notes may be subject
to the provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, as amended, affecting the rights and remedies of
creditors. Congress or state legislatures may seek to extend the time for
payment of principal or interest, or both, or to impose other constraints upon
enforcement of such obligations. 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
Funds' 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. A recent decision of 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 a Fund and the value of its
portfolio.
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
subsequent to the issuance of tax-exempt bonds with certain of these
requirements could cause interest on the bonds to become includable in gross
income, including retroactively to the date of issuance.
A Fund may invest in Ohio Tax-Exempt Obligations either by purchasing them
directly or by purchasing certificates of accrual or similar instruments
evidencing direct ownership of interest payments or principal payments, or both,
on Ohio Tax-Exempt Obligations, provided that, in the opinion of counsel to the
initial seller of each such certificate or instrument, any discount accruing on
such certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related Ohio Tax-Exempt Obligations will be
exempt from federal income tax and Ohio personal income tax to the same extent
as interest on such Ohio Tax-Exempt Obligations. A Fund may also invest in Ohio
Tax-Exempt Obligations by purchasing from banks participation interests in all
or part of specific holdings of Ohio Tax-Exempt Obligations. Such participations
may be backed in whole or in part by an irrevocable letter of credit or
guarantee of the selling bank. The selling bank may receive a fee from the Fund
in connection with the arrangement. A Fund will not purchase participation
interests unless it receives an opinion of counsel or a ruling of the Internal
Revenue Service that interest earned by it on Ohio Tax-Exempt Obligations in
which it holds such a participation interest is exempt from federal income tax
and Ohio personal income tax.
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. No Municipal Fund currently intends to invest
in lower-rated municipal securities. However, each Municipal Fund may hold up to
5% of its assets in municipal securities that have been downgraded below
investment grade. While the market for municipal securities is considered to be
substantial, 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.
A Municipal 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. No Municipal Fund intends to invest in securities
whose interest is federally taxable; however, from time to time, a Municipal
Fund may invest a portion of its assets on a temporary basis in fixed-income
obligations whose interest is subject to federal income tax. For example, a
Municipal Fund may invest in obligations whose interest is federally taxable
pending the investment or reinvestment in municipal securities of proceeds from
the sale of its shares of portfolio securities.
Should a Municipal Fund invest in federally taxable obligations, it would
purchase securities which in the Adviser's judgment are of high quality. This
would include obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; obligations of domestic banks; and repurchase
agreements. The Municipal 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 a Municipal Fund may also
consider the comparable ratings of other NRSROs.
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 New York legislature that would affect the state tax treatment of the
Municipal Funds' distributions. If such proposals were enacted, the availability
of municipal obligations and the value of the Municipal Funds' holdings would be
affected and the Trustees would reevaluate the Funds' investment objective and
policies.
The Municipal 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, a Municipal Fund may hold cash that is not earning income.
In addition, there may be occasions when, in order to raise cash to meet
redemptions, a Municipal Fund may be required to sell securities at a loss.
Refunded Municipal Bonds. Investments by a Fund in refunded municipal bonds that
are secured by escrowed obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities are considered to be investments in U.S.
Government obligations for purposes of the diversification requirements to which
the Funds is subject under the 1940 Act. As a result, more than 5% of a Fund's
total assets may be invested in such refunded bonds issued by a particular
municipal issuer. The escrowed securities securing such refunded municipal bonds
will consist exclusively of U.S. Government obligations, and will be held by an
independent escrow agent or be subject to an irrevocable pledge of the escrow
account to the debt service on the original bonds.
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 securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When a Fund
engages in when-issued transactions, it relies on the seller to consummate the
trade.
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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 their investment objectives.
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 a 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.
A Fund may renegotiate delayed-delivery transactions after they are entered into
or may sell underlying securities before they are delivered, either of which may
result in capital gains or losses.
Mortgage-Backed Securities--In General. Mortgage-Backed Securities are backed by
mortgage obligations including, among others, conventional 30-year fixed rate
mortgage obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, Mortgage-Backed Securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. A Fund may purchase Mortgage-Backed Securities at a
premium or at a discount. Among the U.S. Government securities in which a Fund
may invest are Government Mortgage-Backed Securities (or government guaranteed
mortgage-related securities). Such guarantees do not extend to the value of
yield of the Mortgage-Backed Securities themselves or of the Fund's shares.
U.S. Government Mortgage-Backed Securities. Certain obligations of certain
agencies and instrumentalities of the U.S. Government are Mortgage-Backed
Securities. Some such obligations, such as those issued by GNMA are supported by
the full faith and credit of the U.S. Treasury; others, such as those of FNMA,
are supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Federal Farm Credit
Banks or FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies and instrumentalities if it is not
obligated to do so by law.
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
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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, but are not backed by the full
faith and credit of the U.S. Government.
GNMA Certificates. GNMA Certificates 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 underlying mortgages. Prepayments of
principal by mortgagors and mortgage foreclosures usually will result in the
return of the greater part of principal investment long before the maturity of
the mortgages in the pool. Foreclosures impose no risk to principal investment
because of the GNMA guarantee, except to the extent that a Fund has purchased
the certificates above par in the secondary market.
FHLMC Securities. FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. FHLMC issues
two types of mortgage pass-through securities ("FHLMC Certificates"), mortgage
participation certificates, and collateralized mortgage obligations ("CMOs").
Participation Certificates resemble GNMA Certificates in that each Participation
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FHLMC guarantees timely monthly payment of
interest on PCs and the ultimate payment of principal. 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. FNMA was established in 1938 to create a secondary market in
mortgages insured by the FHA, but has expanded its activity to the secondary
market for conventional residential mortgages. FNMA primarily issues two types
of mortgage-backed securities, guaranteed mortgage pass-through certificates
("FNMA Certificates") and CMOs. FNMA Certificates resemble GNMA Certificates in
that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest and principal on FNMA Certificates and CMOs. The FNMA
guarantee is not backed by the full faith and credit of the U.S. Government.
Collateralized Mortgage Obligations. Mortgage-Backed Securities in which a Fund
may invest may also include CMOs. CMOs are securities backed by a pool of
mortgages in which the principal and interest cash flows of the pool are
channeled on a prioritized basis into two or more classes, or tranches, of
bonds.
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
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guarantees are issued by government entities, private insurers and the mortgage
poolers. Such insurance and guarantees and the creditworthiness of the issuers,
thereof will be considered in determining whether a Non-Governmental
Mortgage-Backed Security meets a Fund's investment quality standards. There can
be no assurance that the private insurers can meet their obligations under the
policies. A Fund may buy Non-Governmental Mortgage-Backed Related Securities
without insurance or guarantees if, through an examination of the loan
experience and practices of the poolers, the Adviser determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable. A Fund will not purchase
mortgage-related securities or any other assets which in the opinion of the
Adviser are illiquid if, as a result, more than 15% of the value of the Fund's
net assets will be invested in illiquid securities.
A Fund may purchase mortgage-related securities with stated maturities in excess
of 10 years. Mortgage-related securities include CMOs and participation
certificates in pools of mortgages. The average life of mortgage-related
securities varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments. The rate of such
prepayments, and hence the average life of the certificates, will be a function
of current market interest rates and current conditions in the relevant housing
markets. The impact of prepayment of mortgages is described under "Government
Mortgage-Backed Securities." Estimated average life will be determined by the
Adviser. Various independent mortgage-related securities dealers publish
estimated average life data using proprietary models, and in making such
determinations, the Adviser will rely on such data except to the extent such
data are deemed unreliable by the Adviser. The Adviser might deem data
unreliable which appeared to present a significantly different estimated average
life for a security than data relating to the estimated average life of
comparable securities as provided by other independent mortgage-related
securities dealers.
Asset-Backed Securities. Asset-backed securities are debt securities backed by
pools of automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon. These
issues are normally traded over-the-counter and typically have a short to
intermediate maturity structure, depending on the paydown characteristics of the
underlying financial assets which are passed through to the security holder.
Futures and Options
Futures Contracts. A Fund 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.
A Fund 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. 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
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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 their margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for a Fund than might later be available in the market when it effects
anticipated purchases.
A Fund will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase. A Fund may also enter into futures
contracts as a temporary substitute to maintain exposure to a particular market
or security pending the purchase or sale of that security.
A Fund's 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. A Fund will not enter into futures
contract transactions for purposes other than bona fide hedging purposes to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of a Fund's total assets. In
addition, a Fund will not enter into futures contracts to the extent that the
value of the futures contracts held would exceed 1/3 of the Fund's total assets.
Futures transactions will be limited to the extent necessary to maintain a
Fund's qualification as a regulated investment company.
The Trust has undertaken to restrict their futures contract trading as follows:
first, the Trust will not engage in transactions in futures contracts for
speculative purposes; second, the Trust will not market its Funds to the public
as commodity pools or otherwise as vehicles for trading in the commodities
futures or commodity options markets; third, the Trust will disclose to all
prospective shareholders the purpose of and limitations on its Funds' commodity
futures
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trading; fourth, the Trust will submit to the CFTC special calls for
information. Accordingly, registration as a Commodities Pool Operator with the
CFTC is not required.
In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the SEC. Under those requirements, where a Fund has a long position in a
futures contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or liquid securities
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 liquid securities that, when
added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established). However, segregation of assets is
not required if a Fund "covers" a long position. For example, instead of
segregating assets, a Fund, when holding a long position in a futures contract,
could purchase a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by a Fund. In addition, where
a Fund takes short positions, or engages in sales of call options, it need not
segregate assets if it "covers" these positions. For example, where a Fund holds
a short position in a futures contract, it may cover by owning the instruments
underlying the contract. A Fund may also cover such a position by holding a call
option permitting it to purchase the same futures contract at a price no higher
than the price at which the short position was established. Where a Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. A Fund
could also cover this position by holding a separate call option permitting it
to purchase the same futures contract at a price no higher than the strike price
of the call option sold by a Fund.
In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Code's requirements for qualification as
a registered investment company and a Fund's intention to qualify as such.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying the futures contracts
that 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 it 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 markets, 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 involves 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
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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. Each Fund may sell (write) call options that 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, except that the Small Company Opportunity
Fund may write uncovered calls, that is, call options on securities that it does
not own. The risk of writing uncovered call options is that the writer of the
option may be forced to acquire the underlying security at a price in excess of
the exercise price of the option, that is, the price at which the writer has
agreed to sell the underlying security to the purchaser of the option. 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. 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.
The Convertible Securities Fund. The Convertible Securities Fund may purchase
and write (i.e., sell) call options that are traded on U.S. securities
exchanges, such as the Chicago Board Options Exchange, the American Stock
Exchange, the Philadelphia Stock Exchange and the Pacific Stock Exchange. The
Convertible Securities Fund may write call options only if they are covered, and
the options must remain covered so long as the Fund is obligated as a writer.
Puts. A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. A Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to a
Fund upon its exercise of a "put" is normally (i) a Fund's acquisition cost of
the securities (excluding any accrued interest which a Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period a Fund owned the securities, plus (ii)
all interest accrued on the securities since the last interest payment date
during that period.
Puts may be acquired by a Fund to facilitate the liquidity of its portfolio
assets. Puts may also be used to facilitate the reinvestment of a Fund's assets
at a rate of return more favorable than that of the underlying security. Puts
may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of a Fund's assets. See "Variable and Floating Rate Notes"
and "Valuation" in this SAI.
A Fund generally will acquire puts only where the puts are available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for puts either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the puts
(thus reducing the yield to maturity otherwise available for the same
securities). The Funds intends to enter into puts only with dealers, banks, and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.
The Special Value Fund may write put options from time to time. Such options may
be listed on a national securities exchange and issued by the Options Clearing
Corporation or traded over-the-counter. The Small Company Opportunity Fund may
seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option the Small Company Opportunity
Fund has written, however, the Small Company Opportunity Fund must continue to
be prepared to pay the strike price while the option is outstanding, regardless
of price changes, and must continue to set aside assets to cover its
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position. Upon the exercise of an option, the Fund is not entitled to the gains,
if any, on securities underlying the options. The Small Company Opportunity Fund
also may purchase index put and call options and write index options. Through
the writing or purchase of index options, the Small Company Opportunity Fund can
achieve many of the same objectives as through the use of options on individual
securities. Utilizing options is a specialized investment technique that entails
a substantial risk of a complete loss of the amounts paid as premiums to writers
of options.
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 Trust's 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, the Fund would seek to take appropriate steps to protect liquidity.
Each of the Money Market Funds may invest up to 10% of its net assets in
illiquid securities.
Restricted Securities. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act, or in a registered public offering. The Convertible Securities
Fund may invest up to 15% of its net assets in restricted securities.
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 Funds (with the exception of the tax-exempt
funds) may from time to time lend securities from their 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 Adviser,
serves as lending agent for the Funds, except the tax-exempt funds, pursuant to
a Securities Lending Agency Agreement that was adopted by the Trustees of the
Funds. Under the Funds' 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 Funds 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 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 Fund sufficient to
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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 Funds or the borrower at any time. While a
Fund 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. A Fund will only enter into loan arrangements
with broker-dealers, banks or other institutions that the Adviser has determined
are creditworthy under guidelines established by the Trustees. The Funds will
limit their securities lending to 33 1/3% of total assets.
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. 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.
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. The Convertible Securities Fund
will use only warrants that are attached to the underlying securities.
Convertible Securities. A convertible security is typically a bond or preferred
stock that may be converted at a stated price within a specified period of time
into a specified number of shares of common stock of the same or a different
issuer. Convertible securities are usually senior to common stock in a
corporation's capital structure, but usually are subordinate to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar non-convertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the common stock into which it is
convertible.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed income security) or its
"conversion value" (i.e., the value of the underlying share of common stock if
the security is converted). As a fixed-income security, a convertible security
tends to increase in market value when interest rates decline and tends to
decrease in value when interest rates rise. However, the price of a convertible
security also is influenced by the market value of the security's underlying
common stock. Thus, the price of a convertible security tends to increase as the
market value of the underlying stock increases, and tends to decrease as the
market value of the underlying stock declines. While no securities investment is
without some risk, investments in convertible securities generally entail less
risk than investments in the common stock of the same issuer.
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Securities received upon conversion of convertible securities or upon exercise
of call options or warrants forming elements of synthetic convertibles
(described below) may be retained temporarily to permit orderly disposition or
to defer realization of gain or loss for federal tax purposes, and will be
included in calculating the amount of the Fund's total assets invested in true
and synthetic convertibles.
Synthetic Securities. The Convertible Securities Fund also may invest in
"synthetic convertibles". A synthetic convertible is create by combining
separate securities which possess the two principal characteristics of a true
convertible security, i.e., fixed income ("fixed-income component") and the
right to acquire equity securities ("convertibility component"). The
fixed-income component is achieved by investing in non-convertible bonds,
preferred stocks and money market instruments. The convertibility component is
achieved by investing in warrants or exchange listed call options or stock index
call options granting the holder the right to purchase a specified quantity of
securities within a specified period of time at a specified price or to receive
cash in the case of stock index options.
A holder of a synthetic convertible faces the risk of a decline in the price of
the stock or the level of the index involved in the convertibility component,
causing a decline in the value of the option or warrant. Should the price of the
stock fall below the exercise price and remain there throughout the exercise
period, the entire amount paid for the call option or warrant would be lost.
Since a synthetic convertible includes the fixed-income component as well, the
holder of a synthetic convertible also faces the risk that interest rates will
rise, causing a decline in the value of the fixed-income instrument.
Refunding Contracts. A Fund generally will not be obligated to pay the full
purchase price if it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated damages to the
issuer (currently 15-20% of the purchase price). A Fund may secure its
obligations under a refunding contract by depositing collateral or a letter of
credit equal to the liquidated damages provisions of the refunding contract.
When required by SEC guidelines, a Fund will place liquid assets in a segregated
custodial account equal in amount to its obligations under refunding contracts.
Standby Commitments. A Fund may enter into standby commitments, which are puts
that entitle holders to same-day settlement at an exercise price equal to the
amortized cost of the underlying security plus accrued interest, if any, at the
time of exercise. The Funds may acquire standby commitments to enhance the
liquidity of portfolio securities.
Ordinarily, the Funds may not transfer a standby commitment to a third party,
although they could sell the underlying municipal security to a third party at
any time. The Funds may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In the
latter case, the Funds would pay a higher price for the securities acquired,
thus reducing their yield to maturity.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the
Funds; and the possibility that the maturities of the underlying securities may
be different from those of the commitments.
Foreign Investments. A Fund may invest in securities issued by foreign branches
of U.S. banks, foreign banks, or other foreign issuers, including sponsored and
unsponsored American Depositary Receipts ("ADRs") and securities purchased on
foreign securities exchanges. Such investment may subject a 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.
On January 1, 1999, 11 European countries that are members of the European
Economic and Monetary Union (EMU) introduced the Euro as a common currency. The
introduction of the Euro may result in uncertainties for European securities and
for each Fund that invests in them. Over a period of time, issuers will need to
redenominate
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European debt and equity securities, which may result in various accounting
differences and tax treatments that otherwise would not likely occur. Some
complications may arise due to the fact that some members of the EMU, such as
the United Kingdom, have not implemented the Euro. The Adviser and Indocam
International Investment Services, S.A. ("IIIS"), the sub-adviser of the
International Growth Fund, are actively working to address issues related to the
introduction of the Euro. At this time, no one can predict what impact the
introduction of the Euro will have. To the extent that the Euro has a negative
effect on a particular market, the value of some of the Funds' securities could
be negatively affected.
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, which
may result in 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.
A 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 International Growth Fund currently invests in the securities of issuers
based in a number of foreign countries. The Adviser and IIIS, the sub-adviser of
the International Growth Fund, continuously evaluate 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 meet the investment criteria of the Adviser and IIIS and are
consistent with the investment objective 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 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.
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Additional Information Concerning Ohio Issuers
- ----------------------------------------------
The Ohio Municipal Bond Fund and Ohio Municipal Money Market Fund will each
invest most of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease - purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions ("Ohio Obligations"). The Ohio Municipal
Bond Fund and Ohio Municipal Money Market Fund are therefore susceptible to
general or particular economic, political or regulatory factors that may affect
issuers of Ohio Obligations. The following information constitutes only a brief
summary of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived from
official statements of certain Ohio issuers published in connection with their
issuance of securities and from other publicly available information, and is
believed to be accurate. No independent verification has been made of any of the
following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection with
investment in particular Ohio Obligations or in those obligations of particular
Ohio issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors apply.
However, the information below is intended only as a general summary, and is not
intended as a discussion of any specific factors that may affect any particular
obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1996 is
11,173,000.
While diversifying more into the service and other non-manufacturing areas, the
Ohio economy continues to rely in part on durable goods manufacturing largely
concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
seven years, the State rates were below the national rates (4.6% versus 4.9% in
1997). The unemployment rate and its effects vary among geographic areas of the
State.
There can be no assurance that future national, regional or state-wide economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the Ohio Municipal Bond Fund and Ohio Municipal Money Market Fund or the
ability of particular obligors to make timely payments of debt service on (or
lease payments relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations and
expenditures, and is precluded by law from ending its July 1 to June 30 fiscal
year ("FY") or fiscal biennium in a deficit position. Most State operations are
financed through the General Revenue Fund ("GRF"), for which the personal income
and sales-use taxes are the major sources. Growth and depletion of GRF ending
fund balances show a consistent pattern related to national economic conditions,
with the ending FY balance reduced during less favorable and increased during
more favorable economic periods. The State has well-established procedures for,
and has timely taken, necessary actions to ensure resource/expenditure balances
during less favorable economic periods. Those procedures included general and
selected reductions in appropriations spending.
The 1992-93 biennium presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences an
interim appropriations act was enacted effective July 1, 1991; it included GRF
debt service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a
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month. Pursuant to the general appropriations act for the entire biennium,
passed on July 11, 1991, $200 million was transferred from the Budget
Stabilization Fund ("BSF," a cash and budgetary management fund) to the GRF in
FY 1992.
Based on updated results and forecasts in the course of that FY, both in light
of a continuing uncertain nationwide economic situation, there was projected and
then timely addressed an FY 1992 imbalance in GRF resources and expenditures. In
response, the Governor ordered most State agencies to reduce GRF spending in the
last six months of FY 1992 by a total of approximately $184 million; the $100.4
million BSF balance and additional amounts from certain other funds were
transferred late in the FY to the GRF, and adjustments were made in the timing
of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected for
FY 1993. It was addressed by appropriate legislative and administrative actions,
including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for debt
service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF. The
biennium ended June 30, 1995 with a GRF ending fund balance of $928 million, of
which $535.2 million was transferred into the BSF. The significant GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF and other funds including school assistance
funds and, in anticipation of possible federal program changes, a human services
stabilization fund.
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100 million
was transferred for elementary and secondary school computer network purposes
and $30 million to a new State transportation infrastructure fund. Approximately
$400.8 million served as a basis for temporary 1996 personal income tax
reductions aggregating that amount. The 1996-97 biennium-ending GRF fund balance
was $834.9 million. Of that, $250 million went to school building construction
and renovation, $94 million to the school computer network, $44.2 million for
school textbooks and instructional materials and a distance learning program,
and $34 million to the BSF, and the $263 million balance to a State income tax
reduction fund.
The GRF appropriations act for the 1998-99 biennium was passed on June 25, 1997
and promptly signed (after selective vetoes) by the Governor. All necessary GRF
appropriations for State debt service and lease rental payments then projected
for the biennium were included in that act. Subsequent legislation increased the
fiscal year 1999 GRF appropriate on level for elementary and secondary
education, with the increase to be funded in part by mandated small percentage
reductions in State appropriations for various State agencies and institutions.
Expressly exempt from those reductions are all appropriations for debt service,
including lease rental payments.
The BSF had a September 17, 1998 balance of over $906 million.
The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State constitutional provisions.
The State may incur debt, limited in amount to $750,000, to cover casual
deficits or failures in revenues or to meet expenses not otherwise provided for.
The Constitution expressly precludes the State from assuming the debts of any
local government or corporation. (An exception is made in both cases for any
debt incurred to repel invasion, suppress insurrection or defend the State in
war.)
By 14 constitutional amendments approved from 1921 to date (the latest adopted
in 1995) Ohio voters authorized the incurrence of State debt and the pledge of
taxes or excises to its payment. At September 17, 1998, $1.12 billion (excluding
certain highway bonds payable primarily from highway use receipts) of this debt
was outstanding. The only such State debt at that date still authorized to be
incurred were portions of the highway bonds, and the following: (a) up to $100
million of obligations for coal research and development may be outstanding at
any one time ($26.7 million
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outstanding); (b) $240 million of obligations previously authorized for local
infrastructure improvements, no more than $120 million of which may be issued in
any calendar year (over $1 billion outstanding or awaiting delivery) and (c) up
to $200 million in general obligation bonds for parks, recreation and natural
resources purposes which may be outstanding at any one time ($88.6 million
outstanding, with no more than $50 million to be issued in any one year).
The electors in 1995 approved a constitutional amendment extending the local
infrastructure bond program (authorizing an additional $1.2 billion of State
full faith and credit obligations to be issued over 10 years for the purpose),
and authorizing additional highway bonds (expected to be payable primarily from
highway use receipts). The latter supersedes the prior $500 million outstanding
authorization, and authorizes not more than $1.2 billion to be outstanding at
any time and not more than $220 million to be issued in a fiscal year.
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations issued
by the Ohio Public Facilities Commission and the Ohio Building Authority, and
certain obligations issued by the State Treasurer, over $5.2 billion of which
were outstanding or awaiting delivery at September 17, 1998.
The State estimates that aggregate FY 1998 rental payments under various capital
lease and lease purchase agreements were approximately $9.1 million. In recent
years, State agencies have also participated in transportation and office
building projects that may have some local as well as State use and benefit, in
connection with which the State enters into lease purchase agreements with terms
ranging from 7 to 20 years. Certificates of participation, or special obligation
bonds of the State or a local agency, are issued that represent fractionalized
interests in or are payable from the State's anticipated payments. The State
estimates highest future FY payments under those agreements (as of September 17,
1998) to be approximately $27.3 million (of which $23.6 million is payable from
sources other than the GRF, such as federal highway money distributions). State
payments under all those agreements are subject to biennial appropriations, with
the lease terms being two years subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund " approach funded essentially
from program revenues.)
State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease -purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state - wide aggregate
approximately 44% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 119 districts (as
of September 17, 1998) from voter -authorized income taxes, for significant
portions of their budgets. Litigation, similar to that in other states, has been
pending questioning the constitutionality of Ohio's system of school funding.
The Ohio Supreme Court has concluded that aspects of the system (including basic
operating assistance and the loan program referred to below) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution , staying its order to permit time for
responsive corrective actions. The parties await eventual trial court decision
on the adequacy of steps taken to date by the State to enhance school funding
consistent with the Supreme Court decision. A small number of the State's 612
local school districts have in any year required special assistance to avoid
year -end deficits. A program has provided for school district cash need
borrowing directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed. Recent borrowings under this program
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totaled $71.1 million for 29 districts in FY 1995 (including $29.5 million for
one), $87.2 million for 20 districts in FY 1996 (including $42.1 million for
one), $113.2 million for 12 districts in FY 1997 (including $90 million to one
for restructuring its prior loans), and $23.4 million for 10 districts in FY
1998.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State.
For those few municipalities and school districts that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
25 cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated (one village and three cities are in preliminary "fiscal
watch" status). As of September 17, 1998, the 1996 school district "fiscal
emergency" provision was applied to six districts, and 10 were on preliminary
"fiscal watch" status.
At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts. The Constitution has since 1934 limited to 1% of true
value in money the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions, without
a vote of the electors or a municipal charmer provision, and statutes limit the
amount of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes that are unlimited as to amount or
rate.
Additional Information Concerning New York Issuers
- --------------------------------------------------
The New York Tax-Free Fund will invest substantially all of its assets in New
York municipal securities. In addition, the specific New York municipal
securities in which the New York Tax-Free Fund will invest will change from time
to time. The New York Tax-Free Fund is therefore susceptible to political,
economic, regulatory or other factors affecting issuers of New York municipal
securities. The following information constitutes only a brief summary of a
number of the complex factors which may affect issuers of New York municipal
securities and does not purport to be a complete or exhaustive description of
all adverse conditions to which issuers of New York municipal securities may be
subject. Such information is derived from official statements utilized in
connection with the issuance of New York municipal securities, as well as from
other publicly available documents. Such information has not been independently
verified by the New York Tax-Free Fund, and the New York Tax-Free Fund assumes
no responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have a material adverse impact on the financial condition of such
issuers. The New York Tax-Free Fund cannot predict whether or to what extent
such factors or other factors may affect the issuers of New York municipal
securities, the market value or marketability of such securities or the ability
of the respective issuers of such securities acquired by the Fund to pay
interest on or principal of such securities. The creditworthiness of obligations
issued by local New York issuers may be unrelated to the creditworthiness of
obligations issued by the State of New York, and there is no responsibility on
the part of the State of New York to make payments on such local obligations.
There may be specific factors that are applicable in connection with investment
in the obligations of particular issuers located within New York, and it is
possible the Fund will invest in obligations of particular issuers as to which
such specific factors are applicable. However, the information set forth below
is intended only as a general summary and not as a discussion of any specific
factors that may affect any particular issuer of New York municipal securities.
The New York Tax-Free Fund may invest in municipal securities issued by New York
State (the "State"), by its various public bodies (the "Agencies") and/or by
other entities located within the State, including the City of New York (the
"City") and political subdivisions thereof and/or their agencies.
New York State. The State's current fiscal year commenced on April 1, 1998, and
ends on March 31, 1999 and is referred to herein as the State's 1998-99 fiscal
year. The Legislature adopted the debt service component of the State budget for
the 1998-99 fiscal year on March 30, 1998 and the remainder of the budget on
April 18, 1998. Prior to
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adoption of the budget, the Legislature enacted appropriations for disbursements
considered to be necessary for State operations and other purposes. The State
Financial Plan for the 1998-99 fiscal year was released on June 25, 1998 and is
based on the State's budget as enacted by the Legislature and signed into law by
the Governor. The update to the State's financial projections based upon General
Accepted Accounting Principles will be released on or before September 1, 1998.
1998-99 Fiscal Year State Financial Plan. The 1998-99 State Financial Plan is
projected to be balanced on a cash basis, with an estimated reserve for future
needs of $761 million. General Fund disbursements in 1998-99 are now projected
to grow by $2.43 billion over 1997-98 levels, or $690 million more than proposed
in the Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State's enacted budget includes several new multi-year tax
reduction initiatives, in addition to significant increases in spending for
public schools, special education programs, and for the State and City
university systems. It also allocates $50 million for a new Debt Reduction
Reserve Fund (DRRF) that may eventually be used to pay debt service costs on or
to prepay outstanding State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the General Fund
of $1.42 billion that is comprised of a reserve of $761 million available for
future needs, a balance of $400 million in the Tax Stabilization Reserve Fund
(TSRF), a balance of $158 million in the Community Projects Fund (CPF), and a
balance of $100 million in the Contingency Reserve Fund. In the event of an
unanticipated General Fund cash operating deficit, the Tax Stabilization Reserve
Fund (TSRF) can be used. The CRF provides resources to help finance any
extraordinary litigation costs during the fiscal year.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the federal government, that are not under the
control of the State. In addition, the State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. The Division of Budget believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth in this SAI and those projections may be changed
materially and adversely from time to time.
The four governmental fund types that comprise the State Financial Plan are the
General Fund, the Special Revenue Funds, the Capital Projects Funds, and the
Debt Service Funds. This fund structure adheres to accounting standards of the
Governmental Accounting Standards Board. This section discusses first the
General Fund and then the other governmental funds.
General Fund. The General Fund is the principal operating fund of the State and
is used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1998-99 fiscal year, the General Fund is expected to account for
approximately 47.6 percent of total Governmental Funds disbursements and 70.1
percent of total State Funds disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types. The following are the projected
shares of General Fund receipts and disbursements: Receipts: Personal Income Tax
- - 56.6%, User Taxes and Fees - 19%, Business Taxes - 13.2%, Other Taxes - 2.7%,
Miscellaneous - 8.5%; Disbursements: Local Assistance - 68.4%; State Operations
- - 18.2%, Debt Service - 6.0%, General State Charges - 6.0%, Capital/Other -
1.4%.
State Fiscal Year 1998-99. The General Fund is projected to be balanced on a
cash basis for the 1998-99 fiscal year. Total receipts and transfers from other
funds are projected to be $37.56 billion, an increase of $3.01 billion from the
1997-98 fiscal year. This total includes $34.36 billion in tax receipts, $1.40
billion in miscellaneous receipts, and $1.80 billion in transfers from other
funds. Total General Fund disbursements and transfers to the other funds are
projected to be $36.78 billion, an increase of $2.43 billion from the 1997-98
fiscal year.
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Projected General Fund Receipts
The discussion below summarizes the State's projections of General Fund tax
revenues and other revenues for the 1998-99 fiscal year.
The Personal Income Tax is imposed on the income of individuals, estates and
trusts and is based on federal definitions of income and deductions with certain
modifications. This tax continues to account for over half of the State's
General Fund receipts base.
The projected yield of the tax for the 1998-99 fiscal year is $21.24 billion, an
increase of nearly $3.5 billion from reported collections in the State's 1997-98
fiscal year. Since 1997 represented the completion of the 20 percent income tax
reduction program enacted in 1995, growth from 1997 to 1998 will be unaffected
by major income tax reductions. Adding to the projected annual growth is the net
impact of the transfer of the surplus from 1997-98 to the current year which
affects reported collections by over $2.4 billion on a year-over-year basis, as
partially offset by the diversion of slightly over $700 million in income tax
receipts to the STAR fund to finance the initial year of the school tax
reduction program. The STAR program was enacted in 1997 to increase the State
share of school funding and reduce residential school taxes. Adjusted for these
transactions, the growth in net income tax receipts is roughly $1.7 billion, an
increase of over 9 percent. This growth is largely a function of over 8 percent
growth in income tax liability projected for 1998 as well as the impact of the
1997 tax year settlement on 1998-99 net collections.
User taxes and fees are comprised of three-quarters of the State four percent
sales and use tax (the balance, one percent, flows to support Local Government
Assistance Corporation ("LGAC") debt service requirements), cigarette, alcoholic
beverage container, and auto rental taxes, and a portion of the motor fuel
excise levies. Also included in this category are receipts from the motor
vehicle registration fees and alcoholic beverage license fees. A portion of the
motor fuel tax and motor vehicle registration fees and all of the highway use
tax are earmarked for dedicated transportation funds.
Receipts in this category in the State's 1998-99 fiscal year are expected to
total $7.14 billion, an increase of $107 million from reported results in the
prior year. The sales tax component of this category account for all of the
1998-99 growth, as receipts from all other sources decline $100 million. The
growth in yield of the sales tax in 1998-99, after adjusting for tax law and
other changes, is projected at 4.7 percent. The yield of most of the excise
taxes in this category show a long-term declining trend, particularly cigarette
and alcoholic beverage taxes. These General Fund declines are exacerbate in
1998-99 by revenue losses from scheduled and newly enacted tax reductions, and
by an increase in earmarking of motor vehicle registration fees to the Dedicated
Highway and Bridge Trust Fund.
Business taxes include franchise taxes based generally on net income of general
business, bank and insurance corporations, as well as gross-receipts-based taxes
on utilities and gallonage-based petroleum business taxes. Beginning in 1994,
the surcharge rate has been phased out and, for most taxpayers, there will be no
surcharge liability for taxable periods ending in 1997 and thereafter.
Total business tax collections in the State's 1998-99 fiscal year are projected
at $4.96 billion, a decline of $91 million since the prior fiscal year. The
category includes receipts from the largely income-based levies on general
business corporations, banks and insurance companies, gross receipts taxes on
energy and telecommunication service providers and a per-gallon imposition on
petroleum business. The decline results from statutory changes over the past two
years. These include the first year of utility-tax rate cuts and the Power for
Jobs tax reduction program for energy providers, and the scheduled additional
diversion of General Fund petroleum business and utility tax receipts to their
funds. In addition, profit growth is also expected to slow in 1998.
Other taxes include estate, gift and real estate transfer taxes, a tax on gains
from the sale or transfer of certain real estate, a pari-mutuel tax and other
minor levies. They are now projected to total $1.02 billion-$75 million below
last year's amount. Two factors account for a significant part of the expected
decline in collections from this category. First, the effects of the elimination
of the real property gains tax collections; second, a decline in estate tax
receipts, following the explosive growth recorded in 1997-98, when receipts
expanded by over 16 percent.
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Miscellaneous receipts include investment income, abandoned property receipts,
medical provider assessments, minor federal grants, receipts from public
authorities, and certain other license and fee revenues. Receipts in this
category in the State's 1998-99 fiscal year are expected to total $1.40 billion,
down almost $200 million from the prior year, reflecting the loss of
non-recurring receipts in 1997-98 and the growing effects of the phase-out of
the medical provider assessments..
Transfer from other funds to the General Fund consist primarily of tax revenues
in excess of debt service requirements, particularly the one percent sales tax
used to support payments to LGAC. Transfers from other funds are expected to
total $1.8 billion, or $222 million less than total receipts from this category
during 1997-98. Total transfers of sales taxes in excess of LGAC debt service
requirements are expected to increase by approximately $51 million, while
transfers from all other funds are expected to fall by $273 million, primarily
reflecting the absence, in 1998-99, of a one-time transfer of nearly $200
million for retroactive reimbursement of certain social services claims from the
federal government..
Projected General Fund Disbursements
General Fund disbursements in 1998-99, including transfers to support capital
projects, debt service and other funds are estimated at $36.78 billion. This
represents an increase of $2.43 billion or 7.1 percent from 1997-98. Nearly
one-half of the growth is for educational purposes, reflecting increased support
for public schools, special education programs and the State and City university
systems. The remaining increase is primarily for Medicaid , mental hygiene, and
other health and social welfare programs, including children and family
services. The 1998-99 Financial Plan also includes funds for the current
negotiated salary increases for State employees, as well as increased transfers
for debt service.
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to individuals.
Disbursements from this category are projected to total $25.14 billion in the
1998-99 Financial Plan, an increase of $1.88 billion or 8.1 percent over the
prior year. The largest annual increases are for educational programs, Medicaid,
other health and social welfare programs, and community projects grants.
The 1998-99 budget provides $9.65 billion in support for public schools. The
year-to-year increase of $769 million is comprised of partial funding for
1998-99 school year increase of $847 million as well as the remainder of the
1997-98 school year increase that occurs in State fiscal year 1998-99. Spending
for other educational programs, which includes the State and City university
systems, the Tuition Assistance Program, and handicapped programs, is estimated
at $3.00 billion, an increase of $270 million over 1997-98 levels. General Fund
payments for Medicaid are projected to be $5.60 billion, an increase of $144
million from the prior year. Medicaid spending is projected to increase $260
million or 4.9 percent. Other social service spending is forecast to total $3.63
billion, an increase of $131 million from 1997-98. This includes an increase in
support for children and families and local public health programs, offset by a
decline in welfare spending of $75 million that reflects continuing State and
local efforts to reduce welfare fraud, declining caseloads, and the impact of
State and federal welfare reform legislation.
Remaining disbursements primarily support community-based mental hygiene
programs, community and public health programs, local transportation programs,
and revenue sharing. Revenue sharing and other general purpose aid to local
governments are projected at $837 million, an increase of approximately $37
million from 1997-98.
State operations spending reflects the administrative costs of operating the
State's agencies, including the prison system, mental hygiene institutions, the
State University system ("SUNY"), the Legislature, and the court system.
Personal service costs account for approximately 73 percent of spending in this
category. Since January 1995, the State's work force has been reduced by about
ten percent and is expected to remain at its current level of approximately
191,000 persons in 1998-99.
Disbursements for State operations are projected at $6.70 billion, an increase
of $511 million or 8.3 percent from the prior year. This increase is primarily
due to an additional payroll cycle in 1998-99, a 3.5 percent general salary
increase
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on October 1, 1998 for most State employees, the loss of federal receipts that
would otherwise lower General Fund spending in mental hygiene programs, and a
projected 15.6 percent increase in the Judiciary's budget.
General State charges primarily reflect the costs of providing fringe benefits
for State employees, including contributions to pension systems, the employer's
share of social security contributions, employer contributions toward the cost
of health insurance, and the costs of providing worker's compensation and
unemployment insurance benefits. This category also reflects certain fixed costs
such as payments in lieu of taxes, and payments of judgments against the State
or its public officers.
Disbursements in this category are projected to total $2.22 billion in the
1998-99 State Financial Plan, a decrease of $50 million from the 1997-98 levels.
This annual decline reflects projected decreases in pension costs and Court of
Claims payments, offset by modest projected increases for health insurance
contributions, social security costs, and the loss of reimbursements due to a
reduction in the fringe benefit rate charged to positions financed by
non-General Fund sources.
Debt service paid from the General Fund reflects debt service on short-term
obligations of the State, and includes only interest costs on the State's
commercial paper program. The 1998-99 debt service estimate is $11 million,
reflecting relative stability in short-term interest rates. The State's
short-term TRAN borrowing program was eliminated in 1995.
Transfers to other funds from the General Fund are made primarily to finance
certain portions of State capital projects spending and debt service on
long-term bonds, where these costs are not funded from other sources. Transfers
in support of debt service are projected to total $2.13 billion in 1998-99, an
increase of $110 million from 1997-98. Transfers in support of capital projects
are projected at $200 million, comparable to last year. Remaining transfers from
the General Fund to other funds are estimated to decline $59 million in 1998-99
to $327 million.
Special Revenue Funds are used to account for the proceeds of specific revenue
sources such as federal grants that are legally restricted, either by the
Legislature or outside parties, to expenditures for specified purposes. Total
disbursements for programs supported by Special Revenue Funds are projected at
$29.97 billion, an increase of $2.32 billion or 8.4 percent from 1997-98.
Federal grants account for approximately three-quarters of all spending in the
Special Revenue fund type. Disbursements from federal funds are estimated at
$21.78 billion, an increase of $1.12 billion or 5.4 percent. The single largest
program in this fund group is Medicaid, which is projected at $13.65 billion, an
increase of $465 million or 3.5 percent above last year. Federal support for
welfare programs is projected at $2.53 billion, similar to 1997-98. The
remaining growth in federal funds is primarily due to the new Child Health Plus
program, estimated at $197 million in 1998-99. State special revenue spending is
projected to be $8.19 billion, an increase of $1.20 billion or 17.2 percent from
last year's levels. Most of this projected increase in spending is due to the
$704 million cost of the first phase of the STAR program, as well as $231
million in additional operating assistance for mass transportation, and $113
million for the State share of the new Child Health Plus program.
Capital Projects Funds account for the financial resources used in the
acquisition, construction, or rehabilitation of major State capital facilities,
and for capital assistance grants to certain local governments or public
authorities. In the 1998-99 fiscal year, activity in these funds is expected to
comprise 5.5 percent of total governmental receipts. Capital Projects Funds
spending in fiscal year 1998-99 is projected at $4.14 billion, an increase of
$575 million or 16.1 percent from last year. The major components of this
expected growth are transportation and environmental programs, including
continued increased spending for 1996 Clean Water/Clean Air Bond Act projects
and higher projected disbursements from the Environmental Protection Fund.
Another significant component of this projected increase is in the area of
public protection, primarily for facility rehabilitation and construction of
additional prison capacity.
Debt Service Funds are used to account for the payment of principal and interest
on, long-term debt of the State and to meet commitments under lease-purchase and
other contractual-obligation financing arrangements. This fund type is expected
to comprise 3.8 percent of total government fund receipts in the 1998-99 fiscal
year. Receipts in these funds in excess of debt service requirements may be
transferred to the General Fund, Capital Projects Funds and Special Revenue
Funds, pursuant to law.
In the 1998-99 fiscal year, total disbursements in this fund type are projected
at $3.36 billion, an increase of $275 million or 8.9 percent from 1997-98
levels. Of the increase, $102 million is for transportation purposes and another
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$45 million is for education purposes. The remainder is for a variety of
programs in such areas as mental health and corrections, and for general
obligation financings.
Special Considerations. The economic and financial condition of the State may be
affected by various financial, social, economic and political factors. These
factors can be very complex, may vary from fiscal year to fiscal year, and are
frequently the result of actions taken not only by the State and its agencies
and instrumentalities, but also by entities, such as the federal government,
that are not under the control of the State. Because of the uncertainty and
unpredictability of these factors, their impact cannot, as a practical matter,
be included in the assumptions underlying the State's projections at this time.
The State Financial Plan is based upon forecasts and national and State economic
activity developed through both internal analysis and review of State and
national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, the condition of the financial sector,
federal fiscal and monetary policies, the level of interest rates, and the
condition of the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not experience results in
the current fiscal year that are worse than predicted, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
Projections of total State receipts in the State Financial Plan are based on the
State tax structure in effect during the fiscal year and on assumptions relating
to basic economic factors and their historical relationships to State tax
receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
estimates for taxes that are based on computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions relating to
economic and demographic factors, levels of disbursements for various services
provided by local governments (where the cost is partially reimbursed by the
State), and the results of various administrative and statutory mechanisms in
controlling disbursements for State operations. Factors that may affect the
level of disbursements in the fiscal year include uncertainties relating to the
economy of the nation and the State, the policies of the federal government, and
changes in the demand for and use of State services.
An additional risk to the State Financial Plan arises from the potential impact
of certain litigation and of federal disallowances now pending against the
State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely form the projections set forth in this Annual
Information Statement. In the past, the State has taken management actions and
made use of internal sources to address potential State Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
Despite recent budgetary surpluses recorded by the State, actions affecting the
level of receipts and disbursements, the relative strength of the State and
regional economy, and actions by the federal government have helped to create
projected structural budget gaps for the State. These gaps result from a
significant disparity between recurring revenues and the costs of maintaining or
increasing the level of support for State programs. To address a potential
imbalance in any given fiscal year, the State would be required to take actions
to increase receipts and/or reduce disbursements as it enacts the budget for
that year, and, under the State Constitution, the Governor is required to
propose a balanced
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budget each year. There can be no assurance, however, that the Legislature will
enact the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance in a given fiscal year or to align recurring receipts
and disbursements in future fiscal years.
Year 2000 Compliance. New York State is currently addressing "Year 2000" data
processing compliance issues. The Year 2000 compliance issue ("Y2K") arises
because most computer software programs allocate two digits to the data field
for "year" on the assumption that the first two digits will be "19." Such
programs will thus interpret the year 2000 as the year 1900 absent
reprogramming. Y2K could impact both the ability to enter data into computer
programs and the ability of such programs to correctly process data.
In 1996, the State created the Office for Technology (OFT) to help address
statewide technology issues, including the Year 2000 issue. OFT has estimated
that investments of at least of $140 million will be required to bring
approximately 350 State mission-critical and high-priority computer systems not
otherwise scheduled for replacement into Year 2000 compliance, and the State is
planning to spend $100 million in the 1998-99 fiscal year for this purpose.
Mission-critical computer applications are those which impact the health, safety
and welfare of the State and its citizens, and for which failure to be in the
Y2K compliance could have a material and adverse impact upon State operations.
High-property computer applications are those that are critical for a State
agency to fulfill its mission and deliver services, but for which there are
manual alternatives. Work has been completed on roughly 20 percent of these
systems. All remaining unfinished mission-critical and high-priority systems
have at least 40 percent or more of the work completed. Contingency planning is
underway for those systems which may be non-compliant prior to failure dates.
The enacted budget also continues funding for major systems scheduled for
replacement, including the State payroll, civil service, tax and finance and
welfare management systems, for which Year 2000 compliance is included as a part
of the project.
OFT is monitoring compliance on a quarterly basis and is providing assistance
and assigning resources to accelerate compliance for mission critical systems,
with most compliance testing expected to be completed by mid-1999. There can be
no guarantee, however, that all of the State's mission-critical and
high-priority computer systems will be Year 2000 compliant and that there will
not be an adverse impact upon State operations or State finances as a result.
Cash Basis Results for Prior Fiscal Years. The State reports its financial
results on two bases of accounting: the cash basis, showing receipts and
disbursements; and the modified accrual basis, prescribed by Generally Accepted
Accounting Principles (GAAP), showing revenues and expenditures.
General Fund 1995-96 through 1997-98. The General Fund is the principal
operating fund of the State and is used to account for all financial
transactions, except those required to be accounted for in another fund. It is
the State's largest fund and receives most State taxes and other resources not
dedicated to particular purposes. General Fund moneys are also transferred to
other funds, primarily to support certain capital projects and debt service
payments in other fund types.
New York State's financial operations have improved during recent fiscal years.
During the period 1989-90 through 1991-92, the State incurred General Fund
operating deficits that were closed with receipts from the issuance of tax and
revenue anticipation notes ("TRANs"). A national recession, followed by the
lingering economic slowdown in the New York and regional economy, resulted in
repeated shortfalls in receipts and three budget deficits during those years.
During its last six fiscal years, however, the State has recorded balanced
budget on a cash basis, with positive fund balances as described below.
The State ended its 1997-98 fiscal year in balance on a cash basis, with a
General Fund cash surplus as reported by Division Of the Budget of approximately
$2.04 billion. The cash surplus was derived primarily from higher-than
anticipated receipts and lower spending on welfare, Medicaid, and other
entitlement programs.
The General Fund closing fund balance was $638 million, an increase of $205
million from the prior fiscal year. The balance is held in three accounts within
the General Fund: the Tax Stabilization Reserve Fund (TSRF), the Contingency
Reserve Fund (CRF) and the Community Projects Fund (CPF). The TSRF closing
balance was $400 million, following a required deposit of $15 million (repaying
a transfer made in 1991-92) and an extraordinary deposit of $68 million made
from the 1997-98 surplus. The CRF closing balance was $68 million, following a
$27 million deposit from the
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surplus. The CPF, which finances legislative initiatives, closed the fiscal year
with a balance of $170 million, an increase of $95 million. The General Fund
closing balance did not include $2.39 billion in the tax refund reserve account,
of which $521 million was made available as a result of the Local Government
Assistance Corporation (LGAC) financing program and was required to be on
deposit on March 31, 1998.
General Fund receipts and transfers from other funds for the 1997-98 fiscal year
totaled $34.55 billion, an annual increase of $1.51 billion, or 4.57 percent
over 1996-97. General Fund disbursements and transfers to other funds totaled
$34.35 billion, an annual increase of $1.45 billion or 4.41 percent.
The State ended its 1996-97 fiscal year with the General Fund in balance on a
cash basis, with a cash surplus as reported by DOB of approximately $1.42
billion. The cash surplus was derived primarily from higher-than-expected
receipts and lower than expected spending for social services programs.
The General Fund closing balance was $433 million, an increase of $146 million
from the 1995-96 fiscal year. The balance included $317 million in the TSRF,
after a required deposit of $15 million and an additional deposit of $65 million
in 1996-97. In addition, $41 million remained on deposit in the CRF. The
remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing balance did not include $1.86 billion in
the tax refund reserve account, of which $521 million was made available as a
result of the LGAC financing program and was required to be on deposit as of
March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97 fiscal year
totaled $33.04 billion, an increase of 0.7 percent from the previous fiscal
year. General Fund disbursements and transfers to other funds totaled $32.90
billion for the 1996-97 fiscal year, an increase of 0.7 percent from the 1995-96
fiscal year.
The State ended its 1995-96 fiscal year with a General Fund cash surplus of $445
million. The cash surplus was derived from higher-than-expected receipts,
savings generated through agency cost controls, and lower-than-expected welfare
spending.
The General Fund closing balance was $287 million, an increase of $129 million
from 1994-95 levels. The $129 million change in fund balance is attributable to
a $65 million voluntary deposit to the TSRF, a $15 million required deposit to
the TSRF, a $40 million deposit to the CRF, and a $9 million deposit to the
Revenue Accumulation Fund. The closing fund balance included $237 million on
deposit in the TSRF. In addition, $41 million was on deposit in the CRF. The
remaining $9 million reflected amounts then on deposit in the Revenue
Accumulation Fund. The General Fund closing balance did not include $678 million
in the tax refund reserve account of which $521 million was made available as a
result of the LGAC financing program and was required to be on deposit as of
March 31, 1996.
General Fund receipts and transfers from other funds (including net refund
reserve account activity) totaled $32.81 billion, a decrease of 1.1 percent from
1994-95 levels. General Fund disbursements and transfers to other funds totaled
$32.68 billion for the 1995-96 fiscal year, a decrease of 2.2 percent from
1994-95 levels.
Activity in the three other governmental funds has remained relatively stable
over the last three fiscal years, with federally-funded programs comprising
approximately two-thirds of these funds. The most significant change in the
structure of these funds has been the redirection of a portion of
transportation-related revenues from the General Fund to two new dedicated funds
in the Special Revenue and Capital Projects fund types. These revenues are used
to support the capital programs of the Department of Transportation and the
Metropolitan Transportation Authority ("MTA").
In the Special Revenue Funds, disbursements increased from $26.26 billion to
$27.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.
Disbursements in the Capital Projects Funds declined from $3.97 billion to $3.56
billion over the last three years, as spending for miscellaneous capital
programs decreased, partially offset by increases for mental hygiene, health and
environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation
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taxes began to be deposited, general obligation bond proceeds declined
substantially, federal grants remained stable, and reimbursements from public
authority bonds (primarily transportation related) increased.
Activity in the Debt Service Funds reflected increased use of bonds during the
three-year period for improvements to the State's capital facilities and the
continued implementation of the LGAC fiscal reform program. The increases were
moderated by the refunding savings achieved by the State over the last several
years using strict present value savings criteria. The growth in LGAC debt
service was offset by reduced short-term borrowing costs reflected in the
General Fund.
GAAP-Basis Results for Prior Fiscal Years. The Comptroller prepares a
comprehensive annual financial report on the basis of generally accepted
accounting principles ("GAAP") for governments as promulgated by the
Governmental Accounting Standards Board. The report, generally released in July
each year, contains general purpose financial statements with a Combined Balance
Sheet and its Combined Statement of Revenues, Expenditures and Changes in Fund
Balances. These statements are audited by independent certified public
accountants.
The State completed its 1996-97 fiscal year with a combined Governmental Funds
operating surplus of $2.1 billion, which included an operating surplus in the
General Fund of $1.9 billion, in the Capital Projects Funds of $98 million and
in the Special Revenue Funds of $65 million, offset in part by an operating
deficit of $37 million in the Debt Service Funds.
The State reported a General Fund operating surplus of $1.93 million for the
1996-97 fiscal year, as compared to an operating surplus of $380 million for the
prior fiscal year. The 1996-97 fiscal year surplus reflects several major
factors, including the cash-basis surplus, the benefit of bond proceeds which
reduced the State's pension liability, an increase in taxes receivable of $493
million, and a reduction in tax refund liabilities of $196 million. This was
offset by a $244 million increase payable to local governments.
Revenues increased $1.91 billion (nearly 6.0 percent) over the prior fiscal year
with increases in all revenue categories. Personal income taxes grew $620
million, an increase of nearly 3.6 percent. The increase in personal income
taxes was caused by moderate employment and wage growth and the strong financial
markets during 1996. Consumption and use taxes increased $179 million or 2.7
percent as a result of increased consumer confidence. Business taxes grew $268
million, an increase of 5.6 percent, primarily as a result of the strong
financial markets during 1996. Other taxes increased primarily because revenues
from estate and gift taxes increased. Miscellaneous revenues increased $743
million, a 33.1 percent increase, because of legislative increases in receipts
from the Medicaid Malpractice Insurance Association and from medical provider
assessments.
Expenditures increased $830 million (2.6 percent) from the prior fiscal year
with the largest increase occurring in pension contributions and State aid for
education spending. Pension contribution expenditures increased $514 million
(198.2 percent) primarily because the State paid off its 1984-85 and 1985-86
pension amortization liability. Education expenditures grew $351 million (3.4
percent) due mainly to an increase in spending for support for public schools
and physically handicapped children offset by a reduction in spending for
municipal and community colleges. Modest increases in other State aid spending
was offset by a decline in social services expenditures of $157 million (1.7
percent). Social services spending continues to decline because of cost
containment strategies and declining caseloads.
Net other financing sources increased $475 million (62.6 percent) due primarily
to bond proceeds provided by the Dormitory Authority of the State of New York
(DASNY) to pay the outstanding pension amortization, offset by elimination of
prior year LGAC proceeds.
An operating surplus of $65 million was reported for Special Revenue Funds for
the 1996-97 fiscal year, increasing the accumulated fund balance to $532
million. Revenues increased $583 million over the prior fiscal year (2.2
percent) as a result of increases in tax and lottery revenues. Expenditures
increased $384 million (1.6 percent) as a result of increased costs for
departmental operations. Net other financing uses decreased $275 million (8.0
percent) primarily because of declines in amounts transferred to other funds.
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Debt Service Funds ended the 1996-97 fiscal year with an operating deficit of
$37 million and, as a result, the accumulated fund balance declined to $1.90
billion. Revenues increased $102 million (4.6 percent) because of increases in
both dedicated taxes and mental hygiene patient fees. Debt service expenditures
increased $47 million (2.0 percent). Net other financing sources decreased $277
million (92.6 percent) due primarily to an increase in payments on advance
refunds.
An operating surplus of $98 million was reported in the Capital Projects Funds
for the State's 1996-97 fiscal year and, as a result, the accumulated fund
deficit decreased to $614 million. Revenues increased $100 million (5.0 percent)
primarily because a larger share of the real estate transfer tax was shifted
from the General Fund to the Environmental Protection Fund and federal grant
revenues increased for transportation and local waste water treatment projects.
Expenditures decreased $359 million (10.0 percent) because of declines in
capital grants for education, housing and regional development programs and
capital construction spending. Net financing sources decreased by $637 million
as a result of a decrease in proceeds from financing arrangements.
The State completed its 1995-96 fiscal year with a combined Governmental Funds
operating surplus of $432 million, which included an operating surplus in the
General Fund of $380 million, in the Capital Projects Funds of $276 million, and
in the Debt Service Funds of $185 million, offset in part by an operating
deficit of $409 million in the Special Revenue Funds.
The State reported a General Fund operating surplus of $380 million for the
1995-96 fiscal year, as compared to an operating deficit of $1.43 billion for
the prior fiscal year. The 1995-96 fiscal year surplus was caused by several
factors, including the cash-basis surplus and the benefit of $529 million in
LGAC bond proceeds which were used to fund various local assistance programs.
This was offset in part by a $437 million increase in tax refund liability
primarily resulting from the effects of ongoing tax reductions and (to a lesser
extent) changes in accrual measurement policies, and increases in various other
expenditure accruals.
Revenues increased $530 million (nearly 1.7 percent) over the prior fiscal year
with an increase in personal income taxes and miscellaneous revenues offset by
decreases in business and other taxes. Personal income taxes grew $715 million,
an increase of 4.3 percent. The increase in personal income taxes was caused by
moderate employment and wage growth and the strong financial markets during
1995. Business taxes declined $295 million or 5.8 percent, resulting primarily
from changes in the tax law that modified the distribution of taxes between the
General Fund and other fund types, and reduced business tax liability.
Miscellaneous revenues increased primarily because of an increase in receipts
from medical provider assessments.
Expenditures decreased $716 million (2.2 percent) from the prior fiscal year
with the largest decrease occurring in State aid for social services programs
and State operations spending. Social services expenditures decreased $739
million (7.5 percent) due mainly to implementation of cost containment
strategies by the State and local governments, and reduced caseloads. General
purpose and health and environment expenditures grew $139 million (20.2 percent)
and $121 million (33.3 percent), respectively. Health and environment spending
increased as a result of increases enacted in 1995-96. In State operations,
personal service costs and fringe benefits declined $241 million (3.8 percent)
and $55 million (3.6 percent), respectively, due to staffing reductions. The
decline in non-personal service costs of $170 million (8.6 percent) was caused
by a decline in the litigation accrual. Pension contributions increased $103
million (66.4 percent) as a result of the return to the aggregate cost method
used to determine employer contributions.
Net other financing sources nearly tripled, increasing $561 million, due
primarily to an increase in bonds issued by LGAC, a transfer from the Mass
Transportation Operating Assistance Fund and transfers from public benefit
corporations.
Special Revenue, Debt Services and Capital Projects Fund Types
An operating deficit of $409 million was reported for Special Revenue Funds for
the 1995-96 fiscal year which decreased the accumulated fund balance to $468
million. Revenues increased $1.45 billion over the prior fiscal year (5.8
percent) as a result of increases in federal grants and lottery revenues.
Expenditures increased $1.21 billion (5.4 percent) as a result of increased
costs for social services programs and an increase in the distribution of
lottery proceeds
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to school districts. Other financing uses increased $693 million (25.1 percent)
primarily because of an increase in federal reimbursements transferred to other
funds.
Debt Service Funds ended the 1995-96 fiscal year with an operation surplus of
over $185 million and, as a result, the accumulated fund balance increased to
$1.94 billion. Revenues increased $10 million (0.5 percent) because of increases
in both dedicated taxes and mental hygiene patient fees. Debt service
expenditures increased $201 million (9.5 percent). Net other financing sources
increased to $299 million, due primarily to increases in patient reimbursement
revenues.
An operating surplus of $276 million was reported in the Capital Projects Funds
for the State's 1995-96 fiscal year and, as a result, the accumulated deficit
fund balance in this fund type decreased to $712 million. Revenues increased
$260 million (14.9 percent) primarily because a larger share of the petroleum
business tax was shifted from the General Fund to the Dedicated Highway and
Bridge Trust Fund, and by an increase in federal grant revenues for
transportation and local waste water treatment projects. Capital Projects Funds
expenditures increased $194 million (5.7 percent) in State fiscal year 1995-96
because of increased expenditures for education and health an environmental
projects. Net other financing sources increased by $577 million as a result of
an increase in proceeds from financing arrangements.
Economics and Demographics. This section presents economic information about the
State which may be relevant in evaluating the future prospects of the State.
However, the demographic information and statistical data, which have been
obtained from the sources indicated, do not present all factors which may have a
bearing on the State's fiscal and economic affairs. Further, such information
requires economic and demographic analysis in order to assess the import of the
data presented. The data analysis may be interpreted differently, according to
the economist or other expert consulted.
The State Financial Plan is based upon a February 1998 projection by DOB of
national and State economic activity. The information in this section and in
tables below summarize the economic outlook upon which projections of receipts
and certain disbursements were made for the 1998-99 Financial Plan.
The national economy has maintained a robust rate of growth during the past six
quarters as the expansion, which is well into its seventh year, continues. Since
early 1992, approximately 16 1/2 million jobs have been added nationally.
Although the State has added approximately 400,000 jobs since late 1992,
employment growth in the State has been hindered during recent years by
significant cutbacks in the computer and instrument manufacturing, utility,
defense, and banking industries. Government downsizing has also moderated these
job gains.
DOB forecasts that national economic growth will be quite strong in the first
half of calendar 1998, but will moderate considerably as the year progresses.
The overall growth rate of the national economy during calendar year 1998 is
expected to be just slightly below the "consensus" of a widely followed survey
of national economic forecasters. Growth in real Gross Domestic Product during
1998 is projected to be moderate at 2.8 percent, with anticipated declines in
federal spending and net exports more than offset by increases in consumption
and investment. Inflation, as measured by the Consumer Price Index, is projected
to reach its lowest annual rate since the 1960's at about 1.6 percent due to
improved productivity, foreign competition and low energy and commodity costs.
Personal income and wages are projected to increase by 5.3 percent and 6.3
percent respectively.
The forecast of the State's economy shows continued expansion during the 1998
calendar year, with employment growth gradually slowing as the year progresses.
The financial and business service sectors are expected to continue to do well,
while employment in the manufacturing and government sectors will post only
small, if any, declines. On an average annual basis, employment growth in the
State is expected to be up from the 1997 rate. Personal income is expected to
record moderate gains in 1998. Wage growth in 1998 is expected to be slower than
in the previous year as the recent robust growth in bonus payments moderates.
The forecast for continued growth, and any resultant impact on the State's
1998-99 Financial Plan, contains some uncertainties. Stronger-than-expected
gains in employment and wages could lead to a significant improvement in
consumer spending. Investments could also remain robust. Conversely, net exports
could plunge even more sharply than expected, with adverse impacts on the growth
of both consumer spending and investment. The inflation rate may
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differ significantly from expectations due to the upward pressure of a tight
labor market and the downward pressure of price reductions emanating from the
economic weakness in Asia. In addition, the State economic forecast could over-
or underestimate the level of future bonus payments or inflation growth,
resulting in forecasted average wage growth that could differ significantly from
actual growth. Similarly, the State forecast could fail to correctly account for
expected declines in government and banking employment and the direction of
employment change that is likely to accompany telecommunications deregulation.
The New York Economy. New York is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
Services: The services sector which includes entertainment, personal services,
such as health care and auto repairs, and business-related services, such as
information processing, law and accounting, is the State's leading economic
sector. The services sector accounts for more than three of every ten
nonagricultural jobs in New York. and has a higher proportion of total jobs than
does the rest of the nation.
Manufacturing: Manufacturing employment continues to decline in importance in
New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. The principal manufacturing industries in recent
years produced printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products, electronic and other
electric equipment, food and related products, chemicals and allied products,
and fabricated metal products.
Trade: Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses, such
as department stores and eating and drinking establishments.
Finance, Insurance and Real Estate: New York City is the nation's leading center
of banking and finance and, as a result, this is a far more important sector in
the State than in the nation as a whole. Although this sector accounts for under
one-tenth of all nonagricultural jobs in the State, it contributes over
one-sixth of all non-farm labor and proprietors' income.
Agriculture: Farming is an important part of the economy of large regions of the
State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk and dairy products,
greenhouse and nursery products, apples and other fruits, and fresh vegetables.
New York ranks among the nation's leaders in the production of these
commodities.
Government: Federal, State and local government together are the third largest
sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total state and local government employment.
Relative to the nation, the State has a smaller share of manufacturing and
construction and a larger share of service-related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated more in the service-producing sector.
Economic and Demographic Trends. In the calendar years 1987 through 1997, the
State's rate of economic growth was somewhat slower than that of the nation. In
particular, during the 1990-91 recession and post-recession period, the economy
of the State, and that of the rest of the Northeast, was more heavily damaged
than that of the nation as a whole and has been slower to recover. The total
employment growth rate in the State has been below the national average
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since 1987. The unemployment rate in the State dipped below the national rate in
the second half of 1981 and remained lower until 1991; since then, it has been
higher. According to data published by the US Bureau of Economic Analysis, total
personal income in the state has risen more slowly than the national average
since 1988.
Total State nonagricultural employment has declined as a share of national
nonagricultural employment.
State per capita personal income has historically been significantly higher than
the national average, although the ratio has varied substantially. Because the
City is a regional employment center for a multi-state region, State personal
income measured on a residence basis understates the relative importance of the
State to the national economy and the size of the base to which State taxation
applies.
DEBT AND OTHER FINANCING ACTIVITIES
Legal Categories of State Debt and Other Financings
State financing activities include general obligation debt of the State and
State-guaranteed debt, to which the full faith and credit of the State has been
pledged, as well as lease-purchase and contractual-obligation financings, moral
obligation financings and other financings through public authorities and
municipalities, where the State's legal obligation to make payments to those
public authorities and municipalities for their debt service is subject to
annual appropriation by the Legislature.
General Obligations and State-Guaranteed Financing
There are a number of methods by which the State itself may incur debt. The
State may issue general obligation bonds. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State. With the exception of general obligation housing bonds
(which must be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes ("TRANs"), and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued general obligation bonds,
by issuing bond anticipation notes ("BANs"). TRANs must mature within one year
from their dates of issuance and may not be refunded or refinanced beyond such
period. BANs may only be issued for the purposes and within the amounts for
which bonds may be issued pursuant to voter authorizations. Such BANs must be
paid from the proceeds of the sale of bonds in anticipation of which they were
issued or from other sources within two years of the date of issuance or, in the
case of BANs for housing purposes, within five years of the date of issuance.
Pursuant to specific constitutional authorization, the State may also directly
guarantee certain public authority obligations. The State Constitution provides
for the State guarantee of the repayment of certain borrowings for designated
projects of the New York State Thruway Authority, the Job Development Authority
and the Port Authority of New York and New Jersey. The State has never been
called upon to make any direct payments pursuant to such guarantees.
State-guaranteed bonds of the Port Authority of New York and New Jersey were
fully retired on December 31, 1996. State-guaranteed bonds issued by the Thruway
Authority were fully retired on July 1, 1995.
In February 1997, the Job Development Authority (JDA) issued approximately $85
million of State-guaranteed bonds to refinance certain of its outstanding bonds
and notes in order to restructure and improve JDA's capital finances. Due to
concerns regarding the economic viability of its programs, JDA's loan and loan
guarantee activities were suspended in 1995. JDA recently resumed its lending
activities under a revised set of lending programs and underwriting
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guidelines. As a result of the structural imbalances in JDA's capital structure,
and defaults in its loan portfolio and loan guarantee program incurred between
1991 and 1996, JDA would have experienced a debt service cash flow shortfall had
it not completed the 1997 refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. The State does not anticipate that it will be called upon to make
any payments pursuant to the State guarantee in the 1998-99 fiscal year.
Payments of debt service on State general obligation and State-guaranteed bonds
and notes are legally enforceable obligations of the State.
Lease-Purchases and Contractual-Obligation Financing
The State employs additional long-term financing mechanisms, lease-purchase and
contractual obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a financing
arrangement with LGAC to restructure the way the State makes certain local aid
payments.
The State also participates in the issuance of certificates of participation
("COPs") in a pool of leases entered into by the State's Office of General
Services on behalf of several State departments and agencies interested in
acquiring operational equipment, or in certain cases, real property. Legislation
enacted in 1986 established restrictions upon and centralized State control,
through the Comptroller and the Director of the Budget, over the issuance of
COPs representing the State's contractual obligation, subject to annual
appropriation by the Legislature and availability of money, to make installment
or lease-purchase payments for the State's acquisition of such equipment or real
property.
The State has never defaulted on any of its general obligation indebtedness or
its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.
Moral Obligation and Other Financing
Moral obligation financing generally involves the issuance of debt by a public
authority to finance a revenue-producing project or other activity. The debt is
secured by project revenues and includes statutory provisions requiring the
State, subject to appropriation by the Legislature, to make up any deficiencies
which may occur in the issuer's debt service reserve fund. There has never been
a default on any moral obligation debt of any public authority. The State does
not intend to increase statutory authorizations for moral obligation bond
programs. From 1976 through 1987, the State was called upon to appropriate and
make payments totaling $162.8 million to make up deficiencies in the debt
service reserve funds of the Housing Finance Agency pursuant to moral obligation
provisions. In the same period, the State also expended additional funds to
assist the Project Finance Agency, the Urban Development Corporation ("UDC") and
other public authorities which had moral obligation debt outstanding. The State
has not been called upon to make any payments pursuant to any moral obligations
since the 1986-87 fiscal year and no such requirements are anticipated during
the 1998-99 fiscal year.
In addition to the moral obligation financing arrangements described above,
State law provides for the creation of State municipal assistance corporations,
which are public authorities established to aid financially troubled localities.
The Municipal Assistance Corporation for the City of New York ("NYC MAC") was
created in 1975 to provide financing assistance to New York City. To enable NYC
MAC to pay debt service on its obligations, NYC MAC receives, subject to annual
appropriation by the Legislature, receipts from the 4 percent New York State
sales tax for the benefit of New York City, the State-imposed stock transfer tax
and, subject to certain prior liens, certain local assistance payments
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otherwise payable to New York City. The legislation creating NYC MAC also
includes a moral obligation provision. Under its enabling legislation, NYC MAC's
authority to issue moral obligation bonds and notes (other than refunding bonds
and notes) expired on December 31, 1984. In 1995, the State created the
Municipal Assistance Corporation for the City of Troy ("Troy MAC"). The bonds
expected to be issued by Troy MAC do not include the moral obligation
provisions.
The State also provides for contingent contractual-obligation financing for the
Secured Hospital Program pursuant to legislation enacted in 1985. Under this
financing method, the State contracts to pay debt service, subject to annual
appropriations, on bonds formerly issued by the New York State Medical Care
Facilities Finance Agency ("MCFFA") and now issued by the Dormitory Authority of
the State of New York ("DASNY") in the event there are shortfalls of revenues
from other sources. The State has never been required to make any payments
pursuant to this financing arrangement, nor does it anticipate being required to
do so during the 1998-99 fiscal year. The legislative authorization to issue
bonds under this program expired on March 1, 1998.
Local Government Assistance Corporation
In 1990, as part of a State fiscal reform program, legislation was enacted
creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments that had been
traditionally funded through the State's annual seasonal borrowing. The
legislation authorized LGAC to issue its bonds and notes in an amount to yield
net proceeds not in excess of $4.7 billion (exclusive of certain refunding
bonds). Over a period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was expected to eliminate
the need for continued short-term seasonal borrowing. The legislation also
dedicated revenues equal to one-quarter of the four cent State sales and use tax
to pay debt service on these bonds. The legislation also imposed a cap on the
annual seasonal borrowing of the State at $4.7 billion, less net proceeds of
bonds issued by LGAC and bonds issued to provide for capitalized interest,
except in cases where the Governor and the legislative leaders have certified
the need for additional borrowing and provided a schedule for reducing it to the
cap. If borrowing above the cap is thus permitted in any fiscal year, it is
required by law to be reduced to the cap by the fourth fiscal year after the
limit was first exceeded. This provision capping the seasonal borrowing was
included as a covenant with LGAC's bondholders in the resolution authorizing
such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of $4.7
billion, completing the program. The impact of LGAC's borrowing is that the
State has been able to meet its cash flow needs throughout the fiscal year
without relying on short-term seasonal borrowings.
1998-99 Borrowing Plan
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1998-99 fiscal
year. Information on the State's five year Capital Program and Financing Plan
for the 1998-99 through 2002-03 fiscal years, updated to reflect actions taken
in the 1998-99 State budget, will be released on or before July 30, 1998. The
projection of State borrowings for the 1998-99 fiscal year is subject to change
as market conditions, interest rates and other factors vary throughout the
fiscal year.
The State expects to issue $528 million in general obligation bonds (including
$154 million for purposes of redeeming outstanding BANs) and $154 million in
general obligation commercial paper. The State also anticipates the issuance of
up to a total of $419 million in Certificates of Participation to finance
equipment purchases (including costs of issuance, reserve funds, and other
costs) during the 1998-99 fiscal year. Of this amount, it is anticipated that
approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refunds and other adjustments
in 1998-99. Included therein are borrowings by (i) DASNY for SUNY, The City
University of New York ("CUNY"), health facilities, mental health and
educational facilities; and new
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facilities for the Office of the State Comptroller and the New York State and
Local Retirement Systems; and for parking facilities; (ii) the Thruway Authority
for the Dedicated Highway and Bridge Trust Fund and Consolidated Highway
Improvement Program; (iii) UDC (doing business as the Empire State Development
Corporation) for prison, youth and sports facilities; (iv) the Housing Finance
Agency ("HFA") for housing programs; and (v) the Environmental Facilities
Corporation ("EFC") and the Energy Research and Development Authority (ERDA).
This includes an estimated $225 million to be issued for the Community
Enhancement Facilities Assistance Program for economic development purposes,
consisting of sports facilities, cultural institutions, transportation,
infrastructure, and other community facility projects. In addition, the
Legislature authorized four public authorities (Thruway Authority, DASNY, UDC
and HFA) to issue bonds to finance a total of $425 million of projects under
this program.
Outstanding Debt of the State and Certain Authorities
For purposes of analyzing the financial condition of the State, debt of the
State and of certain public authorities may be classified as State-supported
debt, which includes general obligation debt of the State and lease-purchase and
contractual obligations of public authorities (and municipalities) where debt
service is paid from State appropriations (including dedicated-tax sources, and
other revenues such as patient charges and dormitory facilities rentals). In
addition, a broader classification, referred to as State-related debt, includes
State-supported debt, as well as certain types of contingent obligations,
including moral-obligation financing, certain contingent contractual-obligation
financing arrangements, and State-guaranteed debt described above, where debt
service is expected to be paid from other sources and State appropriations are
contingent in that they may be made and used only under certain circumstances.
State-Supported Debt Outstanding
General Obligation Bond Programs
The first type of State-supported debt, general obligation debt, is currently
authorized for three programmatic categories: transportation, environmental and
housing. The amount of general obligation bonds and BANs issued in the 1995-96
through 1997-98 fiscal years (excluding bonds issued to redeem BANs) were $333
million, $439 million, and $486 million, respectively. Transportation-related
bonds are issued for State highway and bridge improvements, aviation, highway
and mass transportation projects and purposes, and rapid transit, rail, canal,
port and waterway programs and projects. Environmental bonds are issued to fund
environmentally- sensitive land acquisitions, air and water quality
improvements, municipal non-hazardous waste landfill closures and hazardous
waste site cleanup projects. As of March 31, 1998, the total amount of
outstanding general obligation debt was $5.03 billion, including $294 million in
BANs.
Lease-Purchase and Contractual-Obligation Financing Programs
The second type of State-supported debt, lease-purchase and
contractual-obligation financing arrangements with public authorities and
municipalities, has been used primarily by the State to finance the State's
highway and bridge program, SUNY and CUNY buildings, health and mental hygiene
facilities, prison construction and rehabilitation, and various other State
capital projects.
The State has utilized and expects to continue to utilize lease-purchase and
contractual-obligation financing arrangements to finance its capital programs,
in addition to authorized general obligation bonds. Some of the major capital
programs financed by lease-purchase and contractual obligation agreements are
highlighted below.
Transportation. The State Department of Transportation is primarily responsible
for maintaining and rehabilitating the State's system of highways and bridges,
which includes 40,000 State highway lane miles and 7,500 State bridges. The
Department also oversees and funds programs from rail and aviation projects and
programs that help defray local capital expenses associated with road and bridge
projects.
Legislation enacted in 1991 established the Dedicated Highway and Bridge Trust
Fund to provide for the dedication of a portion of the petroleum business tax
and certain other transportation-related taxes and fees for transportation
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<PAGE>
improvements. Legislation enacted in 1996 authorized a five-year, $12.7 billion
plan for State and local highways and bridges through 1999-2000, to be financed
by a combination of federal grants, pay-as-you-go capital and bond proceeds
supported by the Dedicated Highway and Bridge Trust Fund, and a small amount of
general obligation bonds remaining under previous authorizations. The 1998-99
enacted budget increased this plan to $13 billion.
The State has supported the capital plans of the MTA in part by entering into
service contracts relating to certain bonds issued by the MTA. Legislation
adopted in 1992 and 1993 also authorized payments, subject to appropriation, of
a portion of the petroleum business tax from the State's Dedicated Mass
Transportation Trust Fund to the MTA and authorized it to be used as a source of
payment for bonds to be sold by the MTA to support its capital program.
Education. The State finances the physical infrastructure of SUNY and CUNY and
their respective community colleges and the State Education Department through
direct State capital spending and through financing arrangements with the DASNY,
paying all capital costs of the senior colleges and sharing equally with local
governments for the community colleges, except that SUNY dormitories are
financed through dormitory fees.
Mental Hygiene/Health. The State provides care for its citizens with mental
illness, mental retardation, and developmental disabilities, and for those with
chemical dependencies, through the Office of Mental Health (OMH), the Office of
Mental Retardation and Developmental Disabilities (OMRDD) and the Office of
Alcoholism and Substance Abuse Services (OASAS). Historically, this care has
been provided at large State institutions. Beginning in the 1980s the State
adopted policies to provide institutional care to those most in need and to
expand care in community residences. OMRDD has closed 12 of its 20 developmental
centers. OMH has reduced its adult institutional population from 22,000 in 1982
to 5,825 at the end of 1997-98.
In 1997, OMH released a "Statewide Comprehensive Plan for Mental Health Services
1997-2001." The plan presents the programmatic and fiscal strategy of
implementing an integrated community-based system of care, de-emphasizing State
adult inpatient hospitalization. It estimates that the State-operated adult
inpatient census will decline to a range of 3,700 to 4,700 by the end of the
decade. As OMH approaches its long-term census targets and inpatient bed needs
diminish, plans are underway to develop alternative uses for surplus facilities.
Capital investments for these programs are primarily supported by patient
revenues through financing arrangements with DASNY.
Various capital programs for Department of health facilities have also been
financed by DASNY using contractual-obligation financing arrangements.
Corrections. During the 10-year period 1983-92, the State's prison system more
than doubled in size due to the unprecedented increase in demand for prison
space. Today, the system houses approximately 70,000 inmates in 70 facilities
with 3,000 buildings. Although the Department of Correctional Services (DOCS)
capital program was focused primarily on rehabilitation of existing facilities
in the early 1990s, continued inmate population growth and projected future
growth indicate the need for both expansion of existing facilities and new
facilities. The 1997-98 budget authorized the addition of approximately 3,100
beds in response to this population growth. The 1998-99 enacted budget
authorized an additional 1,500 beds.
Other Programs. The State also uses lease-purchase and contractual-obligation
financing arrangements for the institutional facilities of the Office of
Children and Family Services, and Youth Opportunity Centers; the State's housing
programs; and various environmental, economic development, and State building
programs. In addition, DASNY has issued taxable pension bonds to refinance the
balance of a pre-existing State pension liability, for the purpose of achieving
present value savings.
State Government Employment
The State has approximately 191,000 full-time equivalent employees funded from
all funds, including part-time and temporary employees but excluding seasonal,
legislative and judicial employees.
The current size of the State workforce reflects continuing efforts to
streamline operations and improve efficiency. The workforce is now 17.2 percent
smaller than it was eight years ago, when it peaked at 230,600 positions and the
State
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<PAGE>
began its workforce reduction efforts. During the past four fiscal years,
concerted workforce initiatives have resulted in a reduction of about 20,000
positions (more than one half of the overall reduction since 1990), with levels
stabilized in the last fiscal year.
Negotiating units for State employees are defined by the State Public Employment
Relations Board. Collective bargaining negotiations are conducted by the
Governor's Office of Employee Relations except with respect to employees of the
Judiciary, public authorities and the Legislature. Such negotiations include
terms and conditions of employment except grade classification policies and
certain pension benefits. Approximately 93 percent of the state workforce is
unionized. The remainder of the workforce (about 12,000) is designated as
managerial or confidential and is excluded from collective bargaining. In
practice, however, the results of collective bargaining negotiations are
generally applied to all State employees within the executive agencies. The
State is currently preparing for negotiations with various unions to establish
new agreements since most of the existing contracts will expire on March 31,
1999.
Under the State's Taylor Law, the general statute governing public
employee-employer relations in the State, employees are prohibited from
striking. This form of job action against the State last occurred in 1979 by
employees of the Department of Correctional Services.
State Retirement Systems
General
The New York State and Local Retirement Systems (the Systems) provide coverage
for public employees of the State and its localities (except employees of New
York City and teachers, who are covered by separate plans). The Systems comprise
the New York State and Local Employees Retirement System and the New York State
and Local Police and Fire Retirement System. The Comptroller is the
administrative head of the Systems. State employees made up about 38 percent of
the membership during the 1997-98 fiscal year. There were 2,802 other public
employers participating in the Systems, including all cities (except New York
City), all counties, most towns, villages and school districts (with respect to
non-teaching employees) and a large number of local authorities of the State.
As of March 31, 1998, 582,689 persons were in membership and 284,515 pensioners
and beneficiaries were receiving benefits. The State Constitution considers
membership in any State pension or retirement system to be a contractual
relationship, the benefits of which shall not be diminished or impaired. Members
cannot be required to begin making contributions or make increased contributions
beyond what was required when membership began.
Contributions
Funding is provided in large part by employer and employee contributions.
Employers contribute on the basis of the plan or plans they provide for members.
Members joining since mid-1976, other than police and fire members, have been
required to contribute 3 percent of their salaries.
By law, the State makes its annual payment to the Systems on or before March 1
for the then current fiscal year ending on March 31 based on an estimate of the
required contribution prepared by the Systems. The Director of the Budget is
authorized to revise and amend the estimate of the Systems' bill for purposes of
preparing the State's budget for a fiscal year. Legislation also provides that
any underpayments by the State (as finally determined by the Systems) must be
paid with interest at the actuarially assumed interest earnings rate, in the
second fiscal year following the year of the underpayment. Similarly, any
overpayment for a fiscal year serves as a credit against the Systems' estimated
bill for the second fiscal year following the fiscal year in which the
overpayment is made.
During the 1997-98 fiscal year, the State paid the System's 1997-98 estimated
bill of $288.2 million. The difference between the amounts paid on the estimated
bill and the final bill with interest resulted in an underpayment of the final
bill in the amount of $3.1 million and will be billed on March 1, 2000 ($2.9
million if paid on September 1, 1999).
65
<PAGE>
Assets and Liabilities
Assets are held exclusively for the benefit of members, pensioners and
beneficiaries. Investments for the Systems are made by the Comptroller as
trustee of the Common Retirement Fund, a pooled investment vehicle. The net
assets available for benefits as of March 31,1998 were $106.3 billion (including
$1.9 billion in receivables). The present value of anticipated benefits for
current members, retirees, and beneficiaries as of March 31, 1998 was $84.8
billion. For current retirees and beneficiaries alone the amount was $27.6
billion. Under the funding method used by the Systems, the net assets plus
future actuarially determined contributions, are expected to be sufficient to
pay for the anticipated benefits of current members, retirees and beneficiaries.
The foregoing information as to certain New York risk factors is given to
investors in view of the Fund's policy of concentrating its investments in New
York Issuers. Such information constitutes only a brief summary and does not
purport to be a complete description. See the Appendix to this SAI for a
description of municipal securities ratings.
<PAGE>
DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS
The Money Market Funds use the amortized cost method to determine their net
asset value.
Use of the Amortized Cost Method. The Money Market Funds' use of the amortized
cost method of valuing their instruments depends on their compliance with
certain conditions contained in Rule 2a-7 of the 1940 Act. Under Rule 2a-7, the
Trustees must establish procedures reasonably designed to stabilize the net
asset value per share ("NAV"), as computed for purposes of distribution and
redemption, at $1.00 per share, taking into account current market conditions
and the Money Market Funds' investment objectives.
The Money Market Funds have elected to use the amortized cost method of
valuation pursuant to Rule 2a-7. This involves valuing an instrument at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
a Money Market Fund would receive if it sold the instrument. The value of
securities in a Money Market Fund can be expected to vary inversely with changes
in prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Funds will maintain a dollar-weighted
average portfolio maturity appropriate to its objective of maintaining a stable
net asset value per share, provided that a Money Market Fund will not purchase
any security with a remaining maturity of more than 397 days (securities subject
to repurchase agreements may bear longer maturities) nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. Should the
disposition of a Money Market Fund's security result in a dollar weighted
average portfolio maturity of more than 90 days, the Money Market Fund will
invest its available cash to reduce the average maturity to 90 days or less as
soon as possible.
The Trust's Trustees also have established procedures reasonably designed,
taking into account current market conditions and the Trust's investment
objectives, to stabilize the net asset value per share of the Money Market Funds
for purposes of sales and redemptions at $1.00. These procedures include review
by the Trustees, at such intervals as they deem appropriate, to determine the
extent, if any, to which the net asset value per share of the Money Market Funds
calculated by using available market quotations deviates from $1.00 per share.
In the event such deviation exceeds one-half of one percent, Rule 2a-7 requires
that the Board promptly consider what action, if any, should be initiated. If
the Trustees believe that the extent of any deviation from a Money Market Fund's
$1.00 amortized cost price per share may result in material dilution or other
unfair results to new or existing investors, they will take such steps as they
consider appropriate to eliminate or reduce to the extent reasonably practicable
any such dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity, shortening the dollar-weighted average portfolio
maturity, withholding or reducing dividends, reducing the number of a Money
Market Fund's outstanding shares without monetary consideration, or using a net
asset value per share determined by using available market quotations.
Monitoring Procedures
The Trustee's procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based upon
available indications of market value. The Trustees will decide what, if any,
steps should be taken if there is a difference of more than 0.5% between the two
values. The Trustees will take any steps they consider appropriate (such as
redemption in kind or shortening a Money Market Fund's average maturity) to
minimize any material dilution or other unfair results arising from differences
between the two methods of determining net asset value.
Investment Restrictions
Rule 2a-7 requires that the Money Market Funds limit their investments to
instruments that, in the opinion of the Trustees, present minimal credit risks
and are "Eligible Securities" as defined in Rule 2a-7. See "Investments in Which
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<PAGE>
the Funds Can Invest." An Eligible Security generally must be rated by at least
one NRSRO. Such rating may be of the particular security or of a class of debt
obligations or a debt obligation in that class that is comparable in priority
and security issued by that issuer. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Money Market
Funds will limit the percentage allocation of their investments so as to comply
with Rule 2a-7, which generally (except in the case of the Ohio Municipal Money
Market Fund) limits to 5% of total assets the amount which may be invested in
the securities of any one issuer. Rule 2a-7 provides an exception to this 5%
limit: certain money market funds may invest up to 25% of their total assets in
the First-Tier Securities (as that term is defined by Rule 2a-7 (generally, a
First-Tier Security is a security that has received a rating in the highest
short-term rating category)) of a single issuer for a period of up to three days
after the purchase of such a security. This exception is available to all Money
Market Funds other than the Ohio Municipal Money Market Fund. Additionally,
under Rule 2a-7 the Ohio Municipal Money Market Fund, as a single state money
market fund, must limit the amount which it invests in the securities of any one
issuer to 5% of its total assets only with respect to 75% of its total assets;
provided, however, that no more than 5% of its total assets may be invested in
the securities of any one issuer unless those securities are First-Tier
Securities.
The Money Market Funds will purchase only First-Tier Securities. However, a
Money Market Fund will not necessarily dispose of a security if it ceases to be
a First-Tier Security, although if a First-Tier Security is downgraded to a
Second-Tier Security (as that term is defined by Rule 2a-7) the Adviser will
reassess promptly whether such security continues to present minimal credit
risks and will cause the Money Market Fund to take such action as it determines
is in the best interests of the Money Market Fund and its shareholders.
Rule 2a-7 imposes special diversification requirements on puts. Generally, with
respect to 75% of its total assets, immediately after the acquisition of a put,
a money market fund may have no more than 10% of its total assets invested in
securities issued by, or subject to puts from, the same institution. With
respect to the remaining 75% of its total assets, a money market fund may invest
more than 10% of its assets in puts issued by a non-controlled person so long as
the puts are First-Tier Securities. Where a put is a Second-Tier Security, no
more than 5% of the money market fund's total assets may be invested in
securities issued by, or subject to puts from, the same institution.
The Money Market Funds may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations. This policy may,
from time to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset value
is affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares of
the Money Market Funds computed by dividing the annualized daily income on a
Money Market Fund's portfolio by the net asset value computed as above may tend
to be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of the
Money Market Funds computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.
VALUATION OF PORTFOLIOS SECURITIES FOR THE MONEY MARKET FUNDS
The net asset value of the Money Market Funds is determined and the shares of
each Money Market Fund are priced as of the valuation time(s) indicated in the
Prospectuses on each Business Day. A "Business Day" is a day on which the New
York Stock Exchange, Inc. (the "NYSE") and the Federal Reserve Bank of Cleveland
are open and any other day (other than a day on which no shares of a Money
Market Fund are tendered for redemption and no order to purchase any shares is
received) during which there is sufficient trading in portfolio instruments that
a Money Market Fund's net assets value per share might be materially affected.
The NYSE will not open in observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas.
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<PAGE>
VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS AND THE TAX-FREE
BOND FUNDS
Investment securities held by the Fund For Income, the Government Mortgage Fund,
the Intermediate Income Fund, the Investment Quality Bond Fund, and the Limited
Term Income Fund (the "Taxable Bond Funds") and the National Municipal Bond
Fund, the New York Tax-Free Fund, and the Ohio Municipal Bond Fund (the
"Tax-Free Bond Funds") are valued on the basis of security valuations provided
by an independent pricing service, approved by the Trustees, which determines
value by using information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities. Specific investment securities which
are not priced by the approved pricing service will be valued according to
quotations obtained from dealers who are market makers in those securities.
Investment securities with less than 60 days to maturity when purchased are
valued at amortized cost which approximates market value. Investment securities
not having readily available market quotations will be priced at fair value
using a methodology approved in good faith by the Trustees.
VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS.
Each equity security held by a Fund is valued at the 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 last available bid quotation on
that day. Exchange listed convertible debt securities are valued at the bid
obtained from broker-dealers or a comparable alternative, such as Bloomberg or
Reuters, based upon pricing procedures approved by the Board of Trustees. Each
security traded in the over-the-counter market (but not including securities
reported on the Nasdaq National Market System) is valued at the bid 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 independent pricing services. Prices provided by the pricing
service may be determined without exclusive reliance on quoted prices, and may
reflect appropriate factors such as institution-sized 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 specially 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 generally will be
valued 15 minutes after the close of trading of the NYSE.
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 MONEY MARKET FUNDS
Performance for a class of shares of a Money Market Fund depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in Fund (class) expenses; and
o the relative amount of Fund (class) cash flow.
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<PAGE>
From time to time the Money Market Funds may advertise the performance of each
class compared to similar funds or portfolios using certain indices, reporting
services, and financial publications.
Yield. The Money Market Funds calculate the yield for a class daily, based upon
the seven days ending on the day of the calculation, called the "base period."
This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional shares purchased with dividends earned
from the original one share and all dividends declared on the
original and any purchased shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with the Money Market Funds,
the yield for a class will be reduced for those shareholders paying those fees.
The seven-day yields of the Money Market Funds for the seven-day period ending
October 31, 1998 are listed in the following table.
- --------------------------------------------------------------------------------
Federal Money Market Fund: Investor Shares 4.89%
- --------------------------------------------------------------------------------
Federal Money Market Funds: Select Shares 4.65%
- --------------------------------------------------------------------------------
Financial Reserves Fund 4.73%
- --------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.14%
- --------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 4.83%
- --------------------------------------------------------------------------------
Ohio Municipal Money Market 2.59%
- --------------------------------------------------------------------------------
Prime Obligations Fund 4.68%
- --------------------------------------------------------------------------------
Tax-Free Money Market 2.61%
- --------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares 4.61%
- --------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.37%
- --------------------------------------------------------------------------------
Effective Yield. The Money Market Funds' effective yields are computed by
compounding the unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
The effective yields of Money Market Funds for the seven-day period ending
October 31, 1998 are listed below.
- --------------------------------------------------------------------------------
Federal Money Market Fund: Investor Shares 5.01%
- --------------------------------------------------------------------------------
Federal Money Market Fund: Select Shares 4.76%
- --------------------------------------------------------------------------------
Financial Reserves Fund 4.84%
- --------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.27%
- --------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 4.94%
- --------------------------------------------------------------------------------
Ohio Municipal Money Market 2.62%
- --------------------------------------------------------------------------------
Prime Obligations Fund 4.79%
- --------------------------------------------------------------------------------
Tax-Free Money Market 2.65%
- --------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares 4.72%
- --------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.47%
- --------------------------------------------------------------------------------
Total Return Calculations. Total returns quoted in advertising reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
net capital gain distributions (if any), and any change in the net asset value
per share of a Fund over the period. Average annual total returns are calculated
by determining the growth or decline in value of a hypothetical historical
investment in a Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline in value had been constant over the period. For example, a
cumulative total return of 100% over ten years would produce an average annual
total return of 7.18%, which is the steady annual rate of return that would
equal 100% growth on an annually compounded basis in ten years. While average
annual total returns (or "annualized total return") are a convenient means of
comparing investment alternatives, investors should realize that performance for
a Fund is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of a Fund. When using total return and yield to compare
a Fund with other mutual funds, investors should take into consideration
permitted portfolio composition methods used to value portfolio securities and
computing offering price. The total returns of the Money Market Funds for the
one year, five year, and ten year periods ending October 31, 1998 and the period
since inception of each Money Market Fund are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Since
One-Year Five-Year Ten-Year Inception
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Money Market Fund: Investor Shares 5.33% 4.66% 5.26% 5.35%
- --------------------------------------------------------------------------------------------------------------------
Federal Money Market Fund: Select Shares N/A N/A N/A 3.14%
- --------------------------------------------------------------------------------------------------------------------
Financial Reserves Fund 5.10% 4.84% 5.33% 6.12%
- --------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.53% 5.17% 5.64% 6.51%
- --------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 5.22% N/A N/A 4.93%
- --------------------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 2.94% 2.94% 3.49% 3.69%
- --------------------------------------------------------------------------------------------------------------------
Prime Obligations Fund 4.98% 4.70% 5.36% 5.56%
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market 2.91% 2.92% 3.53% 3.57%
- --------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares N/A N/A N/A 5.17%
- --------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.86% 4.65% 5.18% 5.34%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
In addition to average annual total returns, the Money Market Funds, on behalf
of a class, may quote unaveraged or cumulative total returns reflecting the
total income over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. The cumulative total
returns of the Money Market Funds for the five year and ten year periods ending
October 31, 1998 and the period since inception are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Five-Year Ten-Year Since Inception
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Money Market Fund: Investor Shares 25.60% 66.92% 73.74%
- -----------------------------------------------------------------------------------------------------------
Federal Money Market Fund: Select Shares N/A N/A 3.14%
- -----------------------------------------------------------------------------------------------------------
Financial Reserves Fund 26.68% 68.02% 152.34%
- -----------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 28.64% 73.08% 171.01%
- -----------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares N/A N/A 17.80%
- -----------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market Fund 15.58% 40.98% 61.99%
- -----------------------------------------------------------------------------------------------------------
Prime Obligations Fund 25.80% 68.51% 90.97%
- -----------------------------------------------------------------------------------------------------------
Tax-Free Money Market Fund 15.50% 41.50% 42.93%
- -----------------------------------------------------------------------------------------------------------
U.S. Government Obligations Fund: Investor Shares N/A N/A 9.55%
- -----------------------------------------------------------------------------------------------------------
U.S. Government Obligations Fund: Select Shares 25.54% 65.76% 86.25%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
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PERFORMANCE OF THE NON-MONEY MARKET 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 class of Non-Money Market 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
Non-Money Market Fund's performance. A Non-Money Market Fund's advertisement of
its performance must, under applicable SEC rules, include the average annual
total returns for each class of shares of a Non-Money Market 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 Non-Money Market
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 Non-Money
Market Fund are not insured; their yield and total return are not guaranteed and
normally will fluctuate on a daily basis. When redeemed, an investor's shares
may be worth more or less than their original cost. Yield and total return for
any given past period are not a prediction or representation by the Trust of
future yields or rates of return on its shares. The yield and total returns of
the Class A and Class B shares of the Non-Money Market Funds are affected by
portfolio quality, portfolio maturity, the type of investments the Non-Money
Market Fund holds, and operating expenses.
72
<PAGE>
Performance -- Class B Shares. Class B shares of the Funds were initially
offered on the dates listed below. The performance figures for Class B shares
for periods prior to such dates represent the performance for Class A shares of
the Funds, which have been restated to reflect the applicable contingent
deferred sales charge ("CDSC") payable at redemption within 6 years from
purchase. Class B Shares are subject to an asset based sales charge of 0.75% of
average daily net assets per year and other class-specific expenses. Had these
fees and expenses been reflected, performances quoted would have been lower.
Class B shares of the National Municipal Bond Fund and New York Tax Free Fund
were initially offered on September 26, 1994. Class B shares of the Balanced
Fund, Diversified Stock Fund, International Growth Fund, Ohio Regional Stock
Fund and Special Value Fund were initially offered on March 1, 1996.
Performance -- Class G Shares. Five of the Funds discussed in this SAI (the
Diversified Stock Fund, the Government Mortgage Fund, the International Growth
Fund, the Ohio Municipal Bond Fund, and the Small Company Opportunity Fund)
offer Class G shares. This Class was established in October 1998 to facilitate
the reorganization of the Gradison Funds, a family of mutual funds advised by
the Gradison Division of McDonald & Company Securities, Inc. See "Purchasing
Shares -- Class G Shares -- The Gradison Fund Reorganization" in this SAI. The
following table lists each Gradison Fund and its corresponding Victory Fund.
Gradison Fund: Victory Fund (Class G):
U.S. Government Reserves -> Gradison Government Reserves Fund*
Government Income Fund -> Fund for Income
Ohio Tax- Free Income Fund -> Ohio Municipal Bond Fund
Established Value Fund -> Established Value Fund*
Growth & Income Fund -> Diversified Stock Fund
Opportunity Value Fund -> Small Company Opportunity Fund
International Fund -> International Growth Fund
- ------------------
* Described in a separate statement of additional information.
No performance information for the corresponding Class G shares has been
provided in this SAI. Because financial information relating to the Gradison
Government Income Fund and the Gradison Opportunity Value Fund will survive the
planned reorganization, performance information relating to the Victory Fund for
Income and the Victory Small Company Opportunity Fund will be updated after the
reorganization is completed to reflect the historical performance of the
Gradison Government Income Fund and the Gradison Opportunity Value Fund.
Standardized Yield. The "yield" (referred to as "standardized yield") of the
Non-Money Market Funds for a given 30-day period for a class of shares is
calculated using the following formula set forth in rules adopted by the SEC
that apply to all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)^6 - 1]
---
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 that class outstanding
during the 30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day
of the period, adjusted for undistributed net investment income.
73
<PAGE>
The standardized yield of a class of shares for a 30-day period may differ from
its yield for any other period. The SEC 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 a Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from a
Fund's portfolio investments calculated for that period. The standardized yield
may differ from the "dividend yield" of that class, described below.
Additionally, because each class of shares of a Fund is subject to different
expenses, it is likely that the standardized yields of the share classes of the
Funds will differ. The yields on the Funds for the 30-day period ended October
31, 1998 were as follows.
- --------------------------------------------------------------------------------
Balanced Fund: Class A 1.95%
- --------------------------------------------------------------------------------
Balanced Fund: Class B 0.86%
- --------------------------------------------------------------------------------
Convertible Securities Fund 4.18%
- --------------------------------------------------------------------------------
Diversified Stock Fund: Class A 0.77%
- --------------------------------------------------------------------------------
Diversified Stock Fund: Class B (0.31)%
- --------------------------------------------------------------------------------
Fund for Income 5.39%
- --------------------------------------------------------------------------------
Government Mortgage Fund 4.65%
- --------------------------------------------------------------------------------
Growth Fund (0.03)%
- --------------------------------------------------------------------------------
Intermediate Income Fund 4.11%
- --------------------------------------------------------------------------------
International Growth Fund: Class A N/A
- --------------------------------------------------------------------------------
International Growth Fund: Class B N/A
- --------------------------------------------------------------------------------
Investment Quality Bond Fund 4.29%
- --------------------------------------------------------------------------------
Lakefront Fund 1.20%
- --------------------------------------------------------------------------------
LifeChoice Conservative Investor Fund 3.56%
- --------------------------------------------------------------------------------
LifeChoice Growth Investor Fund 1.32%
- --------------------------------------------------------------------------------
LifeChoice Moderate Investor Fund 2.29%
- --------------------------------------------------------------------------------
Limited Term Income Fund 4.34%
- --------------------------------------------------------------------------------
National Municipal Bond Fund: Class A 3.21%
- --------------------------------------------------------------------------------
National Municipal Bond Fund: Class B 2.24%
- --------------------------------------------------------------------------------
New York Tax-Free Fund: Class A 3.25%
- --------------------------------------------------------------------------------
New York Tax-Free Fund: Class B 2.18%
- --------------------------------------------------------------------------------
Ohio Municipal Bond Fund 3.38%
- --------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class A 0.82%
- --------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B (0.24)%
- --------------------------------------------------------------------------------
Real Estate Investment Fund 4.91%
- --------------------------------------------------------------------------------
Small Company Opportunity Fund (0.71)%
- --------------------------------------------------------------------------------
Special Value Fund: Class A 0.78%
- --------------------------------------------------------------------------------
Special Value Fund: Class B (0.31)%
- --------------------------------------------------------------------------------
Stock Index Fund 1.67%
- --------------------------------------------------------------------------------
Value Fund A 0.38%
- --------------------------------------------------------------------------------
74
<PAGE>
Dividend Yield and Distribution Returns. From time to time a Non-Money Market
Fund may quote a "dividend yield" or a "distribution return" for each class.
Dividend yield is based on the Class A or Class B share dividends derived from
net investment income during a one-year period. Distribution return includes
dividends derived from net investment income and from net realized capital gains
declared during a one-year period. The "dividend yield" is calculated as
follows:
<TABLE>
<CAPTION>
<S> <C>
Dividend Yield of the Class = Dividends of the Class for a Period of One-Year
-----------------------------------------------
Max. Offering Price of the Class (last day of period
</TABLE>
For Class A shares, the maximum offering price includes the maximum front-end
sales charge. For Class B shares, the maximum offering price is the net asset
value per share, without considering the effect of the CDSC.
From time to time similar yield or distribution return calculations may also be
made using the Class A net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields on Class A shares
at maximum offering price and net asset value, and distribution returns on Class
A shares at maximum offering price and net asset value for the one year period
ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Distribution
Dividend Yield Return at
at Maximum Dividend Yield Maximum Distribution
Offering Price at Net Asset Offering Price Return at Net
Value Asset Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund 2.36% 2.50% 7.14% 7.57%
- --------------------------------------------------------------------------------------------------------------------
Convertible Securities Fund 4.16% 4.42% 12.38% 13.14%
- --------------------------------------------------------------------------------------------------------------------
Diversified Stock Fund 0.56% 0.59% 10.47% 11.11%
- --------------------------------------------------------------------------------------------------------------------
Fund for Income 6.05% 6.17% 6.05% 6.17%
- --------------------------------------------------------------------------------------------------------------------
Government Mortgage Fund 5.37% 5.69% 5.37% 5.69%
- --------------------------------------------------------------------------------------------------------------------
Growth Fund 0.02% 0.02% 5.44% 5.77%
- --------------------------------------------------------------------------------------------------------------------
Intermediate Income Fund 5.11% 5.42% 5.11% 5.42%
- --------------------------------------------------------------------------------------------------------------------
International Growth Fund 0.40% 0.42% 5.98% 6.34%
- --------------------------------------------------------------------------------------------------------------------
Investment Quality Bond Fund 5.15% 5.46% 5.15% 5.46%
- --------------------------------------------------------------------------------------------------------------------
Lakefront Fund 1.18% 1.25% 2.72% 2.88%
- --------------------------------------------------------------------------------------------------------------------
LifeChoice Conservative Investor Fund N/A 3.68% N/A 3.92%
- --------------------------------------------------------------------------------------------------------------------
LifeChoice Growth Investor Fund N/A 1.24% N/A 3.75%
- --------------------------------------------------------------------------------------------------------------------
LifeChoice Moderate Investor Fund N/A 2.40% N/A 3.18%
- --------------------------------------------------------------------------------------------------------------------
Limited Term Income Fund 5.28% 5.38% 5.28% 5.38%
- --------------------------------------------------------------------------------------------------------------------
75
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
Distribution
Dividend Yield Return at
at Maximum Dividend Yield Maximum Distribution
Offering Price at Net Asset Offering Price Return at Net
Value Asset Value
- --------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund 3.71% 3.94% 3.71% 3.94%
- --------------------------------------------------------------------------------------------------------------------
New York Tax-Free Fund 4.50% 4.78% 4.68% 4.96%
- --------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond Fund 4.01% 4.25% 4.79% 5.09%
- --------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund 0.76% 0.81% 10.32% 10.95%
- --------------------------------------------------------------------------------------------------------------------
Real Estate Investment Fund 4.10% 4.35% 4.46% 4.73%
- --------------------------------------------------------------------------------------------------------------------
Small Company Opportunity Fund 0.00% 0.00% 17.49% 18.56%
- --------------------------------------------------------------------------------------------------------------------
Special Value Fund 0.60% 0.63% 9.21% 9.77%
- --------------------------------------------------------------------------------------------------------------------
Stock Index Fund 1.60% 1.70% 6.52% 6.92%
- --------------------------------------------------------------------------------------------------------------------
Value Fund 0.52% 0.56% 7.58% 8.04%
- --------------------------------------------------------------------------------------------------------------------
The dividend yield on Class B shares with and without the CDSC, and distribution
returns on Class B shares with and without the CDSC for the one year period
ended October 31, 1998 were as follows.
- --------------------------------------------------------------------------------------------------------------------
Dividend Yield Dividend Yield Distribution Distribution
with CDSC without CDSC Returns with Returns without
CDSC CDSC
- --------------------------------------------------------------------------------------------------------------------
Balanced Fund 1.34% 1.41% 6.15% 6.48%
- --------------------------------------------------------------------------------------------------------------------
Diversified Stock Fund 0.00% 0.00% 10.13% 10.66%
- --------------------------------------------------------------------------------------------------------------------
International Growth Fund 0.00% 0.00% 5.79% 6.09%
- --------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund 2.72% 2.87% 2.72% 2.87%
- --------------------------------------------------------------------------------------------------------------------
New York Tax-Free Fund 3.57% 3.76% 3.75% 3.75%
- --------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund 0.00% 0.00% 9.81% 10.33%
- --------------------------------------------------------------------------------------------------------------------
Special Value Fund 0.00% 0.00% 8.85% 9.32%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Total Returns. The "average annual total return" of a Fund, or of each class 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 greater than one year.
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:
76
<PAGE>
ERV - P = Total Return
-------
P
In calculating total returns for Class A 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). For Class B shares, the payment of the applicable CDSC (5.0%
for the first year, 4.0% for second year, 3.0% for the third and fourth years,
2.0% for the fifth year, 1.0% for the sixth year and none thereafter) is applied
to the investment result for the time period shown (unless the total return is
shown at net asset value, as described 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.
The average annual total return and cumulative total return on Class A and Class
B shares, for the period from the commencement of operations to October 31, 1998
(life of fund) at maximum offering price is shown on the table that follows. The
average annual total return for the one and five year periods (when applicable)
ended October 31, 1998 also are shown on the table that follows.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Average Annual
Total Return Five-Year
for the Life of Cumulative Total One-Year Average Average Annual
the Fund at Return for the Life Annual Total Total Return at
Maximum Maximum of the Fund at Return at Maximum Maximum Offering
Sales Charge Offering Price* Maximum Offering Offering Price* Price*
Price*
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund: Class A 5.75% 12.40% 77.12% 7.94% N/A
- --------------------------------------------------------------------------------------------------------------------
Balanced Fund: Class B 5.00% 12.84% 80.50% 9.27% N/A
- --------------------------------------------------------------------------------------------------------------------
Convertible 5.75% 10.41% 184.20% (9.22%) 7.67%
Securities Fund
- --------------------------------------------------------------------------------------------------------------------
Diversified Stock 5.75% 15.72% 273.71% 12.74% 19.45%
Fund: Class A
- --------------------------------------------------------------------------------------------------------------------
Diversified Stock 5.00% 16.16% 286.73% 14.34% 20.17%
Fund: Class B
- --------------------------------------------------------------------------------------------------------------------
Fund for Income 2.00% 8.00% 142.09% 4.47% 5.91%
- --------------------------------------------------------------------------------------------------------------------
Government Mortgage 5.75% 7.43% 83.35% 1.04% 4.92%
Fund
- --------------------------------------------------------------------------------------------------------------------
Growth Fund 5.75% 19.98% 144.60% 21.19% N/A
- --------------------------------------------------------------------------------------------------------------------
Intermediate Income 5.75% 4.47% 23.87% 2.03% N/A
Fund
- --------------------------------------------------------------------------------------------------------------------
International Growth 5.75% 5.42% 56.26% (0.28%) 3.98%
Fund: Class A
- --------------------------------------------------------------------------------------------------------------------
- ----------
* For Class B Shares the calculations reflect the imposition of the CDSC.
77
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
Average Annual
Total Return Five-Year
for the Life of Cumulative Total One-Year Average Average Annual
the Fund at Return for the Life Annual Total Total Return at
Maximum Maximum of the Fund at Return at Maximum Maximum Offering
Sales Charge Offering Price* Maximum Offering Offering Price* Price*
Price*
- --------------------------------------------------------------------------------------------------------------------
International Growth 5.00% 5.75% 60.42% 0.51% 4.37%
Fund: Class B
- --------------------------------------------------------------------------------------------------------------------
Investment Quality 5.75% 4.90% 26.36% 1.81% N/A
Bond Fund
- --------------------------------------------------------------------------------------------------------------------
Lakefront Fund 5.75% 7.48% 12.75% (1.00%) N/A
- --------------------------------------------------------------------------------------------------------------------
LifeChoice 5.75% 7.50% 14.18% 2.66% N/A
Conservative
Investor Fund
- --------------------------------------------------------------------------------------------------------------------
LifeChoice Growth 5.75% 8.47% 16.08% 0.96% N/A
Investor Fund
- --------------------------------------------------------------------------------------------------------------------
LifeChoice Moderate 5.75% 7.73% 14.62% 1.21% N/A
Investor Fund
- --------------------------------------------------------------------------------------------------------------------
Limited Term Income 2.00% 6.21% 72.36% 4.75% 4.63%
Fund
- --------------------------------------------------------------------------------------------------------------------
National Municipal 5.75% 5.14% 26.81% 1.95% N/A
Bond Fund: Class A
- --------------------------------------------------------------------------------------------------------------------
National Municipal 5.00% 5.18% 27.02% 2.88% N/A
Bond Fund: Class B
- --------------------------------------------------------------------------------------------------------------------
New York Tax-Free 5.75% 5.99% 56.64% 0.04% 3.42%
Fund: Class A
- --------------------------------------------------------------------------------------------------------------------
New York Tax-Free 5.00% 6.30% 60.25% 0.96% 3.74%
Fund: Class B
- --------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond 5.75% 7.10% 78.63% 1.92% 5.04%
Fund: Class A
- --------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock 5.75% 12.20% 182.78% (8.71%) 11.97%
Fund: Class A
- --------------------------------------------------------------------------------------------------------------------
78
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
Average Annual
Total Return Five-Year
for the Life of Cumulative Total One-Year Average Average Annual
the Fund at Return for the Life Annual Total Total Return at
Maximum Maximum of the Fund at Return at Maximum Maximum Offering
Sales Charge Offering Price* Maximum Offering Offering Price* Price*
Price*
- --------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock 5.00% 12.51% 190.02% (7.81%) 12.42%
Fund: Class B
- --------------------------------------------------------------------------------------------------------------------
Real Estate 5.75% 1.09% 1.64% (17.00%) N/A
Investment Fund
- --------------------------------------------------------------------------------------------------------------------
Small Company 5.75% 1.53% 7.58% (37.01%) N/A
Opportunity Fund
- --------------------------------------------------------------------------------------------------------------------
Special Value Fund: 5.75% 10.09% 60.30% (16.33%) N/A
Class A
- --------------------------------------------------------------------------------------------------------------------
Special Value Fund: 5.00% 10.42% 62.68% (15.57%) N/A
Class B
- --------------------------------------------------------------------------------------------------------------------
Stock Index Fund 5.75% 19.57% 140.52% 14.06% N/A
- --------------------------------------------------------------------------------------------------------------------
Value Fund 5.75% 18.21% 127.38% 13.54% N/A
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time the Non-Money Market Funds also may quote an "average annual
total return at net asset value" or a cumulative "total return at net asset
value." It is based on the difference in net asset value per share at the
beginning and the end of the period for a hypothetical investment in that class
of shares (without considering front-end or contingent deferred sales charges)
and takes into consideration the reinvestment of dividends and capital gains
distributions. The average annual total return and cumulative total return on
Class A and Class B shares of the Funds, at net asset value for the period from
the commencement of operations to October 31, 1998 (life of fund) are shown in
the table that follows.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Cumulative Total
Total Return at Return at Net Asset
Net Asset Value Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Balanced Fund: Class A 13.77% 87.93%
- --------------------------------------------------------------------------------
Balanced Fund: Class B 12.84% 80.50%
- --------------------------------------------------------------------------------
Convertible Securities Fund 10.41% 184.20%
- --------------------------------------------------------------------------------
Diversified Stock Fund: Class A 16.48% 296.50%
- --------------------------------------------------------------------------------
Diversified Stock Fund: Class B 16.16% 286.73%
- --------------------------------------------------------------------------------
Fund for Income 8.19% 146.93%
- --------------------------------------------------------------------------------
Government Mortgage Fund 8.19% 94.53%
- --------------------------------------------------------------------------------
Growth Fund 21.44% 159.53%
- --------------------------------------------------------------------------------
Intermediate Income Fund 5.75% 31.43%
- --------------------------------------------------------------------------------
79
<PAGE>
- --------------------------------------------------------------------------------
Average Annual Cumulative Total
Total Return at Return at Net Asset
Net Asset Value Value
- --------------------------------------------------------------------------------
International Growth Fund: Class A 6.16% 65.79%
- --------------------------------------------------------------------------------
International Growth Fund: Class B 5.75% 60.42%
- --------------------------------------------------------------------------------
Investment Quality Bond Fund 6.18% 34.06%
- --------------------------------------------------------------------------------
Lakefront Fund 7.48% 12.75%
- --------------------------------------------------------------------------------
LifeChoice Conservative Investor Fund 7.50% 14.18%
- --------------------------------------------------------------------------------
LifeChoice Growth Investor Fund 8.47% 16.08%
- --------------------------------------------------------------------------------
LifeChoice Moderate Investor Fund 7.73% 14.62%
- --------------------------------------------------------------------------------
Limited Term Income Fund 6.45% 75.80%
- --------------------------------------------------------------------------------
National Municipal Bond Fund: Class A 6.46% 34.55%
- --------------------------------------------------------------------------------
National Municipal Bond Fund: Class B 5.18% 27.02%
- --------------------------------------------------------------------------------
New York Tax-Free Fund: Class A 6.80% 66.15%
- --------------------------------------------------------------------------------
New York Tax-Free Fund: Class B 6.30% 60.25%
- --------------------------------------------------------------------------------
Ohio Municipal Bond Fund: Class A 7.85% 89.52%
- --------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class A 12.51% 190.02%
- --------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B 12.94% 200.03%
- --------------------------------------------------------------------------------
Real Estate Investment Fund: Class A 1.09% 1.64%
- --------------------------------------------------------------------------------
Small Company Opportunity Fund: Class A 2.79% 14.14%
- --------------------------------------------------------------------------------
Special Value Fund: Class A 11.42% 70.08%
- --------------------------------------------------------------------------------
Special Value Fund: Class B 10.42% 62.68%
- --------------------------------------------------------------------------------
Stock Index Fund 21.02% 155.19%
- --------------------------------------------------------------------------------
Value Fund 19.65% 141.26%
- --------------------------------------------------------------------------------
</TABLE>
Other Performance Comparisons.
From time to time a Fund may publish the ranking of its performance or the
performance of its Class A, Class B or Class G 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 Non-Money Market 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 Class A, Class B or Class G shares by Morningstar, Inc., an
independent mutual fund monitoring service that ranks mutual funds, including
the Non-Money Market Funds, in broad investment categories (domestic equity,
international equity taxable bond, municipal bond or other) monthly, based upon
each fund's three, five, and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted for
fees and sales loads. There are five ranking categories with a corresponding
number of stars: highest (5), above average (4), neutral (3), below average (2),
80
<PAGE>
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 or in Class A, Class B or Class
G shares of 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
Russell 2000 Index, the Lehman Brothers Government/Corporate Bond Index, the
Lehman Brothers Aggregate Bond Index, the Lehman Brothers Mortgage-Backed
Securities Index, the J.P. Morgan Government Bond Index and the Morgan Stanley
All Country World 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 S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The Russell 2000 Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stock of small-
to mid-sized companies. The Lehman Brothers Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Brothers
Mortgage-Backed Securities Index is a broad-based unmanaged index that
represents the general performance of fixed-rate mortgage bonds. The Lehman
Brothers 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 Morgan
Stanley All Country World Index is a widely recognized, unmanaged index of
common stock prices with country weightings of international companies. On
October 31, 1998, the International Growth Fund formally changed its benchmark
from the Morgan Stanley Capital International Europe, Australasia, Far East
Index (MSCI EAFE) to the All Country World Index effective because the Adviser
believes that this index more closely represents the foreign countries in which
the International Growth Fund invests. The foregoing 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 or Class A,
Class B or Class G shares of a Non-Money Market Fund 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 also may 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
81
<PAGE>
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 Gradison McDonald at
513-579-5700 or 800-869-5999 or the Funds at 800-539-FUND.
Investors also may judge, and a Fund may at times advertise, the performance of
a Fund or of Class A, Class B or Class G shares 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: IBC's Money
Fund Reports, 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. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the U.S.
Government. Money market mutual funds may seek to maintain a fixed price per
share.
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION
The NYSE holiday closing schedule indicated in this SAI under "Valuation of
Portfolio Securities for the Money Market 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 may not be able to accept purchase or redemption
requests. A Fund's net asset value may be affected to the extent that its
securities are traded on days that are not Business Days.
The Trust has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem
shares of the Balanced Fund, Convertible Securities Fund, Diversified Stock
Fund, Federal Money Market Fund, Fund for Income, Government Mortgage Fund,
Growth Fund, Intermediate Income Fund, International Growth Fund, Investment
Quality Bond Fund, Lakefront Fund, the LifeChoice Funds, Limited Term Income
Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond
Fund, Ohio Regional Stock Fund, Small Company Opportunity Fund, Real Estate
Investment Fund, Special Value Fund, Stock Index Fund and Value Fund 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.
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Pursuant to Rule 11a-3 under the 1940 Act, the Funds are required to give
shareholders at least 60 days' notice prior to terminating or modifying a Fund's
exchange privilege. The 60-day notification requirement may, however, be waived
if (1) the only effect of a modification would be to reduce or eliminate an
administrative fee, redemption fee, or deferred sales charge ordinarily payable
at the time of exchange or (2) a Fund temporarily suspends the offering of
shares as permitted under the 1940 Act or by the SEC or because it is unable to
invest amounts effectively in accordance with its investment objective and
policies.
The Funds reserve the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in the Adviser's judgment,
a Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise be adversely affected.
Purchasing Shares.
Alternative Sales Arrangements - Class A and Class B Shares. The alternative
sales arrangements permit an investor to choose the method of purchasing shares
that is more beneficial depending on the amount of the purchase, the length of
time the investor expects to hold shares and other relevant circumstances. When
comparing only Class A and Class B shares, investors should understand that the
purpose and function of the deferred sales charge and asset-based sales charge
with respect to Class B shares are the same as those of the initial sales charge
with respect to Class A shares. Any salesperson or other person entitled to
receive compensation for selling Fund shares may receive different compensation
with respect to one class of shares in comparison to another class of shares on
behalf of a single investor (not including dealer "street name" or omnibus
accounts). Over time, generally it will be more advantageous for that investor
to purchase Class A shares of a Fund instead. However, some of the Funds will
also offer Class G shares, which are described in "Class G Shares -- The
Gradison Fund Reorganization" below. Investors also should evaluate the benefits
of investing in Class G shares.
Each of the three classes of shares represents interests in the same portfolio
investments of a Fund. However, each class has different shareholder privileges
and features. The net income attributable to Class B and Class G shares and the
dividends payable on these shares will be reduced by incremental expenses borne
solely by Class B and Class G shares, respectively, including the asset-based
sales charge to which these shares are subject.
Class B Conversion Feature. Ninety-six months (eight years) after an investor's
purchase order for Class B shares is accepted, such "Matured Class B Shares"
automatically will convert to Class A shares, on the basis of the relative net
asset value of the two classes, without the imposition of any sales load or
other charge. Each time any Matured Class B shares convert to Class A shares,
any Class B shares acquired by the reinvestment of dividends or distributions on
such Matured Class B shares that are still held will also convert to Class A
shares, on the same basis. The conversion feature is intended to relieve holders
of Matured Class B shares of the asset-based sales charge under the Class B
Distribution Plan after such shares have been outstanding long enough that the
Distributor may have been compensated for distribution expenses related to such
shares.
The conversion of Matured Class B shares to Class A shares is subject to the
continuing availability of a private letter ruling from the Internal Revenue
Service, or an opinion of counsel or tax adviser, to the effect that the
conversion of Matured Class B shares does not constitute a taxable event for the
holder under Federal income tax law. If such a revenue ruling or opinion is no
longer available, the automatic conversion feature may be suspended, in which
event no further conversion of Matured Class B shares would occur while such
suspension remained in effect. Although Matured Class B shares could then be
exchanged for Class A shares on the basis of relative net asset value of the two
classes, without the imposition of a sales charge or fee, such exchange could
constitute a taxable event for the holder, and absent such exchange, Class B
shares might continue to be subject to the asset-based sales charge for longer
than six years.
The methodology for calculating the net asset value, dividends and distributions
of the Fund's Class A, Class B and Class G shares recognizes two types of
expenses. General expenses that do not pertain specifically to a Class are
allocated to the shares of each Class, based upon the percentage that the net
assets of such Class bears to a Fund's total net assets, and then pro rata to
each outstanding share within a given class. Such general expenses include (1)
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management fees, (2) legal, bookkeeping and audit fees, (3) printing and mailing
costs of shareholder reports, prospectuses, statements of additional information
and other materials for current shareholders, (4) fees to the Trustees who are
not affiliated with the Adviser, (5) custodian expenses, (6) share issuance
costs, (7) organization and start-up costs, (8) interest, taxes and brokerage
commissions, and (9) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a Class are allocated equally to each
outstanding share within that class. Such expenses include (1) Rule 12b-1
distribution fees and shareholder servicing fees, (2) incremental transfer and
shareholder servicing agent fees and expenses, (3) registration fees, and (4)
shareholder meeting expenses, to the extent that such expenses pertain to a
specific class rather than to a Fund as a whole.
Class G Shares -- The Gradison Fund Reorganization. KeyCorp, the parent of Key
Asset Management Inc. ("KAM" or the "Adviser"), recently completed the
acquisition of McDonald & Company Investments, Inc., the corporate parent of
McDonald & Company Securities Inc., a major regional broker-dealer. In October
1998, McDonald & Company Securities Inc. changed its name to McDonald
Investments Inc. The Gradison Division of McDonald Securities Inc. (the
"Gradison Division") will join KAM. To achieve economies of scale, the Trust's
Board of Trustees, on December 11, 1998, approved Agreements and Plans of
Reorganization by which the Trust, on behalf of certain of its series, will
acquire the portfolio securities of seven funds previously managed by the
Gradison Division in a tax-free exchange for Class G shares of these series (the
"Gradison Fund Reorganization"), subject to various conditions, such as approval
by the shareholders of the Gradison Funds. The Gradison Fund Reorganization is
scheduled to take place on or about March 26, 1999.
As outlined in the table under "Performance -- Class G Shares" in this SAI, each
of five of the seven Gradison funds will transfer all of its assets to its
corresponding Victory Fund in exchange for newly established Class G shares of
such corresponding Fund and the assumption of its liabilities by such
corresponding Fund, followed by the constructive distribution pro rata to its
shareholders of the corresponding Fund's Class G shares received in the
reorganization. The two remaining Gradison Funds, Gradison U.S. Government
Reserves and Gradison Established Value Fund, will participate in a separate
reorganization which is described in a separate statement of additional
information.
No sales charge is imposed on the purchase of Class G shares. The Gradison
Division of McDonald Investments Inc. ("Gradison McDonald") compensates its own
employees, and may compensate its affiliates, for Class G share sales, some of
which compensation may be recouped in the event of share redemptions made during
the first nine months after sale. See "How to Sell Shares" in the Prospectuses.
In addition, Class G shares of the Fund for Income and the Ohio Municipal Bond
Fund are subject to an annual Rule 12b-1 fee of up to 0.25% of average daily net
assets and Class G shares of the Diversified Stock Fund, International Growth
Fund and Small Company Opportunity Fund are subject to an Rule 12b-1 fee of up
to 0.50% of average daily net assets. There is no conversion feature applicable
to Class G shares. Distributions paid to holders of a Fund's Class G shares may
be reinvested in additional Class G shares of that Fund or Class G shares of a
different Fund.
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Dealer Reallowances. The following table shows the amount of the front end sales
load that is reallowed to dealers as a percentage of the offering price of Class
A Shares of the Balanced Fund, Convertible Securities Fund, Diversified Stock
Fund, Government Mortgage Fund, Growth Fund, Intermediate Income Fund,
Investment Quality Bond Fund, International Growth Fund, Lakefront Fund,
National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund,
Ohio Regional Stock Fund, Real Estate Investment Fund, Small Company Opportunity
Fund, Special Value Fund, Stock Index Fund and Value Fund. The following
information applies to the LifeChoice Funds only in the event that the SEC
grants the Trust an order permitting the LifeChoice Funds to charge a sales load
that exceeds 1.50%.
Initial Sales Charge: Concession to Dealers:
Amount of Purchase % of Offering Price % of Offering Price
------------------ ------------------- -------------------
Up to $50,000 5.75% 5.00%
$50,000 to $100,000 4.50% 4.00%
$100,000 to $250,000 3.50% 3.00%
$250,000 to $500,000 2.50% 2.00%
$500,000 to $1,000,000 2.00% 1.75%
$1,000,000 and above 0.00% *
The following table shows the amount of the front end sales load that is
reallowed to dealers as a percentage of the offering price of the Class A Shares
of the Fund for Income and Limited Term Income Fund
Initial Sales Charge: Concession to Dealers:
Amount of Purchase % of Offering Price % of Offering Price
------------------ ------------------- -------------------
Up to $50,000 2.00% 1.50%
$50,000 to $100,000 1.75% 1.25%
$100,000 to $250,000 1.50% 1.00%
$250,000 to $500,000 1.25% 0.75%
$500,000 to $1,000,000 1.00% 0.50%
$1,000,000 and above 0.00% *
* There is no initial sales charge on purchases of $1 million or more.
However, a CDSC of up to 1.00% will be imposed on shares redeemed within
the first year after purchase, or a .50% CDSC will be charged on shares
redeemed within two years of purchase. This charge will be based on the
lower of the cost of the shares or net asset value at the time of
redemption. No CDSC is imposed on reinvested distributions. Investment
professionals may be paid at a rate of up to 1.00% of the purchase price.
The following Funds do not impose sales charges on their shares: the Federal
Money Market Fund, Financial Reserves Fund, Institutional Money Market Fund,
Ohio Municipal Money Market Fund, Prime Obligations Fund, Tax-Free Money Market
Fund and U.S. Government Obligations Fund.
Reduced Sales Charge. Reduced sales charges are available for purchases of
$50,000 or more of Class A shares of a Fund alone or in combination with
purchases of other Class A shares of the Trust. To obtain the reduction of the
sales charge, you or your Investment Professional must notify the Transfer Agent
at the time of purchase whenever a quantity discount is applicable to your
purchase.
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In addition to investing at one time in any combination of Class A shares of the
Trust's 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 Class A shares of the Trust for several
accounts at the same time, you may combine these investments into a single
transaction if purchased through one Investment Professional, and if the total
is $50,000 or more. The following may qualify for this privilege: an individual,
or "company" as defined in Section 2(a)(8) of the 1940 Act; an individual,
spouse, and their children under age 21 purchasing for his, her, or their own
account; a trustee, administrator or other fiduciary purchasing for a single
trust estate or single fiduciary account or for a single or a parent-subsidiary
group of "employee benefit plans" (as defined in Section 3(3) of ERISA); and
tax-exempt organizations under Section 501(c)(3) of the Code.
Rights of Accumulation. "Rights of Accumulation" permit reduced sales charges on
future purchases of Class A shares after you have reached a new breakpoint. You
can add the value of existing Trust's Class A 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 Class A shares of certain other Funds 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. Each investment you make after signing the Letter will be
entitled to the sales charge applicable to the total investment indicated in the
Letter. For example, a $2,500 purchase toward a $60,000 Letter would receive the
same reduced sales charge as if the $60,000 had been invested at one time. To
ensure that the reduced price will be received on future purchases, you or your
Investment Professional must inform the Transfer Agent that the Letter is in
effect each time shares are purchased. Neither income dividends nor capital gain
distributions taken in additional shares will apply toward the completion of the
Letter.
You are not obligated to complete the additional purchases contemplated by a
Letter. If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
If you purchase more than the amount specified in the Letter and qualify for a
further sales charge reduction, the sales charge will be adjusted to reflect
your total purchase at the end of 13 months. Surplus funds will be applied to
the purchase of additional shares at the then current offering price applicable
to the total purchase.
Exchanging Shares.
Shares of any Victory Money Market Fund may be exchanged for shares of any of
the Funds, including Class A and Class B (but not Class G) shares of the Funds.
Exchanges for Class A shares of the Funds may be subject to payment of a sales
charge.
Shares of a Fund may be exchanged for the same class of shares of any other Fund
of the Trust. For example, an investor can exchange Class B shares of a Fund
only for Class B shares of another Fund. At present, not all Funds of the Trust
offer multiple classes of shares. If a Fund has only one class of shares that
does not have a class designation, that class is "Class A" for exchange
purposes. When Class B shares are redeemed to effect an exchange, the priorities
described in the 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.
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Class G shares of any Fund may be exchanged for Class G shares, Select shares,
or any single class money market shares of a Fund offered by the Trust.
Shareholders who owned Class G shares on the closing date of the Gradison Fund
reorganization, can exchange into Class A shares of any Fund that does not offer
Class G Shares without paying a sales charge.
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 Funds into which shares of the Fund are
exchangeable as described above, 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 the same Fund or another Fund offered by the Trust
within 90 days of payment of the sales charge, the shareholder's basis in the
shares of the Fund that were redeemed may not include the amount of the sales
charge paid. That would reduce the loss or increase the gain recognized from
redemption. The Funds may amend, suspend, or cease offering this reinvestment
privilege at any time as to shares redeemed after the date of such amendment,
suspension, or cessation. The reinstatement must be into an account bearing the
same registration.
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 separately
for Class A, Class B and Class G shares, from their net investment income as
follows. Each Fund declares and pays capital gains annually.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Income Dividends Declared and Balanced Fund, Fund for Income, Government Mortgage Fund, Intermediate Income
Paid Monthly Fund, Investment Quality Bond Fund, Limited Term Income Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund
- -------------------------------------------------------------------------------------------------------------------
Income Dividends Declared and Convertible Securities Fund, Diversified Stock Fund, Growth Fund, International
Paid Quarterly Growth Fund, Lakefront Fund, the LifeChoice Funds, Ohio Regional Stock Fund,
Real Estate Investment Fund, Small Company Opportunity Fund, Special Value
Fund, Stock Index Fund, Value Fund
- -------------------------------------------------------------------------------------------------------------------
Declared Daily and Paid Monthly Money Market Funds
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of a class'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 or borne separately by a class, as described in "Alternative Sales
Arrangements - Class A and Class B" and "Class G Shares -- The Gradison Fund
Reorganization" above. Dividends are calculated in the same manner, at the same
time and on the same day for shares of each class. However, dividends on Class B
and Class G shares are expected to be lower as a result of applicable
asset-based sales charges, and Class B and Class G dividends will also differ in
amount as a consequence of any differences in net asset value among the three
share Classes.
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For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount earned, including both original issue and
market discount, on discount paper accrued ratably to the date of maturity.
Expenses, including the compensation payable to the Adviser, are accrued each
day. The expenses and liabilities of a Fund shall include those appropriately
allocable to the Fund as well as a share of the general expenses and liabilities
of the Trust in proportion to the Fund's share of the total net assets of the
Trust.
TAXES
Information set forth in the Prospectuses and this SAI that relates to federal
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 Prospectuses. No attempt has been
made to present a complete explanation of the federal tax treatment of the Funds
or the implications to shareholders, and the discussions here and in each Fund's
prospectus are not intended as substitutes 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 Prospectuses 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 of offset capital
gains in such future years. As of October 31, 1998, the Financial Reserves Money
Market Fund had capital loss carryforwards of approximately $5,000 which expire
in 2001; the Tax-Free Money Market Fund had capital loss carryforwards of
approximately $4,000 which expire in 2006; Limited Term Income Fund had capital
loss carryforwards of approximately $1,335,000, $553,000 and $906,000 which
expire in 2002, 2003, and 2004, respectively; the Fund for Income had capital
loss carryforwards of approximately $585,000, $588,000, and $328,000 which
expire 2001, 2002, and 2003, respectively; Government Mortgage Fund had capital
loss carryforwards of approximately $698,000 and $109,000 which expire 2002 and
2005, respectively; the Investment Quality Bond Fund had capital loss
carryforwards of approximately $3,961,000 which expire 2002; the Real Estate
Investment Fund had capital loss carryforwards of approximately $497,000 which
expire 2006; and the Special Growth Fund had capital loss carryforwards of
approximately $9,811,000 which expire 2006. The Investment Quality Bond Fund has
additional capital loss carryforwards as the successor of a merger with the
Government Bond Fund; however, as explained below, such carryforwards are
subject to limitations on availability. Under Code Sections 382 and 383, if a
Fund has an "ownership change," then the 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 (the "IRS")) in effect for the month in
which the ownership change occurs (the rate for December, 1998 is 4.80%). The
Funds will use their best efforts to avoid having an ownership change. However,
because of circumstances which may be beyond the
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control or knowledge of a Fund, there can be no assurance that a Fund will not
have, or has not already had, an ownership change. If a Fund has or has had an
ownership change, then any capital gain net income for any year following the
ownership change in excess of the annual limitation on the capital loss
carryforwards will have to be distributed by the Fund and will be taxable to
shareholders as described under "Distributions" below.
Pursuant to a planned reorganization (described in this SAI at "Additional
Purchase, Exchange, and Redemption Information: Class G Shares -- The Gradison
Fund Reorganization"), but only upon the consummation of the reorganization and
its qualification, as demonstrated by the written opinion of counsel, as a
tax-free exchange, certain of the Funds will acquire additional capital loss
carryforwards by virtue of acquiring a Gradison Fund in the reorganization. Such
capital loss carryforwards may be subject to the limitations of Sections 382 and
383 described above. As of June 30, 1998, the Gradison Ohio Tax Free Income Fund
had capital loss carryforwards of approximately $527, which expire in 2003; as
of March 31, 1998, the Gradison International Fund had capital loss
carryforwards of approximately $368,000, which expire in 2006; and as of
December 31, 1997, the Gradison Government Income Fund had capital loss
carryforwards of approximately $5,349,618 and $536,544, which expire in 2003 and
2004, respectively. The capital loss carryforwards of each of these funds will
be taken into account by the Victory fund which acquires such fund's assets in
the reorganizations. Specifically, the aforementioned funds' capital loss
carryforwards will be taken into account by the Victory Ohio Municipal Bond
Fund, the Victory International Growth Fund and the Victory Fund For Income,
respectively.
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.
Further, the Code also treats as ordinary income a portion of the capital 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 rate, reduced
by the sum of: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capitalized interest on acquisition indebtedness under
Code Section 263(g). However, if a Fund has a built-in loss with respect to a
position that becomes a part of a conversion transaction, the character of such
loss will be preserved upon a subsequent disposition or termination of the
position. 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.
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
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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.
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. Treasury Regulations provide, in general, that
the net income or net 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 is recognized 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 a swap, under
an alternative method contained in the proposed regulations and, in the case of
a cap or floor, under an alternative method which the IRS may provide in a
revenue procedure).
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 qualified electing fund (a "QEF"), in
which event the Fund 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, a Fund that invests in stock of
a PFIC may make a mark-to-market election with respect to such stock. Pursuant
to such 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 the Fund's
adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock
exceeds the fair market value of the stock at the end of a given taxable year,
such excess will be deductible as ordinary loss in an 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 next 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.
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<PAGE>
Finally, if a 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 the sale or other disposition of its interest in the PFIC or any excess
distribution received by the Fund from the PFIC will be allocated ratably over
the Fund's holding period of its interest 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) 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 its 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 over net short-term capital loss) for any taxable year,
to elect (unless it has 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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For purposes of calculating the excise tax, a regulated investment company: (1)
reduces 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) excludes foreign
currency gains and losses and ordinary gains or losses arising as a result of a
PFIC mark-to-market election (or upon the 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 the company's 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 a Fund 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. In general, the Balanced Fund,
Diversified Stock Fund, International Growth Fund, National Municipal Bond Fund,
New York Tax-Free Fund, Ohio Regional Stock Fund and Special Value Fund
dividends paid on Class A and Class B shares are calculated at the same time and
in the same manner. In general, dividends on Class B shares are expected to be
lower than those on Class A shares due to the higher distribution expenses
charged by the Class B shares. Dividends may also differ between classes as a
result of differences in other class specific expenses.
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):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) 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. 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). With respect to the International Growth Fund, only an
insignificant portion of the Fund will be invested in stock of domestic
corporations; therefore the ordinary dividends distributed by the Fund will not
qualify for the dividends-received deduction for corporate shareholders.
A Fund may either retain or distribute to shareholders its net capital gain for
each taxable year. Each Fund currently intends to distribute any such amounts.
If net capital gain is distributed and designated as a capital gain dividend, it
will be taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his or her shares or whether such gain
was recognized by the Fund prior to the date on which the shareholder acquired
his shares. The Code provides, however, that under certain conditions only 50%
of the capital gain recognized upon a Fund's disposition of domestic qualified
"small business" stock will be subject to tax.
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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 New York Tax-Free Fund, National Municipal Bond Fund, Ohio Municipal Bond
Fund, Ohio Municipal Money Market Fund, and Tax-Free Money 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.
AMT is imposed in addition to, but only to the extent it exceeds, the regular
tax and is computed at a maximum marginal rate of 28% for non-corporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 will generally constitute an item of tax
preference includable in AMTI for both corporate and non-corporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI. 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 a 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.
Investment income that may be received by the International Growth Fund from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the Fund to a reduced rate of, or exemption from, taxes
on such income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested in various
countries is not known: If more than 50% of the value of the Fund's total assets
at the close of its taxable year consist of the stock or securities of foreign
corporations, the Fund may elect to "pass through" to the Fund's shareholders
the amount of foreign taxes paid by the Fund. If the Fund so elects, each
shareholder would be required to include in gross income, even though not
actually received, his pro rata share of the foreign taxes paid by the Fund, but
would be treated as having paid his pro rata share of such foreign taxes and
would therefore be allowed to either deduct such amount in computing taxable
income or use such amount (subject to various Code limitations) as a foreign tax
credit against federal income tax (but not both). For purposes of the foreign
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tax credit limitation rules of the Code, each shareholder would treat as foreign
source income his pro rata share of such foreign taxes plus the portion of
dividends received from the Fund representing income derived from foreign
sources. No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Each shareholder should consult his
own tax adviser regarding the potential application of foreign tax credit rules.
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 his 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 undistributed net investment
income, recognized net capital gain, or unrealized appreciation in the value of
the assets of the Fund, distributions of such amounts will be taxable to the
shareholder in the manner described above, although such distributions
economically 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 the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year if 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 to report the receipt of interest or dividend income
properly, or (3) who has failed to certify to the Fund that it is not subject to
backup withholding or is an "exempt recipient" (such as a corporation).
Sale or Redemption of Shares
The Money Market Funds seek to maintain a stable net asset value of $1.00 per
share; however, there can be no assurance that the Money Market Funds will do
this. In such a case, and for all the Funds other than the Money Market Funds, 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. 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 on 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.
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Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership
("foreign shareholder"), depends on whether the income from a Fund is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
such foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such a foreign shareholder in the International Growth Fund may be
subject to U.S. withholding tax at the rate of 30% (or lower applicable treaty
rate) on the gross income resulting from the Fund's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against such gross income or a credit against the U.S. withholding tax
for the foreign shareholder's pro rata share of such foreign taxes which it is
treated as having paid. Such a foreign shareholder would generally 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. citizens
or domestic corporations.
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 SAI. 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.
TRUSTEES AND OFFICERS
Board of Trustees.
Overall responsibility for management of the Trust rests with the Trustees, who
are elected by the shareholders of the Trust. The Trust is managed by the
Trustees in accordance with the laws of the State of Delaware. There are
currently seven Trustees, five of whom are not "interested persons" of the Trust
within the meaning of that term under the 1940 Act ("Independent Trustees"). The
Trustees, in turn, elect the officers of the Trust to supervise actively its
day-to-day operations. There are also two Advisory Trustees who attend meetings
and serve on committees but do not vote.
The Trustees and the Advisory Trustees of the Trust, their ages, addresses, and
their principal occupations during the past five years are as follows. Each of
the following individuals, except Theodore H. Emmerich and Donald E. Weston,
holds the same position with The Victory Variable Insurance Funds, a registered
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investment company in the same fund complex as the Trust. Whereas Messrs.
Emmerich and Weston serve as Advisory Trustees of the Trust, each of them serves
as a Trustee of The Victory Variable Insurance Funds.
<TABLE>
<CAPTION>
POSITION(S)
HELD WITH
NAME, AGE AND ADDRESS THE TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- --------- ----------------------------------------
<S> <C> <C>
Roger Noall,* 63 Chairman and Since 1996, Executive of KeyCorp; from
c/o Brighton Apt. 1603 Trustee 1995 to 1996, General Counsel and
8231 Bay Colony Drive Secretary of KeyCorp; from 1994 to 1996,
Naples, FL 34108 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).
Leigh A. Wilson,** 54 President and Since 1989, Chairman and Chief Executive
New Century Care, Inc. Trustee Officer, New Century Care, Inc.
53 Sylvan Road North (merchant bank); since 1995, Principal
Westport, CT 06880 of New Century Living, Inc.; since 1989,
Director of Chimney Rock Vineyard and
Chimney Rock Winery.
Dr. Harry Gazelle, 71 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corporation.
Lakewood, OH 44107
Eugene J. McDonald, 66 Trustee Since 1990, Executive Vice President and
Duke Management Company Chief Investment Officer for Asset
2200 West Main Street Management of Duke University and
Suite 1000 President and CEO of Duke Management
Durham, NC 27705 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, 65 Trustee Since 1970, Professor, Weatherhead
Weatherhead School of Management School of Management, Case Western
Case Western Reserve University Reserve University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead School of
Cleveland, OH 44106-7235 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
H. Patrick Swygert, 55 Trustee Since 1995, President, Howard
Howard University University; since May 1996, Director,
2400 6th Street, N.W. Hartford Financial Services Group; since
Suite 402 May 1997, Director, Hartford Life
Washington, DC 20059 Insurance Company; from 1990 to 1995,
President, State University of New York
at Albany.
- --------
* Mr. Noall is an "interested person" and an "affiliated person" of the
Trust.
** Mr. Wilson is deemed to be an "interested person" of the Trust under the
1940 Act solely by reason of his position as President.
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Frank A. Weil, 67 Trustee Since 1984, Chairman and Chief Executive
Abacus & Associates Officer of Abacus & Associates, Inc.
147 E. 47th Street (private investment firm); Director and
New York, NY 10017 President of the Norman and Hickrill
Foundations; Director, Trojan
Industries; from 1977 to 1979, United
States Assistant Secretary of Commerce
for Industry and Trade.
ADVISORY TRUSTEES
Theodore H. Emmerich, 72 Advisory Retired; until 1986, managing partner
1201 Edgecliff Place Trustee (Cincinnati office) Ernst & Young LLP;
Cincinnati, Ohio 45206 Director of Carillon Fund, Inc.
(investment company), American Financial
Group (insurance), and Cincinnati
Milacron Commercial Corporation
(financing arm of Cincinnati Milacron
Corporation, a machine tool
manufacturer); Trustee of Summit
Investment Trust and Carillon Investment
Trust.
Donald E. Weston, 63* Advisory Since October 1998, Chairman of Gradison
McDonald Investments Inc. Trustee McDonald Investments, a division of
580 Walnut Street McDonald Investments Inc.; until October
Cincinnati, Ohio 45202 1998, Chairman of the Gradison Division
of McDonald & Company Securities, Inc.
and a Director of McDonald & Company
Investments Inc.; Director of Cincinnati
Milacron Commercial Corporation.
</TABLE>
The Board currently has an Investment Committee, a Business, Legal, and Audit
Committee, and a Board Process and Nominating Committee. The members of the
Investment Committee are Messrs. Wilson (Chairman), Morrissey, Swygert, Weston
and Weil, who will serve until August 1999. The function of the Investment
Committee is to review the existing investment policies of the Trust, including
the levels of risk and types of funds available to shareholders, and make
recommendations to the Trustees regarding the revision of such policies or, if
necessary, the submission of such revisions to the Trust's shareholders for
their consideration. The members of the Business, Legal and Audit Committee are
Messrs. McDonald (Chairman), Emmerich, and Gazelle who will serve until August
1999. The function of the Business, Legal, and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters and to review
compliance and contract matters. Mr. Swygert is the Chairman of the Board
Process and Nominating Committee (consisting of all the Trustees and Advisory
Trustees), which nominates persons to serve as Independent Trustees and Trustees
to serve on committees of the Board. This Committee also reviews Trustee
performance and compensation issues.
Remuneration of Trustees and Certain Executive Officers.
Each Trustee (other than Mr. Wilson) receives an annual fee of $31,500 for
serving as Trustee of all the Funds of the Trust, and an additional per meeting
fee ($3,500 in person and $1,500 per telephonic meeting). Mr. Wilson receives an
annual fee of $37,500 for serving as President and Trustee for all of the Funds
of the Trust, and an additional per meeting fee ($4,100 in person and $1,800 per
telephonic meeting). The Adviser pays the expenses of Messrs. Noall and Weston.
- --------
* Mr. Weston is an "interested person" and an "affiliated person" of the
Trust.
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The following table indicates the estimated compensation received by each
Trustee from the Victory "Fund Complex"(1) for the fiscal year ended October 31,
1998.
<TABLE>
<CAPTION>
Aggregate
Pension or Retirement Estimated Annual Aggregate Compensation from
Benefits Accrued as Benefits Upon Compensation from Victory "Fund
Portfolio Expenses Retirement Victory Portfolios Complex"
------------------ ---------- ------------------ --------
<S> <C> <C> <C> <C>
Leigh A. Wilson................. -0- -0- $45,000 $53,250
Robert G. Brown*................ -0- -0- $18,300 $18,300
Edward P. Campbell**............ -0- -0- $36,600 $43,500
Theordore H. Emmerich# -0- -0- None None
Harry Gazelle................... -0- -0- $36,600 $39,000
Eugene J. McDonald+............. -0- -0- $25,050 $43,050
Thomas F. Morrissey............. -0- -0- $36,600 $39,000
H. Patrick Swygert.............. -0- -0- $36,600 $39,000
Frank A. Weil+.................. -0- -0- $25,050 $44,250
(1) There are currently 41 mutual funds in the Victory "Fund Complex" for
which the above-named Trustees are compensated, but not all of these
Trustees serve on the board of each fund of the "Fund Complex."
* Mr. Brown resigned as of April 4, 1998.
** Mr. Campbell resigned as of December 31, 1998.
# Mr. Emmerich commenced service on the Board as of January 1, 1999.
+ Mr. McDonald and Mr. Weil commenced service on the Board as of January 1,
1998.
</TABLE>
Officers.
The officers of the Trust, their ages, and principal occupations during the past
five years, are as follows:
<TABLE>
<CAPTION>
Position(s)
with the
Name and Age Trust Principal Occupation During Past 5 Years
------------ ----- ----------------------------------------
<S> <C>
Leigh A. Wilson, 54 President See biographical information under "Board
and Trustee of Trustees" above.
William B. Blundin, 60 Vice Senior Vice President of BISYS Fund
President Services Inc. ("BISYS"); officer of
other investment companies administered
by BISYS.
J. David Huber, 52 Vice President of BISYS; officer of BISYS since June 1987.
President
Robert D. Hingston,46 Secretary Since November 1998, Vice President of
BISYS; from January 1995 to October
1998, founder and principal of RDH
Associates (mutual fund management
consulting firm); from June 1980 to
January 1995, Vice President of
Investors Bank & Trust Company.
98
<PAGE>
Joel B. Engle, 33 Treasurer Since September 1998, Vice President of
BISYS; from March 1995 to September
1998, Vice President, Northern Trust
Company; from July 1994 to February
1995, General Accountant, Wagner Asset
Management; from September 1988 to June
1994, Audit Manager with Ernst & Young
LLP.
</TABLE>
The mailing address of each officer of the Trust is 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
The officers of the Trust (other than Mr. Wilson) receive no compensation
directly from the Trust for performing the duties of their offices. BISYS
receives fees from the Trust as Administrator.
As of December 31, 1998, the Trustees and officers as a group owned beneficially
less than 1% of all classes of outstanding shares of the Funds.
The LifeChoice Funds -- Conflicts of Interest. The Trustees and officers of the
Trust are subject to conflicts of interest in managing both the LifeChoice Funds
described here and some of the underlying Proprietary Portfolios. This conflict
is most evident in the Board's supervision of KAM. KAM and certain of its
affiliates may provide services to, and receive fees from, not just the Funds,
but also some of the Proprietary and Other Portfolios. Their selection of
investments and allocation of Fund assets will be continuously and closely
scrutinized by the Board in order to avoid even the appearance of improper
practices. It is possible, however, that a situation might arise where one
course of action for a LifeChoice Fund would be detrimental to a Proprietary
Portfolio, or vice versa. In that unlikely event, the Trustees and officers of
the Trust will exercise good business judgment in upholding their fiduciary
duties to each set of Funds, thus minimizing such conflicts, if any should
arise.
ADVISORY AND OTHER CONTRACTS
Investment Adviser and Sub-Advisers.
One of the Fund's most important contracts is with its investment adviser, KAM,
a New York corporation registered as an investment adviser with the SEC. KAM, a
wholly owned subsidiary of KeyCorp. On October 23, 1998, the corporate parent of
McDonald & Company Securities, Inc. merged with KeyCorp as a result of which KAM
acquired certain of the investment advisory operations of McDonald & Company
Securities, Inc., including its Gradison Division. Affiliates of the Adviser
manage approximately $62 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 September 30, 1998, KeyCorp had an asset
base of $78 billion, with banking offices in 13 states from Maine to Alaska, and
trust and investment offices in 14 states. KeyCorp's McDonald Investments Inc.,
a registered broker dealer, is located primarily in the midwestern United
States. 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.
The following schedule lists the advisory fees for each mutual fund that is
advised by the Adviser.
.10 of 1% of average daily net assets
LifeChoice Conservative Investor Fund
LifeChoice Growth Investor Fund
LifeChoice Moderate Investor Fund
99
<PAGE>
.25 of 1% of average daily net assets
Federal Money Market Fund
Institutional Money Market Fund
.35 of 1% of average daily net assets
Prime Obligations Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund
.50 of 1% of average daily net assets
Financial Reserves Fund
Fund for Income
Government Mortgage Fund
Limited Term Income Fund
Ohio Municipal Money Market Fund
.55 of 1% of average daily net assets
National Municipal Bond Fund
New York Tax-Free Fund
.60 of 1% of average daily net assets
Ohio Municipal Bond Fund
Stock Index Fund
.65 of 1% of average daily net assets
Diversified Stock Fund
.75 of 1% of average daily net assets
Convertible Securities Fund
Intermediate Income Fund
Investment Quality Bond Fund
Ohio Regional Stock Fund
1% of average daily net assets
Balanced Fund
Growth Fund
Lakefront Fund
Real Estate Investment Fund
Small Company Opportunity Fund
Special Value Fund
Value Fund
1.10% of average daily net assets
International Growth Fund
Investment Advisory Services to the LifeChoice Funds
KAM continuously monitors the allocation of each Fund's investment in Underlying
Portfolios in three distinct investment categories according to certain
percentage ranges predetermined by the Trustees as follows:
<TABLE>
<CAPTION>
Conservative Growth Moderate
Investor Fund Investor Fund Investor Fund
------------- ------------- -------------
<S> <C> <C> <C>
Equity Funds 30-50% 70-90% 50-70%
Bond/Fixed Income Funds 50-70% 10-30% 30-50%
100
<PAGE>
Money Market Funds/Cash 0-15% 0-15% 0-15%
</TABLE>
KAM rebalances or reallocates the LifeChoice Funds' investments across
Underlying Portfolios as market conditions warrant. All reallocations are
expected to occur within the above-described ranges.
The selection of the Proprietary Portfolios in which the LifeChoice Funds will
invest, as well as the percentage of assets which can be invested in each type
of underlying mutual fund, are not fundamental investment policies and can be
changed without the approval of a majority of the respective Fund's
shareholders. Any changes to the percentage ranges shown above for allocation
across types of Underlying Portfolios or for allocation in Proprietary
Portfolios and Other Portfolios requires the approval of the Trust's Board of
Trustees. Investors desiring more information on a Proprietary Portfolio listed
above may call the Trust at 800-539-FUND to request a prospectus, which is
available without charge. The selection of the Other Portfolios also is within
the Adviser's discretion.
The Portfolio Managers of the Proprietary Portfolios
As a shareholder in the Proprietary Portfolios, the LifeChoice Funds will bear
their proportionate share of the investment advisory fees paid by the
Portfolios. Set forth in "The Investment Advisory and Investment Sub-Advisory
Agreements" below is a description of the investment advisory agreements for
each Proprietary Portfolio.
The persons primarily responsible for the investment management of the
Proprietary Portfolios are as follows (unless otherwise noted, a portfolio
manager has managed the Portfolio since commencement of the Fund's operations):
<TABLE>
<CAPTION>
Victory Fund Portfolio Manager Experience
- ------------ ----------------- ----------
<S> <C> <C>
Convertible Richard A. Janus Senior Managing Director of KAM, and has been in the investment
Securities (since April, 1996) advisory business since 1977.
James K. Kaesberg Portfolio Manager and Managing Director of Convertible Securities
(since April, 1996) Investments for KAM, and has been in the investment advisory
business since 1985.
Diversified Stock Lawrence G. Babin Senior Portfolio Manager and Managing Director of KAM, and has been
in the investment business since 1982.
Fund for Income Thomas M. Seay Mr. Seay served as Portfolio Manager of the Gradison Government
(since April 1998) Income Fund since April 1998, prior to which he served as vice
president and fixed income portfolio manager of Lexington
Management Corporation.
Trenton Fletcher Mr. Fletcher is a Portfolio Manager and Director of KAM, and has
(since January, 1998) been associated with KAM or its affiliates since 1989.
Government Robert H. Fernald Senior Portfolio Manager and Director of KAM, and has been working
Mortgage (since May, 1996) in the fixed income markets for over 20 years.
Growth William F. Ruple Senior Portfolio Manager and Director of KAM, and has been in the
(since June, 1995) investment advisory business since 1970.
Intermediate Eric Rasmussen Portfolio Manager and Managing Director, Taxable Fixed Income
Income (since December, 1998) Investments, KAM; Managing Director, Applied Technology
Investments, the passive investment division of KAM; and
has been associated with KAM or an affiliate since 1988.
International Conrad Metz Senior Portfolio Manager and Managing Director of KAM since October
Growth (since October, 1995) 1995; from 1993 to 1995 he was Senior Vice President, International
Equities, at Bailard Biehl & Kaiser. He has been in the investment
business since 1978.
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<PAGE>
Leslie Globits Portfolio Manager and Managing Director of KAM. He has been
(since June, 1998) employed by KAM or an affiliate since 1987.
Ayaz Ebrahim Director and Portfolio Manager of IIIS, Hong Kong, and has been
(since December, 1997) employed by IIIS or its affiliates since 1991.
Didier LeConte Senior Portfolio Manager - European Equities at IIIS, and has been
(since December, 1997) employed by IIIS or its affiliates since 1996.
Jean-Claude Kaltenbach Head of Equity Management at IIIS, and has been employed by IIIS or
(since December, 1997) its affiliates since 1994.
Investment Richard T. Heine Vice President and Portfolio Manager with KAM, and has been in the
Quality Bond investment advisory business since 1977
Limited Term Deborah Svoboda Ms. Svoboda has been a Portfolio Manager and Managing Director of
Income (since September, 1998) KAM since September 1998, prior to which she was a Senior Vice President
responsible for asset-backed securities syndication and
marketing for McDonald & Company Investments Inc.
Small Company William J. Leugers, Jr. Mr. Leugers is a Portfolio Manager and Managing Director of
Opportunity (since November 1998) Gradison McDonald and has been associated with Gradison McDonald
since 1975.
Daniel R. Shick Mr. Shick is a Portfolio Manager and Managing Director of
(since November 1998) Gradison McDonald and has been associated with McDonald since 1972.
Gary H. Miller Mr. Miller is a Vice-President and Portfolio Manager of Gradison
(since November 1998) McDonald and been associated with Gradison McDonald since 1987.
Real Estate Patrice Derrington Managing Director and Portfolio Manager of KAM, and has been in the
Investment real estate, investment, and finance business since 1991.
Richard E. Salomon Director of, and a Senior Managing Director with KAM, and has
been in the investment advisory business since 1982.
Special Value Anthony Aveni Senior Managing Director with KAM, and has been in the investment
(since December, 1993) business since 1981.
Barbara Myers Senior Portfolio Manager and Director with KAM, and has been in the
(since June, 1985) investment business since 1987.
Paul Danes Portfolio Manager and Director of KAM, and has been in the
(since October, 1995) investment business since 1987.
Value Judith A. Jones Senior Portfolio Manager and Managing Director of KAM, and has been
in the investment business since 1967.
Neil A. Kilbane Portfolio Manager and Managing Director of KAM, and has been in the
(since April, 1998) investment business since 1986.
</TABLE>
Sub-Advisers
The Lakefront Fund. Lakefront Capital Investors, Inc. ("Lakefront") serves as
sub-adviser to the Lakefront Fund. Pursuant to an agreement with the Adviser
dated as of March 1, 1997, the Adviser pays Lakefront a monthly fee of 0.50% of
the Lakefront Fund's average daily net assets from its advisory fee.
Lakefront is a registered investment adviser with the SEC. As of October 29,
1998, Lakefront managed approximately $14 million for its clients.
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<PAGE>
The International Growth Fund -- Manager of Managers. As the "Manager of
Managers" of the International Growth Fund, KAM may select one or more
sub-advisers to manage the Fund's assets. KAM evaluates each sub-adviser's
skills, investment styles and strategies in light of KAM's analysis of the
international securities markets. Under its Advisory Agreement with the Trust,
KAM oversees the investment advisory services that a sub-adviser provides to the
International Growth Fund. If KAM engages more than one sub-adviser, KAM may
reallocate assets among sub-advisers when it believes it is appropriate. KAM
provides investment advice with respect to short-term debt securities. KAM has
the ultimate responsibility for the International Growth Fund's investment
performance because it is responsible for overseeing all sub-advisers and
recommending to the Trust's Board of Trustees that it hire, terminate or replace
a particular sub-adviser.
The Trust and KAM have obtained an order from the SEC that allows KAM to serve
as a Manager of Managers. The order lets KAM, subject to certain conditions,
select new sub-advisers with the approval of the Board, without obtaining
shareholder approval. The order also allows KAM to change the terms of
agreements with the sub-advisers or to keep a sub-adviser even if certain events
would otherwise require that a sub-advisory agreement terminate. The Trust will
notify shareholders of any sub-adviser change. Shareholders, however, also have
the right to terminate an agreement with a particular sub-adviser. If KAM hires
more than one sub-adviser, the order also allows the International Growth Fund
to disclose only the aggregate amount of fees paid to all sub-advisers.
IIIS (collectively with Lakefront, the "Sub-Advisers") serves as sub-adviser to
the International Growth Fund. Pursuant to an agreement with the Adviser dated
as of June 1, 1998, the Adviser pays IIIS a monthly fee of 0.55% of the
International Growth Fund's average daily net assets from its advisory fee.
IIIS is a registered investment adviser with the SEC. As of September 30, 1998,
IIIS and its affiliates managed approximately $147 billion for their clients.
IIIS also serves as investment adviser to the France Growth Fund and sub-adviser
to the BNY Hamilton International Equity Fund and the John Hancock European
Equity Fund.
The Investment Advisory and Investment Sub-Advisory Agreements.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Trust, on behalf of the Funds (the "Investment Advisory Agreement"),
provides that it will continue in effect as to the Funds for an initial two-year
term and for consecutive one-year terms thereafter, provided that such renewal
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.
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 the Adviser of
its duties and obligations thereunder.
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<PAGE>
For the fiscal years ended October 31, 1998, 1997 and 1996 (except where noted),
KAM earned the following advisory fees with respect to each Fund, the amount of
fees paid to the Adviser is net of the amount of fee reduction* :
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Fees Paid Fee Reduction Fees Paid Fee Reduction Fees Paid Fee Reduction
--------- ------------- --------- ------------- --------- -------------
Balanced Fund $3,019,535 $943,992 $2,810,294 $353,372 $2,006,013 $376,178
Convertible Securities Fund 794,188** 0 595,753+ $566,242++
Diversified Stock Fund 5,039,529 1,022,826 4,560,843 0 3,147,950 55,678
Federal Money Market Fund 589,340** 732,604 0+ 277,326 0++ 64,632
Financial Reserves Fund 3,761,563 123,455 3,786,668 301,812 3,402,511 582,762
Fund for Income 16,446 103,873 5,722 92,630 22,779 87,637
Government Mortgage Fund 380,810 134,385 565,656 0 646,159 3,389
Growth Fund 1,936,780 304,983 1,709,722 0 1,181,723 70,660
Institutional Money Market Fund 2,051,053 1,279,243 1,638,661 855,791 1,003,395 932,844
Intermediate Income Fund 1,159,701 681,558 1,622,286 340,846 1,218,106 357,865
International Growth Fund 1,082,604 123,169 1,317,383 0 1,224,364 30,428
Investment Quality Bond Fund 880,262 436,244 993,289 208,773 836,655 185,307
Lakefront Fund 6,293 6,293 2,144 5,022 N/A N/A
LifeChoice Conservative Investor 9,198 4,473 4,311+++ 139 N/A N/A
LifeChoice Growth Investor 11,797 5,708 6,130+++ 128 N/A N/A
LifeChoice Moderate Investor 15,484 9,367 6,565+++ 1,024 N/A N/A
Limited Term Income Fund 271,020 123,743 418,588 15,636 671,988 46,818
National Municipal Bond Fund 0 295,779 0 239,815 0 206,174
New York Tax-Free Bond 54,279 60,020 23,901 73,540 7,542 83,068
Ohio Municipal Bond Fund 301,873 174,387 376,962 79,594 298,093 103,079
Ohio Municipal Money Market 2,513,242 1,026,186 2,281,185 833,236 1,129,662 1,706,115
Ohio Regional Stock Fund 334,000 61,447 375,231 0 318,859 4,181
Prime Obligations Fund 3,673,976 0 1,870,850 0 1,628,427 0
Real Estate Investment Fund 14,049 111,672 0 15,464 N/A N/A
- -----------------------------------
* Does not include investment advisory fees paid by Class G shares of the
Diversified Stock Fund, Fund for Income, International Growth Fund,
Ohio Municipal Bond Fund and Opportunity Value Fund (the "Gradison
Funds").
** For the period from December 1, 1997 to October 31, 1998.
+ For the fiscal year ended November 30, 1997.
++ For the fiscal year ended November 30, 1996.
+++ For the period from December 31, 1996 to November 30, 1997.
104
<PAGE>
Small Company Opportunity Fund 920,157 147,949 920,562 0 711,543 33,521
Special Value Fund 3,814,898 443,848 3,525,053 0 2,304,543 71,047
Stock Index Fund 2,681,381 798,447 1,715,703 574,290 936,282 382,702
Tax-Free Money Market Fund 1,829,130 29,470 1,283,064 37,520 1,092,669 31,987
U.S. Government Obligations 6,864,953 0 5,387,642 0 4,208,590 0
Value Fund 4,505,880 613,276 4,396,880 0 3,378,303 62,495
</TABLE>
Sub-Advisory Agreements. Under the Investment Advisory Agreement, the Adviser
may delegate a portion of its responsibilities to a sub-adviser. In addition,
the Investment Advisory Agreement provides that the Adviser may render services
through its own employees or the employees of one or more affiliated companies
that are qualified to act as an investment adviser of the Funds and are under
the common control of KeyCorp as long as all such persons are functioning as
part of an organized group of persons, managed by authorized officers of the
Adviser.
Each Sub-Adviser's Agreement with KAM is terminable at any time, without
penalty, by the Board of Trustees, by the Adviser or by vote of a majority of
the respective Fund's outstanding voting securities on 60 days' written notice
to the Adviser. Unless sooner terminated, each Sub-Advisory Agreement shall
continue in effect from year to year if approved at least annually by a majority
vote of the Board of Trustees, including a majority of the Trustees who are not
interested persons of the Adviser or the respective Sub-Adviser, cast in person
at a meeting called for the purpose of voting on the relevant Sub-Advisory
Agreement.
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.
The Money Market Funds. Pursuant to the Investment Advisory Agreement between
the Adviser and the Trust, on behalf of the Money Market Funds, the Adviser
determines, subject to the general supervision of the Trustees of the Trust, and
in accordance with each Money Market Fund's investment objective, policies and
restrictions, which
105
<PAGE>
securities are to be purchased and sold by the Money Market Funds, and which
brokers are to be eligible to execute its portfolio transactions. Since
purchases and sales of portfolio securities by the Money Market Funds are
usually principal transactions, the Money Market Funds incur little or no
brokerage commissions. For the three fiscal years ended October 31, 1998, 1997
and 1996, the Money Market Funds paid no brokerage commissions. Securities of
the Money Market Funds are normally purchased directly from the issuer or from a
market maker for the securities. The purchase price paid to dealers serving as
market makers may include a spread between the bid and asked prices. The Money
Market Funds also may purchase securities from underwriters at prices which
include the spread retained by the underwriter from the proceeds of the offering
to the issuer.
The Money Market Funds do not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity, but the
Adviser may seek to enhance the yield of the Funds by taking advantage of yield
disparities or other factors that occur in the money markets. For example,
market conditions frequently result in similar securities trading at different
prices. The Adviser may dispose of any portfolio security prior to its maturity
if such disposition and reinvestment of proceeds are expected to enhance yield
consistent with the Adviser's judgment as to desirable portfolio maturity
structure or if such disposition is believed to be advisable due to other
circumstances or conditions. The investment policies of the Money Market Funds
require that investments mature in 90 days or less. Thus, there is likely to be
relatively high portfolio turnover, but since brokerage commissions are not
normally paid on money market instruments, the high rate of portfolio turnover
is not expected to have a material effect on the net income or expenses of the
Money Market Funds.
The Adviser's primary consideration in effecting a security transaction is to
obtain the best net price and the most favorable execution of the order.
Allocation of transactions, including their frequency, among various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders.
Income and Equity Funds. Pursuant to the Investment Advisory Agreement (and for
the Lakefront Fund and the International Growth Fund, the Sub-Advisory
Agreements), the Adviser* determines, subject to the general supervision of the
Trustees of the Trust, 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.
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
Trust. 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 Trust 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 Trust. 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.
- -------------------------------
* For purposes of the following discussion, the term "Adviser" refers to
the Adviser and any sub-advisers.
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<PAGE>
All Funds. The Trust will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with the Adviser, the Sub-Advisers,
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 Trust or any other investment company or account managed
by the Adviser. Such other investment companies or accounts may also invest in
the securities and may follow similar investment strategies as the Funds. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and any other Fund, investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which the Adviser believes to be equitable to such Funds,
investment company or account. In some instances, this investment procedure may
affect the price paid or received by a Fund or the size of the position obtained
by the Fund in an adverse manner relative to the result that would have been
obtained if only that particular Fund had participated in or been allocated such
trades. To the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for a Fund with those to be sold or purchased for the
other Funds of the Trust or for other investment companies or accounts in order
to obtain best execution. In making investment recommendations for the Trust,
the Adviser will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by a Fund is a customer of the Adviser,
their parents or subsidiaries or affiliates and, in dealing with their
commercial customers, the Adviser, its parents, subsidiaries, and affiliates
will not inquire or take into consideration whether securities of such customers
are held by the Trust.
Brokerage commissions paid by each of the Funds listed below were as follows for
the fiscal years ended October 31, 1998, 1997 and 1996* .
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $ 197,179.88 $212,666.31 $190,526.34
- --------------------------------------------------------------------------------------------------------------------
Convertible Securities Fund** 73,375.17 46,738 50,000
- --------------------------------------------------------------------------------------------------------------------
Diversified Stock Fund 1,533,314.33 906,124.85 881,427.50
- --------------------------------------------------------------------------------------------------------------------
Financial Reserves Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
Fund for Income -- -- 1,250.00
- --------------------------------------------------------------------------------------------------------------------
Government Mortgage Fund -- -- 542.84
- --------------------------------------------------------------------------------------------------------------------
Growth Fund 150,360.66 68,970.96 97,820.00
- --------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
Intermediate Income Fund 1,271.88 3,242.20 61,811.73
- --------------------------------------------------------------------------------------------------------------------
International Growth Fund 619,297.58 1,103,488.08 --
- --------------------------------------------------------------------------------------------------------------------
Investment Quality Bond Fund 773.44 1,734.39 12,889.90
- --------------------------------------------------------------------------------------------------------------------
Lakefront Fund 1,927.90 2,513.90 --
- --------------------------------------------------------------------------------------------------------------------
Limited Term Income Fund -- 468.75 8,580.94
- --------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
New York Tax-Free Fund -- -- 0
- --------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond Fund -- -- 0
- -------------------------------
* Does not include commissions paid by the Gradison Funds.
** Brokerage commission information for the Convertible Securities Fund
reflects brokerage commissions paid for the fiscal years ended November
30, 1996 and November 30, 1997 and the period from December 1, 1997 to
October 31, 1998.
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<PAGE>
- --------------------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund 23,932.34 21,805.75 6,597.60
- --------------------------------------------------------------------------------------------------------------------
Prime Obligations Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
Real Estate Investment Fund 46,584.80 -- --
- --------------------------------------------------------------------------------------------------------------------
Small Company Opportunity Fund 272,970.50 238,533.30 176,980.29
- --------------------------------------------------------------------------------------------------------------------
Special Value Fund 581,672.43 428,514.23 431,541.97
- --------------------------------------------------------------------------------------------------------------------
Stock Index Fund 107,718.60 43,190.22 27,553.63
- --------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
Value Fund 391,275.21 218,946.60 225,799.21
</TABLE>
Portfolio Turnover.
The portfolio turnover rates stated in the Prospectuses are calculated by
dividing the lesser of each 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. Portfolio turnover is calculated on the
basis of the Fund as a whole without distinguishing between the classes of
shares issued. The portfolio turnover rates for each of the Funds listed below
were as follows for the fiscal years ended October 31, 1998 and 1997 (except
where noted)*.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balanced Fund 231% 109%
Convertible Securities Fund** 77% 77%
Diversified Stock Fund 84% 63%
Fund for Income 118% 26%
Government Mortgage Fund 296% 115%
Growth Fund 29% 21%
Intermediate Income Fund 318% 195%
International Growth Fund 86% 116%
Investment Quality Bond Fund 492% 249%
Lakefront Fund 36% 36%
LifeChoice Conservative Investor Fund 78%++ 19%+
LifeChoice Growth Investor Fund 30%++ 106%+
LifeChoice Moderate Investor Fund 42%++ 50%+
Limited Term Income Fund 177% 139%
National Municipal Bond Fund 152% 154%
- ------------------------------------
* Does not include turnover related to the Gradison Funds.
** Portfolio turnover information for the Convertible Securities Fund and
the Federal Money Market Fund reflects portfolio turnover for the
fiscal year ended November 30, 1997 and the period from December 1,
1997 to October 31, 1998.
++ From December 1, 1997 to October 31, 1998.
+ From December 31, 1996 to November 30, 1997.
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<PAGE>
1998 1997
---- ----
New York Tax-Free Fund 38% 11%
Ohio Municipal Bond Fund 95% 74%
Ohio Regional Stock Fund 6% 8%
Real Estate Investment Fund 53% 21%
Small Company Opportunity Fund 254% 195%
Special Value Fund 44% 39%
Stock Index Fund 8% 11%
Value Fund 40% 26%
</TABLE>
Administrator.
BISYS Fund Services Ohio, Inc. (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 or the
Sub-Advisers under the Investment Advisory Agreement and Sub-Advisory
Agreements), subject to the supervision of the Board of Trustees.
For the services rendered to the Funds and related expenses borne by the
Administrator, each Fund (except the LifeChoice Funds) pays the Administrator 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.
For the services rendered to the LifeChoice Funds and related expenses borne by
the Administrator, each of these Funds pays the Administrator an annual fee,
computed daily and paid monthly, equal to the greater of 0.01% of the Fund's
average daily net assets or $12,000.
The Administrator 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 the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by it of its
obligations and duties thereunder.
Under the Administration Agreement, the Administrator 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
109
<PAGE>
duties thereunder. Under the Administration Agreement, the Administrator may
delegate all or any part of its responsibilities thereunder.
The following chart reflects the aggregate administration fees earned after fee
reductions by the Administrator in connection with the sale of shares of each
Fund for the fiscal years ended October 31, 1998, 1997 and 1996* .
<TABLE>
<CAPTION>
1998 1997 1996
Fee Fee Fee
Fees Reductions Fees Reductions Fees Reductions
---- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C>
Balanced......................... $565,625 $0 $472,961 $0 $357,125 $0
Convertible Securities** ........ 174,181 0 169,130 0 163,169+ 0
Diversified Stock................ 1,142,672 0 1,034,997 0 678,848 60,602
Federal Money Market ** 429,784 0 213,167 0 64,632+ 0
Financial Reserves............... 987,007 0 1,209,552 0 1,196,089 0
Fund for Income.................. 14,438 21,658 11,799 17,707 13,292 19,833
Government Mortgage.............. 154,559 0 169,697 0 195,013 0
Growth........................... 336,265 0 256,459 0 187,857 0
Institutional Money Market....... 799,361 742,945 340,471 1,156,193 464,863 696,881
Intermediate Income.............. 368,253 0 392,489 0 314,921 0
International Growth............. 164,424 0 179,643 0 171,154 0
Investment Quality Bond.......... 263,302 0 240,312 0 205,210 0
Lakefront........................ 1,888 0 1,045 0 N/A N/A
LifeChoice Conservative Investor 11,015 0 N/A N/A N/A N/A
LifeChoice Growth Investor....... 11,015 0 N/A N/A N/A N/A
LifeChoice Moderate Investor..... 11,015 0 N/A N/A N/A N/A
Limited Term Income.............. 118,429 0 130,222 0 216,263 0
National Municipal Bond.......... 80,667 0 65,363 0 20,352 35,877
New York Tax-Free................ 12,437 18,656 10,626 15,949 9,888 14,823
Ohio Municipal Bond.............. 119,065 0 114,083 0 100,340 0
- ----------------------------------
* Does not include administration fees paid by the Gradison Funds.
** Administration fee information for the Convertible Securities Fund and
the Federal Money Market Fund reflects payments made for the fiscal
years ended November 30, 1996 and November 30, 1997 and the period from
December 1, 1997 to October 31, 1998.
+ From December 1, 1995 through March 31, 1996, SBSF served as
administrator to the Convertible Securities Fund and Federal Money
Market Fund and received fees of $53,761 and $22,722, respectively.
From April 1, 1996 through July 11, 1996, Concord Holding Corporation
served as administrator to these Funds and received fees of $41,268 and
$15,349, respectively. From July 11, 1996 through November 30, 1996,
BISYS served as administrator to these Funds and received fees of
$68,140 and $26,561, respectively.
110
<PAGE>
1998 1997 1996
Fee Fee Fee
Fees Reductions Fees Reductions Fees Reductions
---- ---------- ---- ---------- ---- ----------
Ohio Municipal Money Market...... 917,889 0 548,673 375,708 851,457 0
Ohio Regional Stock.............. 79,090 0 75,046 0 64,609 0
Prime Obligations................ 1,259,710 0 790,839 0 697,897 0
Real Estate Investment 11,216 7,642 0 2,320 N/A N/A
Small Company Opportunity........ 160,216 0 138,080 0 112,578 0
Special Value.................... 601,051 0 525,357 0 356,371 0
Stock Index...................... 0 782,953 0 567,979 0 329,746
Tax-Free Money Market............ 726,665 0 562,890 0 446,706 35,290
U.S. Government Obligations...... 2,171,416 0 2,258,117 0 1,803,685 0
Value............................ 704,301 0 654,663 0 516,120 0
</TABLE>
Sub-Administrator.
KAM serves as sub-administrator to the Trust 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 Trust, except those performed by KAM under its Investment
Advisory Agreement.
For services provided under the Sub-Administration Agreement, the Administrator
pays KAM a fee, with respect to each Fund, calculated at the annual rate of up
to five one-hundredths of one percent (.05%) of such Fund's average daily net
assets. Except as otherwise provided in the Administration Agreement, KAM shall
pay all expenses incurred by it in performing its services and duties as
sub-administrator. Unless sooner terminated, the Sub-Administration Agreement
will continue in effect as to each Fund for a period of two years, and for
consecutive one-year terms thereafter, unless written notice not to renew is
given by the non-renewing party.
Under the Sub-Administration Agreement, KAM's duties include maintaining office
facilities, furnishing statistical and research data, compiling data for various
state and federal filings by the Trust, assist in mailing and filing the Trust's
annual and semi-annual reports to shareholders, providing support for board
meetings, and arranging for the maintenance of books and records and providing
the office facilities necessary to carry out the duties thereunder.
Distributor.
BISYS serves as distributor (the "Distributor") for the continuous offering of
the shares of the Funds pursuant to a Distribution Agreement between the
Distributor and the Trust. Unless otherwise terminated, the Distribution
Agreement will remain in effect with respect to each Fund for two years, and
will continue thereafter for consecutive one-year terms, provided that the
renewal is approved at least annually (1) by the Trustees or by the vote of a
majority of the outstanding shares of each Fund, and (2) by the vote of a
majority of the Trustees of the Trust who are not parties to the Distribution
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Distribution Agreement
will terminate in the event of its assignment, as defined under the 1940 Act.
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<PAGE>
The following chart reflects the total underwriting commissions earned and the
amount of those commissions retained by the Distributor in connection with the
sale of shares of each Fund for the fiscal years ended October 31, 1998, 1997
and 1996* .
<TABLE>
<CAPTION>
1998 1997 1996
Underwriting Amount Underwriting Amount Underwriting Amount
Commissions Retained Commission Retained Commissions Retained
----------- -------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balanced................... $ 148,456 $ 5,744 $96,700 $4,600 $63,000 $60,000
Convertible Securities** 48,035 6,080
Diversified Stock.......... 1,362,247 83,232 1,412,000 448,000 452,000 430,000
Federal Money Market** 0 0
Financial Reserves......... 0 0 0 0 -- --
Fund for Income............ 11,928 3,160 13,800 3,600 18,000 17,000
Government Mortgage........ 9,293 1,145 17,200 2,000 2,000 2,000
Growth..................... 45,898 5,927 15,300 2,200 1,000 1,000
Institutional Money Mkt.... 0 0 0 0 -- --
Intermediate Income........ 665 89 2,600 300 2,000 2,000
International Growth....... 19,553 1,565 11,600 1,300 17,000 17,000
Investment Quality Bond.... 3,437 448 15,700 2,200 6,000 6,000
Lakefront.................. 2,620 380 3,000 500 -- --
LifeChoice Conservative.... 0 0
LifeChoice Growth.......... 0 0
LifeChoice Moderate........ 0 0
Limited Term Income........ 406 100 400 100 3,000 3,000
National Municipal Bond.... 37,577 2,273 30,200 1,300 31,000 31,000
New York Tax-Free.......... 19,708 1,281 51,300 3,900 43,000 39,000
Ohio Municipal Bond........ 29,884 3,834 26,000 3,500 20,000 20,000
Ohio Muni Money Market..... 0 0 0 0 -- --
Ohio Regional Stock........ 15,644 1,031 19,800 1,500 21,000 21,000
Prime Obligations.......... 0 0 0 0 -- --
Real Estate Investment..... 12,709 1,631 16,600 2,300 -- --
Small Co Opportunity....... 14,615 2,156 18,200 2,800 2,000 2,000
Special Value.............. 58,381 3,770 76,000 4,600 22,000 11,000
- ----------------------------------
* Does not include distribution fees paid by the Gradison Funds.
** Underwriting commission information for the Convertible Securities Fund
and the Federal Money Market Fund reflects commissions generated during
the fiscal years ended November 30, 1996 and November 30, 1997 and the
period from December 1, 1997 to October 31, 1998.
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<PAGE>
Stock Index................ 123,439 17,022 91,700 12,800 9,000 9,000
Tax-Free Money Market...... 0 0 0 0 -- --
U.S. Gov't Obligations..... 0 0 0 0 -- --
Value...................... 18,412 2,472 12,800 2,000 1,000 1,000
</TABLE>
Transfer Agent.
State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Funds. Boston Financial Data Services, Inc. serves as the dividend
disbursing agent and shareholder servicing agent for the Funds, pursuant to a
Transfer Agency and Service Agreement. Under its agreement with the Trust, State
Street has agreed (1) to issue and redeem shares of the Funds; (2) to address
and mail all communications by the Funds to their shareholders, including
reports to shareholders, dividend and distribution notices, and proxy material
for its meetings of shareholders; (3) to respond to correspondence or inquiries
by shareholders and others relating to its duties; (4) to maintain shareholder
accounts and certain sub-accounts; and (5) to make periodic reports to the
Trustees concerning the Trust's operations.
Shareholder Servicing Plan.
Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser and each Sub-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 sub-accounting with respect to shares beneficially owned by customers
or providing the information to the Funds as necessary for sub-accounting; (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.
Distribution and Service Plan.
The Trust, on behalf of the Financial Reserves Fund, Fund for Income,
Institutional Money Market Fund (Investor Class and Select Class), Lakefront
Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Money
Market Fund, Real Estate Investment Fund, and U.S. Obligations Fund (Investor
Shares) 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, any Sub-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 pursuant to the Plan. Under the Plan, if a
payment to the Advisers or a Sub-Adviser of management fees or to the
Distributor of administrative fees should be deemed to be indirect financing by
the Trust of the distribution of their shares, such payment is authorized by the
Plan.
The Plan specifically recognizes that the Adviser, any Sub-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, a Sub-Adviser and the
Distributor may use their respective resources, including fee revenues, to
113
<PAGE>
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 Rule 12-1,
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, a Sub-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.
Class B and Class G Shares Distribution Plans.
The Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act for Class B shares of the Balanced Fund, Diversified Stock Fund,
International Growth Fund, National Municipal Bond Fund, New York Tax-Free Fund,
Ohio Regional Stock Fund and Special Value Fund under the Rule. In addition, the
Trust has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under
the 1940 Act for Class G shares of the Diversified Stock Fund, the Government
Mortgage Fund, the International Growth Fund, the Ohio Municipal Bond Fund and
the Small Company Opportunity Fund. (Collectively, the Class B Distribution Plan
and the Class G Distribution and Service Plan will be referred to as the "Rule
12b-1 Plans.")
The Class B Distribution Plan adopted by the Trustees provides that each Fund,
as applicable, will pay the Distributor a distribution fee under the Plan at the
annual rate of 0.75% of the average daily net assets of the Fund attributable to
the Class B shares. Under the Class G Distribution and Service Plan, Class G
shares of each of the Fund for Income, Ohio Municipal Bond Fund, Diversified
Stock Fund, International Growth Fund and Small Company Opportunity Fund pays
the Distributor a service fee of up to 0.25% and Class G shares of each of the
Diversified Stock Fund, International Growth Fund and Small Company Opportunity
Fund pays the Distributor a distribution fee of up to 0.25%.
The Rule 12b-1 fees may be used by the Distributor for: (a) costs of printing
and distributing each Fund's prospectus, statement of additional information and
reports to prospective investors in the Funds; (b) costs involved in preparing,
printing and distributing sales literature pertaining to the Funds; (c) an
allocation of overhead and other branch office distribution-related expenses of
the Distributor; (d) payments to persons who provide support services in
connection with the distribution of each Fund's Class B or Class G shares,
including but not limited to, office space and equipment, telephone facilities,
answering routine inquiries regarding the Funds, processing shareholder
transactions and providing any other shareholder services not otherwise provided
by the Funds' transfer agent; (e) accruals for interest on the amount of the
foregoing expenses that exceed the distribution fee and the CDSCs received by
the Distributor; and (f) any other expense primarily intended to result in the
sale of the Funds' Class B or Class G shares, including, without limitation,
payments to salesmen and selling dealers at the time of the sale of such shares,
if applicable, and continuing fees to each such salesmen and selling dealers,
which fee shall begin to accrue immediately after the sale of such shares.
The amount of the Rule 12b-1 fees payable by any Fund under a Rule 12b-1 Plan is
not related directly to expenses incurred by the Distributor and neither Rule
12b-1 Plan obligates the Funds to reimburse the Distributor for such expenses.
The fees set forth in each Rule 12b-1 Plan will be paid by each Fund to the
Distributor unless and until the Plan is terminated or not renewed with respect
to such Fund; any distribution or service expenses incurred by the Distributor
on behalf of the Funds in excess of payments of the distribution fees specified
above which the Distributor has accrued through the termination date are the
sole responsibility and liability of the Distributor and not an obligation of
the Funds.
The Rule 12b-1 Plans for the Class B and Class G shares each specifically
recognizes that either 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
114
<PAGE>
Funds. In addition, each 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' Class B or Class G
shares, as the case may be, or to third parties, including banks, that render
shareholder support services.
Each Rule 12b-1 Plan was approved by the Trustees, including the independent
Trustees, at a meeting called for that purpose. As required by Rule 12b-1, the
Trustees carefully considered all pertinent factors relating to the
implementation of each Distribution Plan prior to its approval, and have
determined that there is a reasonable likelihood that each Distribution Plan
will benefit the Funds and their Class B or Class G shareholders, as the case
may be. To the extent that a Rule 12b-1 Plan gives the Adviser or the
Distributor greater flexibility in connection with the distribution of Class B
or Class G shares of the Funds, additional sales of the Funds' Class B or Class
G shares may result. Additionally, certain Class B and/or Class G shareholder
support services may be provided more effectively under the relevant
Distribution 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, except the Real Estate Investment Fund, pursuant to a fund
accounting agreement with the Trust dated May 31, 1995 (the "Fund Accounting
Agreement"). As fund accountant for the Trust, BISYS, Inc. calculates each
Fund's net asset value, the dividend and capital gain distribution, if any, and
the yield. BISYS, Inc. also provides a current security position report, a
summary report of transactions and pending maturities, a current cash position
report, and maintains the general ledger accounting records for the Funds. Under
the Fund Accounting Agreement, BISYS, Inc. is entitled to receive annual fees of
.03% of the first $100 million of the Fund's daily average net assets, .02% of
the next $100 million of the Fund's daily average net assets, and .01% of the
Fund's remaining daily average net assets. These annual fees are subject to a
minimum monthly assets charge of $2,500 per taxable fund, $2,917 per tax-free
fund and $3,333 per international fund and does not include out-of-pocket
expenses or multiple class charges of $833 per month assessed for each class of
shares after the first class.
For the fiscal years ended October 31, 1998, 1997, and 1996, the Fund accountant
earned the following fund accounting fees:*
<TABLE>
<CAPTION>
1998 1997 1996
----
<S> <C> <C> <C>
Balanced Fund $134,087 $89,610 $93,776
Convertible Securities Fund** 38,972
Diversified Stock Fund 148,523 119,767 159,249
Federal Money Market Fund** 65,217
Financial Reserves Fund 94,228 88,998 78,188
Fund for Income 56,497 48,449 57,144
Government Mortgage Fund 50,535 38,396 50,487
Growth Fund 63,019 51,705 35,364
Institutional Money Market Fund 107,693 102,437 86,455
Intermediate Income Fund 77,887 67,260 61,867
International Growth Fund 66,653 70,707 90,570
- ------------------------------
* Does not include fund accounting fees paid by the Gradison Funds.
** Fund accounting fee information for the Convertible Securities Fund and
the Federal Money Market Fund reflects fund accounting fees paid during
the fiscal years ended November 30, 1996 and November 30, 1997 and the
period from December 1, 1997 to October 31, 1998.
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<PAGE>
Investment Quality Bond Fund 73,539 57,053 52,699
Lakefront Fund 35,620 24,280 N/A
LifeChoice Conservative Investor Fund 36,056 N/A N/A
LifeChoice Growth Investor Fund 33,290 N/A N/A
LifeChoice Moderate Investor Fund 36,454 N/A N/A
Limited Term Income Fund 41,478 33,524 39,040
National Municipal Bond Fund 62,558 57,061 65,000
New York Tax-Free Fund 52,402 49,575 51,388
Ohio Municipal Bond Fund 51,323 46,445 51,845
Ohio Municipal Money Market Fund 96,726 99,579 65,058
Ohio Regional Stock Fund 48,723 45,783 51,094
Prime Obligations Fund 97,944 92,710 85,261
Real Estate Investment Fund 34,750 15,520 N/A
Small Company Opportunity Fund 41,005 39,041 57,804
Special Value Fund 97,582 87,704 79,170
Stock Index Fund 153,032 120,844 87,027
Tax-Free Money Market Fund 93,791 79,661 107,911
U.S. Government Obligations Fund 106,407 97,657 85,062
Value Fund 92,444 83,739 71,046
</TABLE>
Custodian.
Cash and securities owned by each of the Funds 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 Trust's operations. Key Trust may, with
the approval of a fund and at the custodian's own expense, open and maintain a
sub-custody account or accounts on behalf of a fund, provided that Key Trust
shall remain liable for the performance of all of its duties under the Custodian
Agreement.
Independent Accountants.
PricewaterhouseCoopers LLP serves as the Trust's auditors.
PricewaterhouseCoopers LLP's address is 100 East Broad Street, Columbus, Ohio
43215.
Legal Counsel.
Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York 10022,
is the counsel to the Trust.
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<PAGE>
Expenses.
The Funds bear the following expenses relating to its operations, including:
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 Funds' existence, costs
of shareholders' reports and meetings, and any extraordinary expenses incurred
in the Funds' operation.
ADDITIONAL INFORMATION
Description of Shares.
The Trust is a Delaware business trust. The Delaware Trust Instrument authorizes
the Trustees to issue an unlimited number of shares, which are units of
beneficial interest, without par value. The Trust currently has 36 series of
shares, which represent interests in the Funds and their respective classes
listed below (described in separate Statements of Additional Information) in
addition to those listed on the first page of this SAI.
<TABLE>
<CAPTION>
<S> <C>
Equity Income Fund Michigan Municipal Bond Fund
Class A Shares Class A Shares
Maine Municipal Bond Fund (Intermediate) National Municipal Bond Fund (Long)
Class A Shares Class A Shares
Maine Municipal Bond Fund (Short-Intermediate) National Municipal Bond Fund (Short-Intermediate)
Class A Shares Class A Shares
</TABLE>
The Trust Instrument authorizes the Trustees to divide or redivide any unissued
shares of the Trust into one or more additional series by setting or changing in
any one or more aspects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends, qualifications,
and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectuses and this SAI, the Trust's shares will
be fully paid and non-assessable. In the event of a liquidation or dissolution
of the Trust, shares of a Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative asset values of the respective Funds, of any general assets not
belonging to any particular Fund that are available for distribution.
To the best knowledge of the Trust, the names and addresses of the holders of 5%
or more of the outstanding shares of each class of the Funds' equity securities
as of December 31, 1998, and the percentage of the outstanding shares held by
such holders are set forth in the table below. In addition, as of December 31,
1998, David M. Schneider, 2767 Belgrade Road, Pepper Pike, OH 44124-4601, is the
beneficial owner of 9.8% of the shares of the Gradison Ohio Tax-Free Income
Fund, which is expected to merge with the Victory Ohio Municipal Bond Fund, as
described in "Performance of the Non-Money Market Funds -- Performance -- Class
G Shares" in this SAI.
<TABLE>
<CAPTION>
- --------------------------- ---------------------------------------------- ------------------- -------------------
Percent Owned of Percent Owned
Victory Fund Name and Address of Owner Record Beneficially
- --------------------------- ---------------------------------------------- ------------------- -------------------
<S> <C> <C> <C>
Balanced Fund - Class A SNBOC and Company 97.33% --
4900 Tiedeman Road
Cleveland, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Convertible Securities Charles Schwab & Co./FBO Customers 25.70% --
Fund - Class A Attn: Mutual Funds Dept.
101 Montgomery Street
San Francisco, CA 94104-4122
- --------------------------- ---------------------------------------------- ------------------- -------------------
117
<PAGE>
- --------------------------- ---------------------------------------------- ------------------- -------------------
Key Trust 24.15% --
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Mac & Co 5.11% --
Mellon Bank N.A.
PO box 320
Pittsburgh, PA 15230-0320
- --------------------------- ---------------------------------------------- ------------------- -------------------
Diversified Stock Fund - SNBOC and Company 75.96% --
Class A 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Federal Money Market Fund KeyCorp Investment Products 80.47% --
- - Investor Class Attn: Jennifer Ryan
127 Public Square
Cleveland, OH 44114-1216
- --------------------------- ---------------------------------------------- ------------------- -------------------
Key Trust 6.89% --
Attn: Jim Osborne
PO Box 93971
4900 Tiedeman Road
Cleveland, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Federal Money Market Fund KeyCorp Investment Products 95.25% --
- - Attn: Jennifer Ryan
Select Class 127 Public Square
Cleveland, OH 44114-1216
- --------------------------- ---------------------------------------------- ------------------- -------------------
Financial Reserves Fund SNBOC and Company 90.85% --
4900 Tiedeman Road
Cleveland, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Fund for Income Key Trust Cleveland 38.66% --
PO Box 93971
4900 Tiedeman Road
Cleveland, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Government Mortgage Fund SNBOC and Company 95.20% --
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Growth Fund SNBOC and Company 91.69 % --
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Institutional Money KeyCorp Investment Products 8.08% --
Market Fund - Attn: Jennifer Ryan
Investor Shares 127 Public Square
Cleveland, OH 44114-1216
- --------------------------- ---------------------------------------------- ------------------- -------------------
Liefke & Co. 69.77% --
c/o KeyCorp Trust Services
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Key Clearing Corp./Reinvest. Acct. 19.72% --
KCC Accts Corp Execution Services
4900 Tiedeman Road
Cleveland, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
118
<PAGE>
- --------------------------- ---------------------------------------------- ------------------- -------------------
Institutional Money KeyCorp Investment Products 6.98% --
Market Fund - Attn: Jennifer Ryan
Select Shares 127 Public Square
Cleveland, OH 44114-1216
- --------------------------- ---------------------------------------------- ------------------- -------------------
BISYS Fund Services Ohio Inc. 92.25% --
The Benefit of our Customers
Attn: Victory Cash Control Dept.
3435 Stelzer Road
Columbus, OH 43219-6004
- --------------------------- ---------------------------------------------- ------------------- -------------------
Intermediate Income Fund SNBOC and Company 98.16% --
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
International Growth Fund SNBOC and Company 81.40% --
- - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
International Growth Fund IRA of Jerry L. Ufford 8.26% 8.26%
- - Class B 3303 Linden Rd., Apt. 308
Rocky River, OH 44116
- --------------------------- ---------------------------------------------- ------------------- -------------------
P/S Keogh of Subhash C. Mahajan MD 23.47% 23.47%
7215 Old Oak Blvd, Suite 3104
Miccleburg Hts., OH 44130
- --------------------------- ---------------------------------------------- ------------------- -------------------
Keybank C/F 6.79% 6.79%
IRA of Barbara D'Alesandro
5997 Glenwood Ave
Boardman, OH 44512
- --------------------------- ---------------------------------------------- ------------------- -------------------
Investment Quality Bond SNBOC and Company 78.47% --
Fund PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Lakefront Fund SNBOC and Company 54.36% --
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
BISYS Fund Services 33.28% --
Attn: Fund Administration & Reg. Serv.
3435 Stelzer Road
Columbus, OH 43219-6004
- --------------------------- ---------------------------------------------- ------------------- -------------------
LifeChoice - Conservative SNBOC and Company 97.50% --
Investor 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
LifeChoice - SNBOC and Company 93.52% --
Growth Investor 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
LifeChoice - SNBOC and Company 95.19% --
Moderate Investor 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Limited Term SNBOC and Company 97.90% --
Income Fund PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
119
<PAGE>
- --------------------------- ---------------------------------------------- ------------------- -------------------
National Muni Bond Fund - Key Trust Cleveland 23.11%
Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
National Muni Bond Fund - El Matador Inc. 8.32% 8.32%
Class B 2564 Ogden Ave.
Ogden, UT 84401
- --------------------------- ---------------------------------------------- ------------------- -------------------
KeyBank of Maine Escrow Agent 11.66% 11.66%
for Robert, Geraldine & Janet Sylvester and
GFS ND Manufacturing Co.
115 Cocheco St.
Dover, NH 03820
- --------------------------- ---------------------------------------------- ------------------- -------------------
Marden Spencer 5.38% 5.38%
958 E. Olympus Park Dr. #A102
Salt Lake City, UT 84117
- --------------------------- ---------------------------------------------- ------------------- -------------------
Anne C. Quinn 10.44% 10.44%
42 Juniper Court
St Marys Place
London W8 5UF England
- --------------------------- ---------------------------------------------- ------------------- -------------------
Ethel F. Robinson 8.42% 8.42%
2716 100th SE
Everett, WA 98208
- --------------------------- ---------------------------------------------- ------------------- -------------------
New York Tax-Free Key Trust Cleveland 13.93% --
Fund - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Sally E. Darling Trustee 6.72% 6.72%
Darling Revocable Trust
660 Indian Ridge
Waynesville, NC 28786-5295
- --------------------------- ---------------------------------------------- ------------------- -------------------
New York Tax-Free Anna Maria Desocio 7.43% 7.43%
Fund - Class B Colomba Desocio JTWROS
1624 Caleb Ave.
Syracuse, NY 13206
- --------------------------- ---------------------------------------------- ------------------- -------------------
Richard A. Dudley 16.62% 16.62%
Margaret H. Dudley JTWROS
68 Center St.
Geneseo, NY 14454
- --------------------------- ---------------------------------------------- ------------------- -------------------
Catherine C. Lieb 5.06% 5.06%
19 Park Ave.
Dansville, NY 14437
- --------------------------- ---------------------------------------------- ------------------- -------------------
Ohio Muni Bond Fund SNBOC and Company 84.46% --
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Ohio Municipal SNBOC and Company 23.53% --
MMKT Fund PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
120
<PAGE>
- --------------------------- ---------------------------------------------- ------------------- -------------------
Private Banking 61.06% --
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- --------------------------- ---------------------------------------------- ------------------- -------------------
Key Clearing Corp/Reinvest Acct 7.37% --
KCC Accts Corp Execution Svcs
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Ohio Regional Stock Fund SNBOC and Company 84.20% --
- - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Ohio Regional Stock Fund IRA of Jerry L. Ufford 5.55% 5.55%
- - Class B 3303 Linden Rd., Apt. 308
Rocky River, OH 44116
- --------------------------- ---------------------------------------------- ------------------- -------------------
Prime Obligations Fund Private Banking 41.88% --
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- --------------------------- ---------------------------------------------- ------------------- -------------------
Key Clearing Corp/Reinvest Acct 16.13% --
KCC Accts Corp Execution Svcs
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
KeyCorp Investment Products 33.89% --
Attn: Jennifer Ryan
127 Public Square
Cleveland, OH 44114-1216
- --------------------------- ---------------------------------------------- ------------------- -------------------
Real Estate Investment SNBOC and Company 82.53% --
Fund PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Special Growth Fund SNBOC and Company 96.40% --
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Special Value Fund - SNBOC and Company 90.81% --
Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Stock Index Fund SNBOC and Company 95.53% --
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Tax-Free MMKT Fund SNBOC and Company 33.22% --
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Private Banking 51.32% --
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- --------------------------- ---------------------------------------------- ------------------- -------------------
121
<PAGE>
- --------------------------- ---------------------------------------------- ------------------- -------------------
Key Clearing Corp/Reinvest Acct 6.12% --
KCC Accts Corp Execution Svcs
OH-01-49-0230
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
KeyCorp Investment Products 6.58% --
Attn: Jennifer Ryan
127 Public Square
Cleveland, OH 44114-1216
- --------------------------- ---------------------------------------------- ------------------- -------------------
US Gov't Obligations Fund SNBOC and Company 98.41% --
- - Investor PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
US Gov't Obligations Fund Chase Manhattan Bank 5.26% --
- - Select FBO Global Trust
450 W 33rd Street, 15th Floor
New York, NY 10001-2603
- --------------------------- ---------------------------------------------- ------------------- -------------------
SNBOC and Company 15.41% --
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
Private Banking 33.75% --
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- --------------------------- ---------------------------------------------- ------------------- -------------------
Key Clearing Corp/Reinvest Acct 8.40% --
KCC Accts Corp Execution Svcs
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
KeyCorp Investment Products 33.60% --
Attn: Jennifer Ryan
127 Public Square
Cleveland, OH 44114-1216
- --------------------------- ---------------------------------------------- ------------------- -------------------
Value Fund SNBOC and Company 98.82% --
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- --------------------------- ---------------------------------------------- ------------------- -------------------
</TABLE>
Shares of the Funds 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 or class, and (2) when
the Trustees have determined that the matter affects only the interests of one
or more series, then only shareholders of such series shall be entitled to vote
thereon. There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees have been elected by the shareholders, at which time the Trustees then
in office will call a shareholders' meeting for the election of Trustees. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., persons who have been shareholders for at least six months, and who hold
shares having a net asset value of at least $25,000 or constituting 1% of the
outstanding shares) stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust will provide a list
of shareholders or disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint their successors.
122
<PAGE>
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each Fund of
the Trust affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a Fund will be required in
connection with a matter, a Fund will be deemed to be affected by a matter
unless it is clear that the interests of each Fund in the matter are identical,
or that the matter does not affect any interest of the Fund. Under Rule 18f-2,
the approval of an investment advisory agreement or any change in investment
policy would be effectively acted upon with respect to a fund only if approved
by a majority of the outstanding shares of such Fund. However, Rule 18f-2 also
provides that the ratification of independent accountants, the approval of
principal underwriting contracts, and the election of Trustees may be
effectively acted upon by shareholders of the Trust voting without regard to
series.
Shareholder and Trustee Liability.
The Trust is organized as a Delaware business trust. The Delaware Business Trust
Act provides that a shareholder of a Delaware business trust shall be entitled
to the same limitation of personal liability extended to shareholders of
Delaware corporations, and the Delaware Trust Instrument provides that
shareholders of the Trust shall not be liable for the obligations of the Trust.
The Delaware Trust Instrument also provides for indemnification out of the trust
property of any shareholder held personally liable solely by reason of his or
her being or having been a shareholder. The Delaware Trust Instrument also
provides that the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Trust, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer, or agent
of the Trust shall be personally liable in connection with the administration or
preservation of the assets of the funds or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
Financial Statements.
The audited financial statements of the Trust, with respect to all the Funds
(other than Class G shares), for the fiscal years ended October 31, 1997 and
October 31, 1998 are incorporated by reference herein. The financial statements
for the fiscal years ended October 31, 1997 and October 31, 1998 for all share
Classes of each Fund of the Trust (other than Class G shares), have been audited
by PricewaterhouseCoopers LLP as set forth in their report incorporated by
reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting.
The audited financial statements of Gradison Government Income Fund and the
Gradison Opportunity Value Fund for the fiscal years ended December 31, 1997
March 31, 1998, respectively, are incorporated by reference herein. These
financial statements have been audited by Arthur Andersen L.L.P. as set forth in
their report incorporated by reference herein, and are included in reliance upon
such report and on the authority of such firm as experts in auditing and
accounting. Arthur Andersen LLP's address is 425 Walnut Street, Cincinnati, Ohio
45202. The unaudited financial statements of Gradison Government Income Fund and
Gradison Opportunity Value Fund, dated June 30, 1998 and September 30, 1998,
respectively, are also incorporated herein by reference.
Miscellaneous.
As used in the Prospectuses and in this SAI, "assets belonging to a fund" (or
"assets belonging to the Fund") means the consideration received by the Trust
upon the issuance or sale of shares of a Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale, exchange, or liquidation of such investments, and
any funds or payments derived from any reinvestment of such proceeds and any
general assets of the Trust, which general liabilities and expenses are not
readily identified as
123
<PAGE>
belonging to a particular Fund that are allocated to that Fund by the Trustees.
The Trustees may allocate such general assets in any manner they deem fair and
equitable. It is anticipated that the factor that will be used by the Trustees
in making allocations of general assets to a particular fund of the Trust will
be the relative net asset value of each respective fund at the time of
allocation. Assets belonging to a particular Fund are charged with the direct
liabilities and expenses in respect of that Fund, and with a share of the
general liabilities and expenses of each of the Funds not readily identified as
belonging to a particular Fund, which are allocated to each Fund in accordance
with its proportionate share of the net asset values of the Trust at the time of
allocation. The timing of allocations of general assets and general liabilities
and expenses of the Trust to a particular fund will be determined by the
Trustees and will be in accordance with generally accepted accounting
principles. Determinations by the Trustees as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectuses 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 Trust is registered with the SEC as an open-end management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Trust.
The Prospectuses 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 Prospectuses and this SAI are not an offering of the securities described in
these documents in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectuses and this SAI.
124
<PAGE>
APPENDIX
Description of Security Ratings.
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Adviser or the Sub-Advisers with regard to
portfolio investments for the Funds include Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's ("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 or a Sub-Adviser and the description of each NRSRO's
ratings is as of the date of this SAI, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements - their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
125
<PAGE>
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only slightly
more than for risk-free U.S. Treasury debt.
AA+, AA, AA-. High credit quality Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic or financial conditions are unlikely to increase
investment risk significantly.
AA. Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic, or financial conditions may increase investment
risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is strong, although adverse
changes in business, economic or financial conditions may lead to increased
investment risk.
126
<PAGE>
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.
Duff 1-. High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
127
<PAGE>
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.
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.
128
<PAGE>
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, 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
129
<PAGE>
obligations of such instrumentalities only when the investment adviser believes
that the credit risk with respect to the instrumentality is minimal.
<PAGE>
Registration Statement
of
THE VICTORY PORTFOLIOS
----------------------
on
Form N-1A
PART C. OTHER INFORMATION
Item 23.
Exhibits:
(a)(1) Certificate of Trust (1)
(a)(2) Delaware Trust Instrument dated December 6, 1995, as amended. (2)
(b) Bylaws, Amended and Restated as of August 28, 1998.(3)
(c) The rights of holders of the securities being registered are set
out in Articles II, VII, IX and X of the Trust Instrument
referenced in Exhibit (a)(2) above and in Article IV of the Bylaws
referenced in Exhibit (b) above.
(d)(1) Investment Advisory Agreement dated as of March 1, 1997 between
Registrant and Key Asset Management Inc. ("KAM"), with Schedule A
amended as of March 1, 1997, March 2, 1998 and May 29, 1998. (4)
(d)(2) Investment Advisory Agreement dated March 1, 1997 between
Registrant and KAM regarding Lakefront Fund and Real Estate
Investment Fund. (5)
(d)(3) Investment Sub-Advisory Agreement dated March 1, 1997 between KAM
and Lakefront Capital Investors, Inc. regarding the Lakefront
Fund. (5)
(d)(4) Investment Advisory Agreement dated June 1, 1998 between
Registrant and KAM regarding the International Growth Fund. (4)
(d)(5) Portfolio Management Agreement dated June 1, 1998 between
Registrant, KAM and Indocam International Investment Services,
S.A. regarding the International Growth Fund. (6)
- ---------------------------------
1 Filed as an Exhibit to Post-Effective Amendment No. 26 to
Registrant's Registration Statement on Form N-1A filed
electronically on December 28, 1995, accession number
0000950152-95-003085.
2 Filed as an Exhibit to Post-Effective Amendment No. 36 to
Registrant's Registration Statement on Form N-1A filed
electronically on February 26, 1998, accession number
0000922423-98-000264.
3 Filed as an Exhibit to Post-Effective Amendment No. 44 to
Registrant's Registration Statement on Form N-1A filed
electronically on November 19, 1998, accession number
0000922423-98-001323.
4 Filed as an Exhibit to Post-Effective Amendment No. 42 to
Registrant's Registration Statement on Form N-1A filed
electronically on July 29, 1998, accession number
0000922423-98-000725.
5 Filed as an Exhibit to Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A filed
electronically on December 12, 1997, accession number
0000922423-97-001015.
C-1
<PAGE>
(e) Distribution Agreement dated June 1, 1996 between Registrant and
BISYS Fund Services Limited Partnership, with Schedule I amended
as of March 2, 1998 and May 29, 1998. (4)
(f) None.
(g)(1) Amended and Restated Mutual Fund Custody Agreement dated August 1,
1996 between Registrant and Key Trust of Ohio, Inc., with Schedule
A revised as of March 1998 and May 29, 1998 and Attachment B
revised as of March 2, 1998. (4)
(g)(2) Custody Agreement dated May 31, 1996 between Morgan Stanley Trust
Company and Key Trust Company of Ohio. (7)
(h)(1) Form of Broker-Dealer Agreement. (8)
(h)(2) Administration Agreement dated October 1, 1997 between Registrant
and BISYS Fund Services Limited Partnership ("BISYS"), with
Schedule I amended as of March 2, 1998 and May 29, 1998 and
Schedule II-B amended as of March 2, 1998. (4)
(h)(3) Sub-Administration Agreement dated October 1, 1997 between BISYS
and KAM, with Schedule A amended as of March 2, 1998 and May 29,
1998. (4)
(h)(4) Transfer Agency and Service Agreement dated July 12, 1996 between
Registrant and State Street Bank and Trust Company, with Schedule
A revised as of August 1, 1996, March 2, 1998 and May 29, 1998.
(4)
(h)(5) Fund Accounting Agreement dated May 31, 1995 between Registrant
and BISYS Fund Services Ohio, Inc., with Amended Schedule A as of
February 19, 1997 and March 2, 1998 and May 29, 1998, and Schedule
B as of March 2, 1998. (4)
(h)(6) Purchase Agreement is incorporated herein by reference to Exhibit
13(c) to Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A filed on December 1, 1989.
(i)(1) Opinion of Morris, Nichols, Arsht & Tunnell, Delaware Counsel to
Registrant. (3)
(i)(2) Opinion of Kramer Levin Naftalis & Frankel LLP ("Kramer Levin") as
to the legality of the securities being registered. (3)
(i)(3) Consent of Kramer Levin.
(j)(1) Consent of PricewaterhouseCoopers LLP.
- ---------------------------------
6 Filed as an Exhibit to Post-Effective Amendment No. 40 to
Registrant's Registration Statement on Form N-1A filed
electronically on June 12, 1998, accession number
0000922423-98-000602.
7 Filed as an Exhibit to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A filed
electronically on July 30, 1996, accession number
0000922423-96-000344.
8 Filed as an Exhibit to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A filed
electronically on January 31, 1996, accession number
0000922423-96-000047.
C-2
<PAGE>
(j)(2) Consent of Arthur Andersen LLP.
(k) Not applicable.
(l)(1) Purchase Agreement dated November 12, 1986 between Registrant and
Physicians Insurance Company of Ohio is incorporated herein by
reference to Exhibit 13 to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A filed on November
13, 1986.
(l)(2) Purchase Agreement dated October 15, 1989 is incorporated herein
by reference to Exhibit 13(b) to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A filed on December
1, 1989.
(m)(1) Distribution and Service Plan dated June 5, 1995 for the Class A
Shares of Registrant with Schedule I amended as of February 19,
1997, March 2, 1998 and May 29, 1998. (4)
(m)(2) Distribution Plan dated June 5, 1995 for Class B Shares of
Registrant with Schedule I amended as of February 1, 1996. (6)
(m)(3) Distribution and Service Plan dated December 11, 1998 for Class G
Shares of Registrant.
(m)(4) Shareholder Servicing Plan dated June 5, 1995 with Schedule I
amended as of March 1, 1997, March 2, 1998 and May 29, 1998. (4)
(m)(5) Form of Shareholder Servicing Agreement. (1)
(n)(1) Financial Data Schedules dated October 31, 1998 for the Class A,
Class B, Investor Class and Select Class of the Trust.
(n)(2) Financial Data Schedules for Gradison Government Income Fund and
Gradison Opportunity Value Fund dated June 30, 1998 and September
30, 1998, respectively.
(o) Amended and Restated Rule 18f-3 Multi-Class Plan as of December
11, 1998.
Powers of Attorney of Roger Noall and Frank A. Weil. (9)
Powers of Attorney of Leigh A. Wilson, Harry Gazelle, Thomas F.
Morrissey, H. Patrick Swygert and Eugene J. McDonald. (2)
Item 24. Persons Controlled by or Under Common Control with Registrant.
-------------------------------------------------------------
None.
Item 25. Indemnification
---------------
Article X, Section 10.02 of Registrant's Delaware Trust Instrument, as amended,
incorporated herein as Exhibit (a)(2) hereto, provides for the indemnification
of Registrant's Trustees and officers, as follows:
- ---------------------------------
9 Filed as an Exhibit to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-14 filed
electronically on February 3, 1998, accession number
0000922423-98-000095.
C-3
<PAGE>
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 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."
C-4
<PAGE>
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(d) hereto, and Section 7 of the Transfer Agency Agreement incorporated by
reference as Exhibit 9(c) hereto. Registrant has obtained from a major insurance
carrier a trustees' and officers' liability policy covering certain types of
errors and omissions. In no event will Registrant indemnify any of its trustees,
officers, employees or agents against any liability to which such person would
otherwise be subject by reason of his willful misfeasance, bad faith, or gross
negligence in the performance of his duties, or by reason of his reckless
disregard of the duties involved in the conduct of his office or under his
agreement with Registrant. Registrant will comply with Rule 484 under the
Securities Act of 1933 and Release 11330 under the Investment Company Act of
1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers, and controlling persons or
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Investment Company
Act of 1940, as amended, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
--------------------------------------------------------
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 $78 billion as of September 30, 1998. KeyCorp is a
leading financial institution with a presence in 46 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 approximately $62 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.
Indocam International Investment Services, S.A. ("IIIS") serves as 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 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 years engaged in any other
C-5
<PAGE>
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:
- ----------
<TABLE>
<CAPTION>
<S> <C>
William G. Spears o Senior Managing Director, Chairman and Chief Executive Officer.
Richard J. Buoncore o Senior Managing Director, President and Chief Operating Officer.
Anthony Aveni o Senior Managing Director and Chief Investment Officer of Society Asset
Management Division.
Vincent DeP. Farrell o Senior Managing Director and Chief Investment Officer of Spears, Benzak,
Salomon & Farrell Division.
Richard E. Salomon o Senior Managing Director.
Gary R. Martzolf o Senior Managing Director.
Other Officers:
Charles G. Crane o Senior Managing Director and Chief Market Strategist.
James D. Kacic o Chief Financial Officer, Chief Administrative Officer, and Senior Managing
Director.
William R. Allen o Managing Director.
Michael Foisel o Assistant Treasurer.
Michael Stearns o Chief Compliance Officer.
William J. Blake o Secretary.
Steven N. Bulloch o Assistant Secretary. Also, Senior Vice President and Senior Counsel of
KeyCorp Management Company.
Kathleen A. Dennis o Senior Managing Director.
</TABLE>
The business address of each of the foregoing individuals is 127 Public Square,
Cleveland, Ohio 44114.
The principal executive officer and director of Lakefront is:
- -------------------------------------------------------------
Nathaniel E. Carter o President and Chief Investment Officer.
The business address of the foregoing individual is 127 Public Square,
Cleveland, Ohio 44114.
The principal executive officers and directors of IIIS are as follows:
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Jean-Claude Kaltenbach o Chairman and CEO.
Ian Gerald McEvatt o Director. Claude Doumic o Director.
Didier Guyot de la Pommeraye o Director. Charles Vergnot o Director.
C-6
<PAGE>
Eric Jostrom o Director. Gerard Sutterlin o Secretary General.
</TABLE>
The business address of each of the foregoing individuals is 90 Blvd. Pasteur,
75730 Paris, CEDEX 15 -- France.
Item 27. Principal Underwriter
---------------------
(a) BISYS Fund Services, Registrant's administrator, also acts as the
distributor for the following investment companies as of December 22, 1998.
<TABLE>
<CAPTION>
<S> <C>
Alpine Equity Trust The Kent Funds
American Performance Funds Magna Funds
AmSouth Mutual Funds Meyers Investment Trust
The ARCH Fund, Inc. MMA Praxis Mutual Funds
The BB&T Mutual Funds Group M.S.D. & T. Funds
The Coventry Group Pacific Capital Funds
ESC Strategic Funds, Inc. The Parkstone Advantage Fund
The Eureka Funds Pegasus Funds
Gradison-McDonald Cash Reserves Trust Puget Sound Alternative Investment Series Trust
Gradison-McDonald Municipal Custodian Trust Republic Advisor Funds Trust
Gradison Custodian Trust Republic Funds Trust
Gradison Growth Trust The Riverfront Funds, Inc.
Fifth Third Funds Sefton Funds
Hirtle Callaghan Trust SSgA Liquidity Fund
HSBC Funds Trust The Sessions Group
HSBC Mutual Funds Trust Summit Investment Trust
The Infinity Mutual Funds, Inc. Variable Insurance Funds
INTRUST Funds Trust The Victory Variable Insurance Funds
Vintage Mutual Funds, Inc.
(b) Directors, officers and partners of BISYS Fund Services, Inc., the General
Partner of BISYS Fund Services, as of June 15, 1998 were as follows:
Lynn J. Mangum o Chairman and CEO. William Tomko o Senior Vice
President.
Dennis Sheehan o Director, Michael D. Burns o Vice President.
Executive Vice
President and
Treasurer.
J. David Huber o President. David Blackmore o Vice President.
Kevin J. Dell o Vice President Steve Ludwig o Compliance
and Secretary. Officer.
Mark Rybarczyk o Senior Vice Robert Tuch o Assistant
President. Secretary.
</TABLE>
The business address of each of the foregoing individuals is BISYS Fund
Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43215.
C-7
<PAGE>
Item 28.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 (records relating to its function 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 function 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 function as shareholder servicing
agent).
(5) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as administrator and fund accountant).
(6) BISYS Fund Services Limited Partnership, 3435 Stelzer Road, Columbus,
Ohio 43219 (records relating to its function as distributor).
(7) State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110-3875 (records relating to its function as transfer
agent).
(8) Boston Financial Data Services, Inc. Two Heritage Drive, Quincy,
Massachusetts 02171 (records relating to its functions as dividend
disbursing agent and shareholder servicing agent).
(9) 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).
(10) Morgan Stanley Trust Company, 1585 Broadway, New York, New York 10036
(records relating to its function as sub-custodian of the Balanced Fund,
Convertible Securities Fund, International Growth Fund, Lakefront Fund,
and Real Estate Investment Fund).
Item 29. Management Services
-------------------
None.
Item 30. Undertakings
------------
None.
NOTICE
A copy of the Certificate of Trust of Registrant is on file with the Secretary
of State of Delaware and notice is hereby given that this Post-Effective
Amendment to Registrant's Registration Statement has been executed on behalf of
Registrant by officers of, and Trustees of, 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 Registrant individually but are binding only upon
the assets and property of Registrant.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the
Investment Company Act, Registrant certifies that it meets all of the
requirements for effectiveness of this registration statement under rule 485(b)
under the Securities Act has duly caused this registration statement to be
signed on its behalf by the undersigned, duly authorized, in the City of New
York, and the State of New York on this 26th day of January, 1999.
THE VICTORY PORTFOLIOS
By: /s/ Leigh A. Wilson
-------------------
Leigh A. Wilson, President and Trustee
Pursuant to the requirements of the Securities Act, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Roger Noall Chairman of the Board and Trustee January 26, 1999
- ---------------
Roger Noall
/s/ Leigh A. Wilson Trustee January 26, 1999
- -------------------
Leigh A. Wilson
/s/ Joel B. Engle Treasurer January 26, 1999
- -----------------
Joel B. Engle
/s/ Harry Gazelle* Trustee January 26, 1999
- ------------------
Harry Gazelle
/s/ Thomas F. Morissey* Trustee January 26, 1999
- -----------------------
Thomas F. Morrissey
/s/ H. Patrick Swygert* Trustee January 26, 1999
- -----------------------
H. Patrick Swygert
/s/ Frank A. Weil* Trustee January 26, 1999
- ------------------
Frank A. Weil
/s/ Eugene J. McDonald* Trustee January 26, 1999
- -----------------------
Eugene J. McDonald
</TABLE>
- --------------------------------
*
By: /s/ Carl Frischling
-------------------
Carl Frischling
Attorney-in-fact
<PAGE>
THE VICTORY PORTFOLIOS
INDEX TO EXHIBITS
Item 23.
Exhibit Number
- --------------
EX-99.B10 Consent of Kramer Levin Naftalis & Frankel LLP.
EX-99.B11(a) Consent of PricewaterhouseCoopers LLP.
EX-99.B11(b) Consent of Arthur Andersen LLP.
EX-99.B15 Distribution and Service Plan dated December 11, 1998
for Class G Shares of Registrant.
EX-99.Rule 18f-3 Amended and Restated Rule 18f-3 Multi-Class Plan as of
Multi-Class December 11, 1998.
Plan
EX. 27.1 through Financial Data Schedules dated October 31, 1998 for the
27.40 Class A, Class B, Investor Class and Select Class of the
Trust.
EX.27.41 & 27.42 Financial Data Schedules for Gradison Government Income
Fund and Gradison Opportunity Value Fund dated June 30,
1998 and September 30, 1998, respectively.
KRAMER LEVIN NAFTALIS & FRANKEL LLP
9 1 9 T H I R D A V E N U E
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
FAX
(212) 715-8000
-----
WRITER'S DIRECT NUMBER
(212) 715-9100
January 26, 1999
The Victory Portfolios
3435 Stelzer Road
Columbus, Ohio 43219
Re: The Victory Portfolios
File Nos. 33-8892; 811-4582
---------------------------
Dear Ladies and Gentlemen:
We hereby consent to the reference of our firm as Counsel in this
Registration Statement on Form N-1A.
Very truly yours,
CONSENT OF INDEPENDENT ACCOUNTANTS
January 25, 1999
We consent to the incorporation by reference in this Post-Effective Amendment
No. 45 to the Registration Statement of The Victory Portfolios on Form N-1A
(File No. 33-8982) of our reports dated December 11, 1998 on our audits of the
financial statements and financial highlights of The Victory Portfolios
(comprising, respectively, the U.S. Government Obligations Fund, Prime
Obligations Fund, Financial Reserves Fund, Tax Free Money Market Fund, Ohio
Municipal Money Market Fund, Limited Term Income Fund, Intermediate Income Fund,
Fund for Income, Government Mortgage Fund, Investment Quality Bond Fund,
National Municipal Bond Fund, New York Tax Free Fund, Ohio Municipal Bond Fund,
Balanced Fund, Convertible Securities Fund, Real Estate Investment Fund, Value
Fund, Lakefront Fund, Diversified Stock Fund, Stock Index Fund, Growth Fund,
Special Value Fund, Ohio Regional Stock Fund, International Growth Fund, Special
Growth Fund, Institutional Money Market Fund, Federal Money Market Fund, Life
Choice Moderate Growth Fund, Life Choice Growth Fund and Life Choice
Conservative Growth Fund), which reports are included in the Annual Reports to
Shareholders for the year ended October 31, 1998, and of our reports dated
December 15, 1997 on our audits of the financial statements and financial
highlights of The Victory Portfolios (comprising, respectively, the
Institutional Money Market Fund, U.s. Government Obligations Fund, Prime
Obligations Fund, Financial Reserves Fund, Tax-Free Money Market Fund, Ohio
Municipal Money Market Fund, Limited Term Income Fund, Intermediate Income Fund,
Investment Quality Bond Fund, Government Mortgage Fund, Fund for Income,
National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund,
Balanced Fund, Stock Index Fund, Diversified Stock Fund, Value Fund, Growth
Fund, Special Value Fund, Special Growth Fund, Ohio Regional Stock Fund,
International Growth Fund, Lakefront Fund, and Real Estate Investment Fund),
which reports are included in the Annual Reports to Shareholders for the year
ended October 31, 1997, which are incorporated by reference in this
Post-Effective Amendment to the Registration Statement. We also consent to the
reference to our Firm under the caption "Financial Highlights" in the Prospectus
for the Ohio Municipal Bond Fund, Diversified Stock Fund and International
Growth Fund and under the captions "Financial Statements" and "Independent
Accountants" in the Statement of Additional Information in this Post-Effective
Amendment No. 45 to Registration Statement of The Victory Portfolios on Form
N-1A (File No. 33-8982).
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants we hereby consent to the incorporation by
reference in this Post Effective Amendment No.45 Form N-1A filing of The Victory
Portfolios of our auditors' reports on the financial statements of Gradison
Opportunity Value Fund dated May 6, 1998 and Gradison Government Income Fund
dated January 30, 1998 and to all references to our Firm included in or made a
part of this Post-Effective Amendment No. 45 Form N-1A.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Cincinnati, Ohio
January 21, 1999
THE VICTORY PORTFOLIOS
DISTRIBUTION AND SERVICE PLAN
CLASS G SHARES
This Distribution and Service Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by The Victory Portfolios, a business trust
organized under the laws of the State of Delaware (the "Trust"), on behalf of
the Class G shares, a class of shares of its Funds (individually, a "Fund," and
collectively, the "Funds") as set forth in Schedule I, as amended from time to
time, subject to the following terms and conditions:
Section 1. Annual Fees.
Distribution Fee. Each Fund will pay to the distributor of its shares,
BISYS Fund Services Limited Partnership (the "Distributor"), a distribution fee
under the Plan at the annual rates set forth on Schedule 1 (the "Distribution
Fee").
Adjustment to Fees. Class G of any Fund may pay a Distribution Fee to
the Distributor at a lesser rate than the fees specified in Section 1 hereof as
agreed upon by the Board of Trustees and the Distributor and approved in the
manner specified in Section 3 of this Plan.
Payment of Fees. The Distribution Fees will be calculated daily and
paid monthly by each Fund with respect to the Class G shares at the annual rates
indicated in Schedule I hereof.
Section 2. Expenses Covered by the Plan.
Distribution Fees may be used by the Distributor for: (a) costs of
printing and distributing a Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs involved
in preparing, printing and distributing sales literature pertaining to a Fund;
(c) an allocation of overhead and other branch office distribution-related
expenses of the Distributor; (d) payments to persons who provide support
services in connection with the distribution of a Fund's shares, including but
not limited to, office space and equipment, telephone facilities, answering
routine inquiries regarding a Fund, processing shareholder transactions and
providing any other shareholder services not otherwise provided by a Fund's
transfer agent; (e) accruals for interest on the amount of the foregoing
expenses that exceed the Distribution Fee and the contingent deferred sales
charge received by the Distributor; and (f) any other expense primarily intended
to result in the sale of a Fund's shares, including, without limitation,
payments to salesmen and selling dealers at the time of the sale of shares, if
applicable, and continuing fees to each such salesman and selling dealers, which
fee shall begin to accrue immediately after the sale of such shares.
The amount of the Distribution Fees payable by any Fund under Section 1
hereof is not related directly to expenses incurred by the Distributor and this
Section 2 does not obligate a Fund to reimburse the Distributor for such
expenses. The Distribution Fees described in Section 1 hereof will be paid by a
Fund to the Distributor unless and until the Plan is terminated
<PAGE>
or not renewed with respect to a Fund or Class thereof, any distribution or
service expenses incurred by the Distributor on behalf of a Fund in excess of
payments of the Distribution Fees specified in Section 1 hereof which the
Distributor has accrued through the termination date are the sole responsibility
and liability of the Distributor and not an obligation of a Fund.
Section 3. Indirect Expenses.
While each Fund is authorized to make payments under this Plan to the
Fund's Distributor for expenses described above, it is expressly recognized that
each Fund currently pays, and will continue to pay, an investment advisory fee
to its Investment Adviser and an administration fee to the Administrator. To the
extent that any payments made by any Fund to the Investment Adviser or
Administrator, including payment of fees under the Investment Advisory Agreement
or the Administration Agreement, respectively, should be deemed to be indirect
financing of any activity primarily intended to result in the sale of shares of
the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments
shall be deemed to be authorized by this Plan.
Section 4. Approval of Trustees.
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Trust and
(b) those Trustees who are not interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to it (the "Qualified Trustees"), cast in person at a meeting
called for the purpose of voting on the Plan and the related agreements.
Section 5. Continuance of the Plan.
The Plan will continue in effect for two years after the date set forth
below, and thereafter for successive twelve-month periods: provided, however,
that such continuance is specifically approved at least annually by the Trustees
of the Trust and by a majority of the Qualified Trustees.
Section 6. Agreements.
Any agreement with any person relating to implementation of the Plan
shall be in writing, and any agreement related to the Plan shall provide (a)
that such agreement may be terminated at any time, without payment of any
penalty, by a vote of a majority of the Qualified Trustees or by a vote of a
majority of the outstanding voting securities of the Class G Shares of the Fund,
on not more than sixty days' notice to any other party to the agreement, and (b)
that such agreement shall terminate automatically in the event of its
assignment.
Section 7. Termination.
The Plan may be terminated at any time with respect to a Fund (i) by
the Trust without payment of any penalty, by the vote of a majority of the
outstanding voting securities of the Class G Shares of any Fund or (ii) by a
vote of the Qualified Trustees. The Plan may remain in
2
<PAGE>
effect with respect to a Fund even if the Plan has been terminated in accordance
with this Section 7 with respect to any other Fund.
Section 8. Amendments.
The Plan may not be amended with respect to any Fund so as to increase
materially the amounts of the fees described in Section 1 above, unless the
amendment is approved by a vote of the holders of at least a majority of the
outstanding voting securities of the Class G Shares of that Fund. No material
amendment to the Plan may be made unless approved by the Trust's Board of
Trustees in the manner described in Section 4 above.
Section 9. Selection of Certain Trustees.
While the Plan is in effect, the selection and nomination of the
Trust's Trustees who are not interested persons of the Trust will be committed
to the discretion of the Trustees then in office who are not interested persons
of the Trust.
Section 10. Written Reports.
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by a Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Trust's Board of Trustees, and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule which set out the
amounts expended under the Plan and the purposes for which those expenditures
were made.
Section 11. Preservation of Materials.
The Trust will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 10 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
Section 12. Meanings of Certain Terms.
As used in the Plan, the terms "assignment," "interested person" and
"vote of a majority of the outstanding voting securities" shall have the
respective meanings specified in the 1940 Act and the rules and regulations
thereunder, subject to such exemptions as may be granted by the Securities and
Exchange Commission.
IN WITNESS WHEREOF, the Trust executed this Plan as of December 11,
1998.
The Victory Portfolios
By:
-------------------------
Leigh A. Wilson
President
<PAGE>
SCHEDULE I
This Plan shall be adopted with respect to Class G shares of the
following Funds of The Victory Portfolios:
Fund Rate*
---- -----
o Gradison Government Reserves Fund 0.20%
o Ohio Municipal Bond Fund 0.25%
o Fund for Income 0.25%
o Diversified Stock Fund 0.50%
o International Growth Fund 0.50%
o Established Value Fund 0.50%
o Small Company Opportunity Fund 0.50%
* Expressed as a percentage of the average daily net assets of each Fund
attributable to its Class G Shares.
Dated as of December 11, 1998
THE VICTORY PORTFOLIOS
AMENDED AND RESTATED
RULE 18f-3 MULTI-CLASS PLAN
---------------------------
I. Introduction.
------------
Pursuant to Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), the following sets forth the method for allocating
fees and expenses among each class of shares of the various series (each series
a "Fund") of The Victory Portfolios (the "Trust") that issue multiple classes of
shares, whether now existing or subsequently established (the "Multi-Class
Funds"). In addition, this Rule 18f-3 Multi-Class Plan (the "Plan") sets forth
the shareholder servicing arrangements, distribution arrangements, conversion
features, exchange privileges, and other shareholder services of each class of
shares in the Multi-Class Funds.
The Trust is an open-end series investment company registered under the
1940 Act, the shares of which are registered on Form N-1A under the Securities
Act of 1933, as amended (Registration Nos. 33-8982 and 811-4851). Upon the
effective date of this Plan, the Trust hereby elects to offer multiple classes
of shares in the Multi-Class Funds pursuant to the provisions of Rule 18f-3 and
this Plan. This Plan does not make any material changes to the general class
arrangements and expense allocations previously approved by the Board of
Trustees of the Trust (the "Board").
The Trust currently consists of the following 38 separate Funds:
<TABLE>
<CAPTION>
<S> <C>
Balanced Fund Limited Term Income Fund
Convertible Securities Fund Maine Municipal Bond Fund (Short-Term)
Diversified Stock Fund Maine Municipal Bond Fund (Intermediate)
Equity Income Fund Michigan Municipal Bond Fund
Established Value Fund National Municipal Bond Fund
Federal Money Market Fund National Municipal Bond Fund (Short-Intermediate)
Financial Reserves Fund National Municipal Bond Fund (Long)
Fund For Income New York Tax-Free Fund
Government Mortgage Fund Ohio Municipal Bond Fund
Gradison Government Reserves Fund Ohio Municipal Money Market Fund
Growth Fund Ohio Regional Stock Fund
Institutional Money Market Fund Prime Obligations Fund
Intermediate Income Fund Real Estate Investment Fund
International Growth Fund Special Growth Fund
Investment Quality Bond Fund Special Value Fund
Lakefront Fund Stock Index Fund
LifeChoice Conservative Investor Fund Tax-Free Money Market Fund
LifeChoice Moderate Investor Fund U.S. Government Obligations Fund
LifeChoice Growth Investor Fund Value Fund
</TABLE>
<PAGE>
The Funds are authorized to issue the following classes of shares
representing interests in the same underlying portfolio of assets of the
respective Fund:
<TABLE>
<CAPTION>
<S> <C>
THE MULTI-CLASS FUNDS THE NON-MULTI-CLASS FUNDS
CLASS A, CLASS B AND CLASS G SHARES CLASS A SHARES
Diversified Stock Fund Convertible Securities Fund
International Growth Fund Equity Income Fund
Financial Reserves Fund
Government Mortgage Fund
Growth Fund
Intermediate Income Fund
CLASS A SHARES AND CLASS B SHARES Investment Quality Bond Fund
LifeChoice Growth Fund
Balanced Fund LifeChoice Income and Growth Fund
National Municipal Bond Fund LifeChoice Moderate Growth Fund
New York Tax-Free Fund Lakefront Fund
Ohio Regional Stock Fund Limited Term Income Fund
Special Value Fund Maine Municipal Bond Fund (Short-Term)
Maine Municipal Bond Fund (Intermediate)
Michigan Municipal Bond Fund
National Municipal Bond Fund (Short-Intermediate)
National Municipal Bond Fund (Long)
CLASS A SHARES AND CLASS G SHARES Ohio Municipal Money Market Fund
Prime Obligations Fund
Fund for Income Real Estate Investment Fund
Ohio Municipal Bond Fund Stock Index Fund
Special Growth Fund Tax-Free Money Market Fund
(to be renamed "Small Company Value Fund
Opportunity Fund")
INVESTOR SHARES AND SELECT SHARES
CLASS G SHARES
Federal Money Market Fund
Institutional Money Market Fund Established Value Fund
U.S. Government Obligations Fund Gradison Government Reserves Fund
</TABLE>
I. Class Arrangements.
------------------
The following summarizes the front-end sales charges, contingent
deferred sales charges, Rule 12b-1 distribution fees, shareholder servicing
fees, conversion features, exchange privileges, and other shareholder services
applicable to each particular class of shares of the Funds. Additional details
regarding such fees and services are set forth in each Fund's current Prospectus
and Statement of Additional Information.
A. Class A Shares:
1. MAXIMUM INITIAL SALES LOAD: 5.75% (of the offering price).
Exceptions: Fund for Income and Limited Term Income Fund have an
initial sales charge of 2.00% (of the offering price).
Exceptions: Financial Reserves Fund, LifeChoice Conservative
Investor Fund, LifeChoice Moderate Investor Fund, LifeChoice
Growth Investor Fund, Ohio Municipal Money Market Fund, Prime
Obligations Fund, and Tax-Free Money Market Fund have no sales
charge.
2
<PAGE>
2. CONTINGENT DEFERRED SALES CHARGE: None.
3. RULE 12B-1 DISTRIBUTION FEES: None. Exceptions: Convertible
Securities Fund, Financial Reserves Fund, Fund For Income,
Lakefront Fund, LifeChoice Conservative Investor Fund, LifeChoice
Moderate Investor Fund, LifeChoice Growth Investor Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Money
Market Fund, and Real Estate Investment Fund each have a
"Defensive" Rule 12b-1 Plan.
4. SHAREHOLDER SERVICING FEES: Up to 0.25% per annum of average
daily net assets. Exceptions: Financial Reserves Fund and Stock
Index Fund do not have shareholder servicing plans or fees.
5. CONVERSION FEATURES: None.
6. EXCHANGE PRIVILEGES: Class A shares may be exchanged with Class A
shares of other Funds without incurring a sales charge. However,
exchanges made into a Fund with a higher sales charge require
payment of the percentage-point difference between the higher and
lower sales charges. For example, investors that exchange Class A
shares from the Fund for Income or the Limited Term Income Fund
to purchase Class A shares of a Fund with a 5.75% sales charge
would pay the 3.75% difference in sales charge. Class A shares
may be exchanged with Investor Class shares or Select Class
shares of Federal Money Market Fund, Institutional Money Market
Fund, and U.S. Government Obligations Fund without incurring a
sales charge.
7. OTHER SHAREHOLDER SERVICES: As provided in the Fund's Prospectus.
These services do not differ from those applicable to Class B
shares.
B. Class B Shares:
1. INITIAL SALES LOAD: None
2. CONTINGENT DEFERRED SALES CHARGE ("CDSC"): 5% in the first year,
declining to 1% in the sixth year, and eliminated thereafter. The
CDSC is based on the original purchase cost of investment or the
net asset value of the shares at the time of redemption,
whichever is lower.
3. RULE 12B-1 DISTRIBUTION FEES: 0.75% per annum of the average
daily net assets.
4. SHAREHOLDER SERVICING FEES: Up to 0.25% per annum of the average
daily net assets.
3
<PAGE>
5. CONVERSION FEATURES: Class B shares convert automatically to
Class A shares eight years after purchase, based on relative net
asset values of the two classes. Class B shares acquired by the
reinvestment of dividends and distributions are included in the
conversion.
6. EXCHANGE PRIVILEGES: Class B shares may be exchanged with Class B
shares of other Funds without incurring a sales charge.
7. OTHER SHAREHOLDER SERVICES: As provided in the Fund's Prospectus.
These services do not differ from those applicable to Class A
shares.
C. Investor Shares:
1. MAXIMUM INITIAL SALES LOAD: None.
2. CDSC: None.
3. RULE 12B-1 DISTRIBUTION FEES: Federal Money Market Fund and
Institutional Money Market Fund each have a "Defensive" Rule
12b-1 Plan.
4. SHAREHOLDER SERVICING FEES: None.
5. CONVERSION FEATURES: None.
6. EXCHANGE PRIVILEGES: Investor shares may be exchanged with
Investor shares of other Funds at relative net asset value.
Investor shares may be exchanged with Class A shares of other
Funds; however, such exchanges require payment of the sales
charge of the other Fund's Class A shares.
7. OTHER SHAREHOLDER SERVICES: As provided in the Fund's Prospectus.
D. Select Shares:
1. MAXIMUM INITIAL SALES LOAD: None.
2. CDSC: None.
3. RULE 12B-1 DISTRIBUTION FEES: None. Exception: Federal Money
Market Fund and Institutional Money Market Fund each has a
"Defensive" Rule 12b-1 Plan.
4. SHAREHOLDER SERVICING FEES: Up to 0.25% per annum of the average
daily net assets.
5. CONVERSION FEATURES: None.
4
<PAGE>
6. EXCHANGE PRIVILEGES: Select shares may be exchanged with Select
shares of other Funds at relative net asset value. Select shares
may be exchanged with Class A shares of other Funds; however,
such exchanges require payment of the sales charge of the other
Fund's Class A shares.
7. OTHER SHAREHOLDER SERVICES: As provided in the Fund's Prospectus.
E. Class G Shares
1. MAXIMUM INITIAL SALES LOAD: None.
2. RULE 12B-1 DISTRIBUTION FEES: Small Company Opportunity Fund,
Diversified Stock Fund, International Growth Fund, and
Established Value Fund: up to 0.50% per annum of average daily
net assets; Fund For Income and Ohio Municipal Bond Fund: up to
0.25% per annum of average daily net assets; Gradison Government
Reserves Fund: up to 0.10% per annum of average daily net assets.
3. CONVERSION FEATURES: None.
4. EXCHANGE PRIVILEGES: Class G shares may be exchanged with Class G
Shares, Select Shares, or any single class money market fund
shares of a Victory Fund without paying a sales charge.
Shareholders who own Class G Shares as of the time of the
reorganization of the Gradison Funds with certain series of the
Trust can exchange into Class A Shares of any Victory Fund that
does not offer Class G Shares without paying a sales charge.
5. OTHER SHAREHOLDER SERVICES: As provided in the Fund's Prospectus.
II. Allocation of Expenses.
----------------------
Pursuant to Rule 18f-3 under the 1940 Act, the Trust shall allocate to
each class of shares in a Multi-Class Fund (i) any fees and expenses incurred by
the Trust in connection with the distribution of such class of shares (other
than with respect to the money market Funds) under a distribution plan adopted
for such class of shares pursuant to Rule 12b-1 ("Rule 12b-1 Fees") and (ii) any
fees and expenses incurred by the Trust under a shareholder servicing plan in
connection with the provision of shareholder services to the holders of such
class of shares ("Service Plan Fees"). In addition, pursuant to Rule 18f-3, the
Trust may allocate the following fees and expenses (the "Class Expenses") to a
particular class of shares in a single Multi-Class Fund:
1. transfer agent fees identified by the transfer agent as being
attributable to such class of shares;
2. printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses,
reports, and proxies to
5
<PAGE>
current shareholders of such class of shares or to regulatory
agencies with respect to such class of shares;
3. blue sky registration or qualification fees incurred by such
class of shares;
4. Securities and Exchange Commission registration fees incurred by
such class of shares;
5. the expense of administrative personnel and services (including,
but not limited to, those of a fund accountant or dividend paying
agent charged with calculating net asset values or determining or
paying dividends) as required to support the shareholders of such
class of shares;
6. litigation or other legal expenses relating solely to such class
of shares;
7. fees of the Board incurred as result of issues relating to such
class of shares;
8. independent accountants' fees relating solely to such class of
shares; and
9. shareholder meeting expenses for meetings of a particular class.
Class Expenses, Rule 12b-1 Fees, and Service Plan Fees are the only
expenses allocated to the classes disproportionately. The Class Expenses
allocated to each share of a class during a year will differ from the Class
Expenses allocated to each share of any other class by less than 50 basis points
of the average daily net asset value of the class of shares with the smallest
average daily net asset value.
The initial determination of fees and expenses that will be allocated
by the Trust to a particular class of shares and any subsequent changes thereto
will be reviewed by the Board and approved by a vote of the Board including a
majority of the Trustees who are not interested persons of the Trust. The Board
will monitor conflicts of interest among the classes and agree to take any
action necessary to eliminate conflicts.
Income, realized and unrealized capital gains and losses, and any
expenses of a Fund not allocated to a particular class of such Fund by this Plan
shall be allocated to each class of such Fund on the basis of the relative net
assets (settled shares), as defined in Rule 18f-3, of that class in relation to
the net assets of such Fund.
Income, realized and unrealized capital gains and losses, and any
expenses of a non-money market Fund not allocated to a particular class of any
such Fund pursuant to this Plan shall be allocated to each class of the Fund on
the basis of the net asset value of that class in relation to the net asset
value of the Fund.
Any dividends and other distributions on shares of a class will differ
from dividends and other distributions on shares of other classes only as a
result of the allocation of Class Expenses, Rule 12b-1 Fees, Service Plan Fees,
and the effects of such allocations.
6
<PAGE>
The Investment Adviser will waive or reimburse its management fee in
whole or in part only if the fee is waived or reimbursed to all shares of a Fund
in proportion to their relative average daily net asset values. The Investment
Adviser, and any entity related to the Investment Adviser, who charges a fee for
a Class Expense will waive or reimburse that fee in whole or in part only if the
revised fee more accurately reflects the relative costs of providing to each
class the service for which the Class Expense is charged.
III. Board Review.
------------
The Board shall review this Plan as frequently as it deems necessary.
Prior to any material amendment(s) to this Plan, the Board, including a majority
of the Trustees that are not interested persons of the Trust, shall find that
the Plan, as proposed to be amended (including any proposed amendments to the
method of allocating Class Expenses and/or Fund expenses), is in the best
interest of each class of shares of a Multi-Class Fund individually and the Fund
as a whole. In considering whether to approve any proposed amendment(s) to the
Plan, the Board shall request and evaluate such information as it considers
reasonably necessary to evaluate the proposed amendment(s) to the Plan. Such
information shall address the issue of whether any waivers or reimbursements of
advisory or administrative fees could be considered a cross-subsidization of one
class by another and other potential conflicts of interest between classes.
In making its initial determination to approve this Plan, the Board has
focused on, among other things, the relationship between or among the classes
and has examined potential conflicts of interest among classes (including those
potentially involving a cross-subsidization between classes) regarding the
allocation of fees, services, waivers and reimbursements of expenses, and voting
rights. The Board has evaluated the level of services provided to each class and
the cost of those services to ensure that the services are appropriate and the
allocation of expenses is reasonable. In approving any subsequent amendments to
this Plan, the Board shall focus on and evaluate such factors as well as any
others it deems necessary.
Adopted May 24, 1995; Effective June 5, 1995
Amended and Restated:
December 6, 1995;
February 14, 1996;
May 31, 1996;
February 19, 1997;
October 22, 1997;
December 3, 1997;
August 28, 1998; and
December 11, 1998
7
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 011
<NAME> VICTORY PRIME OBLIGATIONS FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 1379293
<INVESTMENTS-AT-VALUE> 1379293
<RECEIVABLES> 5578
<ASSETS-OTHER> 21
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1384892
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6179
<TOTAL-LIABILITIES> 6179
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1378697
<SHARES-COMMON-STOCK> 1378696
<SHARES-COMMON-PRIOR> 736435
<ACCUMULATED-NII-CURRENT> 16
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1378713
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 59647
<OTHER-INCOME> 0
<EXPENSES-NET> 8352
<NET-INVESTMENT-INCOME> 51295
<REALIZED-GAINS-CURRENT> 16
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 51311
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 51295
<DISTRIBUTIONS-OF-GAINS> 14
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3531074
<NUMBER-OF-SHARES-REDEEMED> 2935538
<SHARES-REINVESTED> 46726
<NET-CHANGE-IN-ASSETS> 642264
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 14
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3674
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8352
<AVERAGE-NET-ASSETS> 1049726
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.049
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.049
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 021
<NAME> VICTORY U.S. GOVERNMENT OBLIGATIONS FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
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<INVESTMENTS-AT-VALUE> 2251840
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<NET-CHANGE-IN-ASSETS> 481416
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<EXPENSE-RATIO> 0.52<F1>
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<FN>
<F1>Investor Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 022
<NAME> VICTORY U.S. GOVERNMENT OBLIGATIONS FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
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<EXPENSE-RATIO> 0.77<F1>
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<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Select Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 031
<NAME> VICTORY TAX-FREE MONEY MARKET FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
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<OVERDISTRIBUTION-GAINS> 4
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<NET-ASSETS> 465528
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<NET-INVESTMENT-INCOME> 15305
<REALIZED-GAINS-CURRENT> (4)
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<EXPENSE-RATIO> 0.80
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<AVG-DEBT-PER-SHARE> 0
<FN>
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 041
<NAME> VICTORY OHIO REGIONAL STOCK FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 21402
<INVESTMENTS-AT-VALUE> 42428
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<ASSETS-OTHER> 4
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16631
<SHARES-COMMON-STOCK> 2016<F1>
<SHARES-COMMON-PRIOR> 2280<F1>
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<ACCUM-APPREC-OR-DEPREC> 21026
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<REALIZED-GAINS-CURRENT> 4989
<APPREC-INCREASE-CURRENT> (6979)
<NET-CHANGE-FROM-OPS> (1604)
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<DISTRIBUTIONS-OF-GAINS> 4701<F1>
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<NUMBER-OF-SHARES-SOLD> 399
<NUMBER-OF-SHARES-REDEEMED> 807
<SHARES-REINVESTED> 163
<NET-CHANGE-IN-ASSETS> (11754)
<ACCUMULATED-NII-PRIOR> 1
<ACCUMULATED-GAINS-PRIOR> 4774
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 744
<AVERAGE-NET-ASSETS> 51760<F1>
<PER-SHARE-NAV-BEGIN> 23.56<F1>
<PER-SHARE-NII> 0.18<F1>
<PER-SHARE-GAIN-APPREC> (.80)<F1>
<PER-SHARE-DIVIDEND> 0.17<F1>
<PER-SHARE-DISTRIBUTIONS> 2.10<F1>
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 20.67<F1>
<EXPENSE-RATIO> 1.26<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 042
<NAME> VICTORY OHIO REGIONAL STOCK FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 21402
<INVESTMENTS-AT-VALUE> 42428
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<PAID-IN-CAPITAL-COMMON> 16631
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<APPREC-INCREASE-CURRENT> (6979)
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<SHARES-REINVESTED> 163
<NET-CHANGE-IN-ASSETS> (11754)
<ACCUMULATED-NII-PRIOR> 1
<ACCUMULATED-GAINS-PRIOR> 4774
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<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 744
<AVERAGE-NET-ASSETS> 966<F1>
<PER-SHARE-NAV-BEGIN> 23.28<F1>
<PER-SHARE-NII> (0.11)<F1>
<PER-SHARE-GAIN-APPREC> (.77)<F1>
<PER-SHARE-DIVIDEND> 0<F1>
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<PER-SHARE-NAV-END> 20.30<F1>
<EXPENSE-RATIO> 2.52<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class B Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 051
<NAME> VICTORY DIVERSIFIED STOCK FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 1036046
<INVESTMENTS-AT-VALUE> 1162448
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<APPREC-INCREASE-CURRENT> (25092)
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<SHARES-REINVESTED> 4406
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<GROSS-EXPENSE> 10952
<AVERAGE-NET-ASSETS> 891210<F1>
<PER-SHARE-NAV-BEGIN> 17.76<F1>
<PER-SHARE-NII> 0.11<F1>
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<EXPENSE-RATIO> 1.02<F1>
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<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Class A Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 052
<NAME> VICTORY DIVERSIFIED STOCK FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 1036046
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<ACCUM-APPREC-OR-DEPREC> 126402
<NET-ASSETS> 984120
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<NET-INVESTMENT-INCOME> 5560
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<PER-SHARE-NAV-BEGIN> 17.62<F1>
<PER-SHARE-NII> (0.08)<F1>
<PER-SHARE-GAIN-APPREC> 3.04<F1>
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<FN>
<F1>Class B Shares
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 061
<NAME> VICTORY LIMITED TERM INCOME FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
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<NET-CHANGE-IN-ASSETS> (570)
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<GROSS-EXPENSE> 808
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 071
<NAME> VICTORY OHIO MUNICIPAL BOND FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
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<SHARES-COMMON-PRIOR> 6660
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<TABLE> <S> <C>
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<NAME> THE VICTORY PORTFOLIOS
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<F1>Class A Shares
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<TABLE> <S> <C>
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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