Rule 497(b)
Registration No. 333-68963
GRADISON GROWTH TRUST
Gradison Established Value Fund
Gradison Growth & Income Fund
Gradison Opportunity Value Fund
Gradison International Fund
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
Gradison Ohio Tax-Free Income Fund
GRADISON-McDONALD CASH RESERVES TRUST
Gradison U.S. Government Reserves
GRADISON CUSTODIAN TRUST
Gradison Government Income Fund
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
The Gradison Funds will host a Special Meeting of Shareholders on March
5, 1999, at 9:30 a.m., Eastern Time. This will be a joint meeting for the
shareholders of each of the Gradison Funds. The Special Meeting will be held at
the Gradison Funds' offices, 580 Walnut Street, Cincinnati, Ohio. At the
meeting, we will ask shareholders of each Fund to vote on:
1. A proposal to reorganize each Gradison Fund into a corresponding
fund of The Victory Portfolios.
2. A proposal to approve a new Investment Advisory Agreement between
each Gradison Fund and McDonald Investments Inc.
3. A proposal to approve a new Investment Sub-Advisory Agreement
between McDonald Investments Inc. and Blairlogie Capital
Management (Gradison International Fund only).
4. Any other business properly brought before the meeting.
By Order of the Boards of Trustees
Richard M. Wachterman, Secretary
580 Walnut Street
Cincinnati, Ohio 45202
January 28, 1999
<PAGE>
Important Information to Help You Understand the Proposals on Which You Are
Being Asked to Vote.
Please read the entire proxy statement. Below is a brief overview of
the matters to be voted upon. Your vote is important. If you have
questions regarding the proposals please call your Investment
Consultant or Gradison Mutual Funds at (513) 579-5700 in the
Cincinnati area or 800-869-5999 outside of Cincinnati. We appreciate
the confidence you have placed in the Gradison Funds and look forward
to helping you achieve your financial goals through investment in The
Victory Portfolios.
What proposals am I being asked to vote on?
You are being asked to vote on the following proposals:
1. To reorganize each Gradison Fund into a corresponding fund of The
Victory Portfolios.
2. To approve a New Investment Advisory Agreement between each
Gradison Fund and McDonald Investments Inc. (McDonald).
3. If you are a shareholder of the Gradison International Fund, you
are also being asked to vote on a proposal to approve a new
Investment Sub-Advisory Agreement between McDonald and Blairlogie
Capital Management (Blairlogie), on behalf of the International
Fund.
GRADISON FUNDS REORGANIZING INTO NEW VICTORY FUNDS
- As of Close of Business on April 1, 1999
Old Gradison Fund New Victory Fund Gradison
----------------- -------------------------
U.S. Government Reserves Gradison Government Reserves Fund
-Class G Shares
Gradison Established Value Fund Established Value Fund-Class G
Shares
GRADISON FUNDS REORGANIZING INTO NEW CLASS OF EXISTING VICTORY FUNDS
- As of Close of Business on March 26, 1999
Old Gradison Fund Victory Fund
----------------- ------------
Gradison Government Income Fund Fund for Income-Class G Shares*
Gradison Ohio Tax-Free Income Fund Ohio Municipal Bond Fund-Class G
Shares
Gradison Growth & Income Fund Diversified Stock Fund-Class G
Shares
Gradison Opportunity Value Fund Special Growth Fund-Class G
Shares**
Gradison International Fund International Growth Fund-Class G
Shares
* Effective no later than the time of the reorganization, the Victory Fund
for Income will be managed in substantially the same manner as the Gradison
Government Income Fund has been managed.
** Effective no later than the time of the reorganization, the Victory Special
Growth Fund will change its name to the Victory Small Company Opportunity
Fund and be managed in substantially the same manner as the Gradison
Opportunity Value Fund has been managed.
Has my Fund's Board of Trustees approved the Reorganization?
Yes. The Board unanimously approved the reorganization on November 6,
1998, and recommends that you vote to approve the reorganization. The
Board of The Victory Portfolios approved the reorganization on
December 11, 1998.
Why is the Reorganization being recommended?
The merger of McDonald with KeyCorp brought together two mutual fund
families, the Gradison Funds and The Victory Portfolios, under a
single management structure. The Boards of both the Gradison Funds and
The Victory Portfolios recognized that several of the Gradison and
Victory Funds have substantially similar investment objectives and
policies.
<PAGE>
The reorganization is expected to produce a number of benefits for
some or all of the Funds, including:
o Reducing investor confusion and eliminating duplicate operational
and administrative costs associated with operating and
maintaining two separate mutual fund families
o Enabling you to exchange your Victory Fund shares for shares of
any other Victory Fund without the payment of a sales charge.
o Facilitating administrative, portfolio management, distribution,
shareholder service and other operating efficiencies.
Will the portfolio manager of my Fund change as a result of the reorganization?
The current portfolio managers of certain Gradison Funds will continue
to manage or co-manage those Funds after the reorganization, as noted
below. The current portfolio managers of Key Asset Management Inc. (or
its sub-adviser) will advise the Victory Ohio Municipal Bond Fund,
Victory Diversified Stock Fund and Victory International Growth Fund
with which Gradison Ohio Tax-Free Income Fund, Gradison Growth &
Income Fund and Gradison International Fund, respectively, will be
reorganized.
GRADISON FUNDS REORGANIZING INTO NEW VICTORY FUNDS
<TABLE>
<CAPTION>
Gradison Fund New Victory Fund Portfolio Manager
- ------------- ---------------- -----------------
<S> <C> <C>
U.S. Government Reserves Gradison Government Reserves Steven Wesselkamper**
Fund
Established Value Fund Established Value Fund* William Leugers**, Daniel Shick**
GRADISON FUNDS MERGING INTO NEW CLASS OF EXISTING VICTORY FUNDS
Gradison Fund Victory Fund Portfolio Manager
- ------------- ------------ -----------------
Government Income Fund Fund for Income Thomas Seay**
Opportunity Value Fund Special Growth Fund* William Leugers,** Daniel Shick**
Ohio Tax-Free Income Fund Ohio Municipal Bond Fund Stephen Dilbone,** Paul Toft***
Growth & Income Fund Diversified Stock Fund Lawrence Babin,*** Conrad Metz,***
International Fund International Growth Fund Leslie Globits***
</TABLE>
* Gary Miller, a Portfolio Manager with McDonald, will become a Co-Portfolio
Manager of the Victory Established Value Fund and the Victory Special
Growth Fund.
** Currently a Gradison portfolio manager.
*** Currently a Victory portfolio manager.
Will the fees and expenses of my Fund increase?
Gradison Fund shareholders will exchange their shares for the Class G
Shares of a similar Victory Fund with expenses (after fee waivers and
permitted reimbursements) that are no higher than your current
Gradison Fund expenses. These expenses will be maintained at a rate no
higher than the expense ratios of the Gradison Funds as of December
31, 1998, for a period of at least two years after the reorganization.
Will I or my Fund have to pay federal income taxes as a result of the
reorganization?
No. Neither you nor the Victory or Gradison Funds will have any
federal income tax liability solely as a result of the reorganization.
Your current cost basis will remain the same.
<PAGE>
Will any sales load, sales commission or other fee be imposed on my shares in
connection with the reorganization?
No.
What happens if the reorganization is approved and I do not wish to participate
in the reorganization?
If you do not wish to participate in the reorganization, you must
redeem your shares of the Gradison Funds before the reorganization
date, as shown below. Please note that redeeming your shares may
result in you incurring a tax liability.
GRADISON FUND REDEEM BY:
Gradison U.S. Government Reserves Before 12:00 p.m., April 1, 1999
Gradison Established Value Fund Before 4:00 p.m., April 1, 1999
Gradison Government Income Fund Before 4:00 p.m., March 26, 1999
Gradison Ohio Tax-Free Income Fund Before 4:00 p.m., March 26, 1999
Gradison Growth & Income Fund Before 4:00 p.m., March 26, 1999
Gradison Opportunity Value Fund Before 4:00 p.m., March 26, 1999
Gradison International Fund Before 4:00 p.m., March 26, 1999
When will the Shareholder Meeting be held?
A Shareholder Meeting will be held on March 5, 1999.
Why am I being asked to approve a new Investment Advisory Agreement with
McDonald Investments Inc.?
You are being asked to approve a new Investment Advisory Agreement
because the merger of McDonald's corporate parent with KeyCorp caused
the agreement to terminate. The Board of Trustees of your Fund has
acted to permit the agreement to continue, but your approval of the
Investment Advisory Agreement with McDonald Investments, Inc. is
necessary to permit McDonald to continue to act as investment adviser
until the time of the reorganization. Your approval also permits
McDonald to act in that capacity in the event that the reorganization
is not approved. Your approval of the Investment Advisory Agreement
also is necessary in order to allow McDonald to receive McDonald
Investment advisory fees for the period since the merger of McDonald's
corporate parent with KeyCorp.
Why am I, as a shareholder of Gradison International Fund, being asked to
approve a new Investment Sub-Advisory Agreement for the International Fund with
Blairlogie Capital Management?
You are being asked to approve this agreement because the merger of
McDonald's corporate parent with KeyCorp caused it to terminate. In
addition, Blairlogie has announced that it will be acquired, which
also would cause the Investment Sub-Advisory Agreement to terminate.
The Board of Trustees of your Fund has acted to permit the agreement
to continue, but your approval of the Investment Sub-Advisory
Agreement with Blairlogie is necessary to permit Blairlogie to
continue to act as investment sub-adviser until the time of the
reorganization. Your approval also permits Blairlogie to act in that
capacity in the event that the reorganization is not approved. Your
approval of the Investment Sub-Advisory Agreement also is necessary in
order to allow McDonald to pay Blairlogie investment sub-advisory fees
for the period since the merger of McDonald's corporate parent with
KeyCorp.
I have received other proxies from Gradison. Is this a duplicate? Do I have to
vote again?
This is NOT a duplicate proxy. You must vote separately for each
account you have with the Gradison Funds.
<PAGE>
How do I vote my shares?
You can vote your shares by completing and signing the enclosed proxy
card(s), and mailing them in the enclosed postage paid envelope. You
may also vote your shares by phone at 800-786-8764 or by fax at
800-733-1885. Internet voting is available at www.proxyvote.com. If
you need assistance, or have any questions regarding the proposal or
how to vote your shares, please call your Investment Consultant or
Gradison Mutual Funds at (513) 579-5700 in the Cincinnati area or
(800)-869-5999 outside of Cincinnati.
<PAGE>
YOUR VOTE IS IMPORTANT!
YOU CAN VOTE EASILY AND QUICKLY BY MAIL, BY PHONE (Toll-Free), OR BY
THE INTERNET. JUST FOLLOW THE SIMPLE INSTRUCTIONS THAT APPEAR
ON YOUR ENCLOSED PROXY CARD.
GRADISON GROWTH TRUST
Gradison Established Value Fund
Gradison Growth & Income Fund
Gradison Opportunity Value Fund
Gradison International Fund
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
Gradison Ohio Tax-Free Income Fund
GRADISON-McDONALD CASH RESERVES TRUST
Gradison U.S. Government Reserves
GRADISON CUSTODIAN TRUST
Gradison Government Income Fund
SPECIAL MEETING OF SHAREHOLDERS
MARCH 5, 1999
THE VICTORY PORTFOLIOS
3435 Stelzer Road
Columbus, Ohio 43219
COMBINED PROXY STATEMENT AND PROSPECTUS
Dated January 28, 199
INTRODUCTION
------------
This Combined Proxy Statement and Prospectus is being provided for a
special meeting of shareholders of the Gradison Funds to be held on March 5,
1999. For each proposal, shareholders of each Gradison Fund will vote
separately. We've divided the Combined Proxy Statement and Prospectus into seven
parts:
Part 1 -- An Overview
Part 2 -- Your Fund's Proposals
Part 3 -- More on Proxy Voting and Shareholder Meetings
Part 4 -- Fund Information
Part 5 -- Prospectus for
Victory Fund for Income - Class G Shares
Victory Ohio Municipal Bond Fund - Class G Shares
Victory Diversified Stock Fund - Class G Shares
Victory Small Company Opportunity Fund - Class G Shares
Victory International Growth Fund - Class G Shares
Part 6 -- Forms of Agreement and Plan of Reorganization and Termination
Part 7 -- Financial Information about The Victory Portfolios
<PAGE>
Please read the entire proxy statement before voting. If you have any
questions, please call us at (513) 579-5700 in the Cincinnati area or
1-800-869-5999.
This Combined Proxy Statement and Prospectus was first mailed to
shareholders the week of January 31, 1999.
This Combined Proxy Statement and Prospectus contains information
about The Victory Portfolios that you should know. Please
keep it for future reference. A Statement of Additional Information
dated January 25, 1999 is incorporated by reference.
Neither the Securities and Exchange Commission (the SEC) nor any
state securities commission has approved or disapproved
these securities, or determined that this Combined Proxy Statement
and Prospectus is truthful or complete. Anyone who tells you otherwise
is committing a crime.
o Shares of the Victory Funds are not insured by the FDIC.
o Shares of the Victory Funds are not deposits of or guaranteed
by KeyBank or any of its affiliates, or any other bank.
o You can lose money by investing in the Victory Funds, because
they are subject to investment risks.
The Gradison Funds and The Victory Portfolios are both required by
federal law to file reports, proxy statements and other information with the
SEC. The SEC maintains a Web site that contains information about the Gradison
Funds and The Victory Portfolios. Any such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's New
York Regional Office, Seven World Trade Center, New York, NY 10048 and Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies
of such materials can be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Part 1 - An Overview ......................................................................................... 1
Part 2 - Your Fund's Proposals ............................................................................... 1
Proposal 1 - To Approve the Reorganization of each Gradison Fund .................................... 1
Introduction ................................................................................... 1
How the Reorganization Works 1
How the Fees of the Gradison Funds Compare to the Fees of The
Victory Portfolios ......................................................................... 3
Information about each Reorganization .......................................................... 7
Why We Want to Reorganize the Gradison Funds ................................................... 8
Considerations by the Boards of Trustees ....................................................... 9
How the Gradison Funds Compare to The Victory Portfolios ....................................... 10
Comparison of Investment Objectives ........................................................ 10
Comparison of Investment Policies and Strategies ........................................... 11
Comparison of Principal Investment Risks ................................................... 18
Comparison of Potential Risks and Rewards .................................................. 21
Comparison of Operations ................................................................... 25
Investment Advisory Agreements ......................................................... 25
Distribution and Service Plans ......................................................... 26
Administrator and Distributor .......................................................... 27
Sub-Administrator ...................................................................... 28
Dividends and Other Distributions ...................................................... 28
Purchase Procedures .................................................................... 29
Exchange Rights ........................................................................ 30
Redemption Procedures .................................................................. 31
Trustees ............................................................................... 31
Comparison of Shareholder Rights ........................................................... 31
Capitalization of the Funds ............................................................... 35
Required Vote ...................................................................................... 35
Board Recommendation ............................................................................... 36
Proposal 2 - To Approve A New Investment Advisory Agreement for each
Gradison Fund ...................................................................................... 36
Introduction .................................................................................. 36
Why We are Asking Shareholders to Approve New Investment
Advisory Agreements ....................................................................... 36
Considerations by the Boards of Trustees ...................................................... 37
Terms of the Investment Advisory Agreements ................................................... 37
Required Vote ................................................................................. 38
Board Recommendation .......................................................................... 38
i
<PAGE>
Proposal 3 - To Approve a New Investment Sub-Advisory Agreement for the
Gradison International Fund ......................................................................... 38
Introduction ................................................................................... 38
Why We Are Asking International Fund Shareholders to Approve the
Investment Sub-Advisory Agreement .......................................................... 39
Considerations by the Board of Trustees ........................................................ 39
Terms of the Investment Sub-Advisory Agreement ................................................. 40
Required Vote .................................................................................. 40
Board Recommendation ........................................................................... 40
Other Information ................................................................................... 41
Principal Executive Officer and Directors of McDonald ........................................ 41
Principal Executive Officer and Directors of Blairlogie ................................... 41
Officers and Trustees of the Gradison Funds ................................................... 42
Old Investment Advisory Agreements ............................................................ 43
Other Fees Paid to McDonald or its Affiliates ................................................. 44
Other Fees Paid to Blairlogie or its Affiliates ............................................. 45
Affiliated Brokerage Commissions ............................................................. 45
Distribution Plan and Investment Advisory Agreement
for the Gradison Ohio Tax-Free Income Fund ................................................... 45
Part 3 - More on Proxy Voting and Shareholder Meetings ....................................................... 45
Part 4 - Fund Information .................................................................................... 48
Part 5 - Prospectus for Class G Shares of Five Existing Victory Funds......................................... 48
</TABLE>
Part 6 - Forms of Agreement and Plan of Reorganization and Termination
Part 7 - Financial Information about The Victory Portfolios
Victory Ohio Municipal Bond Fund
Victory Diversified Stock Fund
Victory International Growth Fund
ii
<PAGE>
PART 1 - AN OVERVIEW
The Board of Trustees of each Gradison Trust has sent you this Combined
Proxy Statement and Prospectus to ask for your vote on proposals affecting your
Fund. This table summarizes the proposals and how they apply to the Gradison
Funds, which have scheduled a shareholder meeting for March 5, 1999.
<TABLE>
<CAPTION>
Proposal Funds Affected
- ----------------------------------------------------------------------------- -------------------------------
<S> <C>
1. Agreement and Plan of Reorganization and Termination All Funds
- ----------------------------------------------------------------------------- -------------------------------
2. Investment Advisory Agreements All Funds
- ----------------------------------------------------------------------------- -------------------------------
3. Investment Sub-Advisory Agreement International Fund
- ----------------------------------------------------------------------------- -------------------------------
</TABLE>
PART 2 - YOUR FUND'S PROPOSALS
PROPOSAL 1.
TO APPROVE THE REORGANIZATION OF EACH GRADISON FUND
Introduction
The Board of Trustees of each Gradison Trust has approved a proposal to
reorganize each Gradison Fund into a corresponding fund of The Victory
Portfolios.
>> The primary purpose of this proposal is to improve operating
efficiencies. In addition, this will allow you to exchange
your shares with any of the funds in The Victory Portfolios,
without paying a sales charge.
Neither you nor your Fund will have any federal income tax liability
solely as a result of the reorganization.
To adopt the Agreement and Plan of Reorganization that applies to your
Fund, we need shareholder approval.
The next few pages of this Combined Proxy Statement and Prospectus
discuss some of the details of each proposed reorganization and how it will
affect your Fund.
How the Reorganization Works
Each Gradison Fund has entered into an "Agreement and Plan of
Reorganization." If shareholders approve this proposal, each Fund would
reorganize into a corresponding Victory Fund of The Victory Portfolios. Key
Asset Management Inc. (KAM) is the investment adviser of each Victory Fund. The
reorganization would work as follows:
-> Each Gradison Fund would transfer all its assets and
liabilities to a corresponding Victory Fund, in exchange for
shares of the Victory Fund.
<PAGE>
-> Each Gradison Fund would distribute the Victory Fund shares it
receives to you. You would receive the same dollar value of
Victory Fund shares as you owned of Gradison Fund shares.
-> You will not have to pay any Federal income tax solely as a
result of the reorganization.
-> You would become a shareholder of Class G shares of the
corresponding Victory Fund. Each Gradison Fund would then
cease operations.
Here is how the reorganization would apply to your Gradison Fund:
New Victory Funds: The Victory Funds described below were established
to continue the operations of the corresponding Gradison Funds and will begin
doing business at the time the reorganization occurs. Each New Victory Fund has
an investment objective identical to that of the corresponding Gradison Fund and
investment policies that are substantially identical to those of the
corresponding Gradison Fund. After the reorganization, we anticipate that each
New Victory Fund will be managed by the same portfolio manager who now manages
your Gradison Fund.
would reorganize into
<TABLE>
<CAPTION>
<S> <C> <C>
Your Gradison Fund Your Victory Fund (Class G)
U.S. Government Reserves -> Gradison Government Reserves Fund
Established Value Fund -> Established Value Fund
</TABLE>
Currently Operating Victory Funds: The Victory Funds described below
are currently operating and have established Class G shares as a new class of
shares that you will receive in the reorganization. Each Victory Fund has an
investment objective and investment policies that are substantially similar to
those of the corresponding Gradison Fund.
would reorganize into
<TABLE>
<CAPTION>
<S> <C> <C>
Your Gradison Fund Your Victory Fund (Class G)
Government Income Fund -> Fund for Income
Ohio Tax-Free Income Fund -> Ohio Municipal Bond Fund
Growth & Income Fund -> Diversified Stock Fund
Opportunity Value Fund -> Small Company Opportunity Fund*
International Fund -> International Growth Fund
*Formerly the Victory Special Growth Fund
</TABLE>
A few words about this Combined Proxy Statement and Prospectus
New Victory Funds: This Combined Proxy Statement and Prospectus is a
proxy statement for a special meeting of shareholders of your Gradison Fund. It
is not a prospectus for
<PAGE>
shares of the Victory Gradison Government Reserves Fund or the Victory
Established Value Fund. You will receive a prospectus for those shares at a
later time.
Currently Operating Victory Funds: This Combined Proxy Statement and
Prospectus is a proxy statement for the special meeting of shareholders for your
Gradison Fund, and a prospectus relating to the Class G shares of the currently
operating Victory Fund that you will receive in the reorganization (the Victory
Fund for Income, the Victory Ohio Municipal Bond Fund, the Victory Diversified
Stock Fund, the Victory Small Company Opportunity Fund and the Victory
International Growth Fund).
How the Fees of the Gradison Funds Compare to the Fees of The Victory Portfolios
Neither the Gradison Funds nor Class G shares of the corresponding
Victory Funds impose any shareholder transaction expenses, as shown below:
<TABLE>
<CAPTION>
<S> <C> <C>
Shareholder Transaction Expenses Gradison Funds Victory Funds, Class G
-------------- ----------------------
Maximum Sales Charge Imposed on Purchases None None
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge None None
Redemption Fees None None
Exchange Fees None None
</TABLE>
The Gradison Funds, like all mutual funds, incur certain expenses in
their operations. The Funds pay these expenses from their assets and as a
shareholder of the Gradison Funds, you pay these expenses indirectly. The
Victory Funds also incur expenses in their operations. The expenses include
management fees, as well as the costs of maintaining accounts, administration,
providing shareholder liaison services and distribution services, and other
activities. The following table compares the expenses paid by the Gradison
Funds, as a percentage of average daily net assets, with the expenses that you
will incur indirectly as a shareholder of Class G shares of the Victory Funds,
after the reorganization. KAM has agreed to waive its management fee, or to
reimburse expenses as allowed by law, until April 1, 2001 to the extent
necessary to maintain the total net operating expenses of each Victory Fund so
that they do not exceed the level for the year ended December 31, 1998 of its
comparable Gradison Fund. The net expenses of the Victory Funds are equal to the
net expenses of the corresponding Gradison Fund for the year ended December 31,
1998. Over time, a Fund's annual expenses may be more or less than the amounts
shown below.
<PAGE>
<TABLE>
<CAPTION>
Gradison U.S. Victory Gradison Government
Annual Fund Operating Expenses Government Reserves Reserves, Class G (New Fund)
------------------- ----------------------------
<S> <C> <C>
Management Fees(1) 0.44% 0.44%
Distribution (Rule 12b-1) Fees 0.10% 0.10%
Other Expenses 0.19% 0.34%
----- -----
Total Fund Operating Expenses 0.73% 0.88%
----- -----
Fee Waiver (0.00)% (0.16)%
------- -------
Net Expenses 0.73% 0.72%(2)
===== ======
<PAGE>
1 The management fees are based upon the average daily net assets of the Fund
at an annual rate of 0.50% on the first $400 million, 0.45% on the next
$600 million, 0.40% on the next $1 billion, and 0.35% in excess of $2
billion.
2 The expenses shown are estimated based on historical expenses of Gradison
U.S. Government Reserves adjusted to reflect anticipated expenses. KAM has
agreed to waive its management fee, or to reimburse expenses as allowed by
law, to the extent necessary to maintain the total net operating expenses
at a maximum of 0.72% until April 1, 2001.
</TABLE>
<TABLE>
<CAPTION>
Gradison Victory Established Value Fund,
Annual Fund Operating Expenses Established Value Fund Class G (New Fund)
---------------------- ------------------
<S> <C> <C>
Management Fees(1) 0.51% 0.51%
Distribution (Rule 12b-1) Fees 0.48% 0.50%
Other Expenses 0.11% 0.25%
----- -----
Total Fund Operating Expenses 1.10% 1.26%
----- -----
Fee Waiver (0.00)% (0.16)%
------- -------
Net Expenses 1.10% 1.10%(2)
===== =====
</TABLE>
1 The management fees are based upon the average daily net assets of the Fund
at an annual rate of 0.65% on the first $100 million, 0.55% on the next
$100 million and 0.45% in excess of $200 million.
2 The expenses shown are estimated based on historical expenses of the
Gradison Established Value Fund adjusted to reflect anticipated expenses.
KAM has agreed to waive its management fee, or to reimburse expenses as
allowed by law, to the extent necessary to maintain the total net operating
expenses at a maximum of 1.10% until April 1, 2001.
<TABLE>
<CAPTION>
Gradison
Annual Fund Operating Expenses Government Income Fund Victory Fund for Income, Class G
---------------------- --------------------------------
<S> <C> <C>
Management Fees 0.50% 0.50%
Distribution (Rule 12b-1) Fees 0.25% 0.25%
Other Expenses 0.15% 0.30%
----- -----
Total Fund Operating Expenses 0.90% 1.05%
----- -----
Fee Waiver (0.00)% (0.16)%
------- -------
Net Expenses 0.90% 0.89%(1)
===== =====
1 The expenses shown are estimated based on historical expenses of the
Gradison Government Income Fund adjusted to reflect anticipated expenses.
KAM has agreed to waive its management fee, or to reimburse expenses as
allowed by law, to the extent necessary to maintain the total net operating
expenses at a maximum of 0.89% until April 1, 2001.
Gradison Ohio Victory Ohio
Annual Fund Operating Expenses Tax-Free Income Fund Municipal Bond Fund, Class G
-------------------- ----------------------------
Management Fees 0.50% 0.60%
Distribution (Rule 12b-1) Fees 0.25% 0.25%
Other Expenses 0.20% 0.27%
---- ----
Total Fund Operating Expenses 0.95% 1.12%
---- ----
Fee Waiver (0.00)% (0.21)%
----- -----
Net Expenses 0.95% 0.91%(1)
==== =======
1 The expenses shown are estimated based on historical expenses of the
Victory Ohio Municipal Bond Fund adjusted to reflect anticipated expenses.
KAM has agreed to waive its management fees, or to reimburse expenses as
allowed by law, to the extent necessary to maintain the total net operating
expenses at a maximum of 0.91% until April 1, 2001.
4
<PAGE>
Victory Diversified
Annual Fund Operating Expenses Gradison Growth & Income Fund Stock Fund, Class G
----------------------------- -------------------
Management Fees 0.65% 0.65%
Distribution (Rule 12b-1) Fees 0.50% 0.50%
Other Expenses 0.29% 0.37%
---- ----
Total Fund Operating Expenses 1.44% 1.52%
---- ----
Fee Waiver (0.00)% (0.08)%
----- -----
Net Expenses 1.44% 1.44%(1)
==== =======
1 The expenses shown are estimated based on historical expenses of the
Victory Diversified Stock Fund adjusted to reflect anticipated expenses.
KAM has agreed to waive its management fees, or to reimburse expenses as
allowed by law, to the extent necessary to maintain the total net operating
expenses at a maximum of 1.44% until April 1, 2001.
Gradison Victory Small Company
Annual Fund Operating Expenses Opportunity Value Fund Opportunity Fund, Class G
---------------------- -------------------------
Management Fees 0.62% 0.62%
Distribution (Rule 12b-1) Fees 0.50% 0.50%
Other Expenses 0.19% 0.31%
---- ----
Total Fund Operating Expenses 1.31% 1.43%
---- ----
Fee Waiver (0.00)% (0.13)%
----- -----
Net Expenses 1.31% 1.30%(1)
==== =======
1 The expenses shown are estimated based on historical expenses of the
Gradison Opportunity Value Fund adjusted to reflect anticipated expenses.
KAM has agreed to waive its management fees, or to reimburse expenses as
allowed by law, to the extent necessary to maintain the total net operating
expenses at a maximum of 1.30% until April 1, 2001.
Victory International
Annual Fund Operating Expenses Gradison International Fund Growth Fund, Class G
--------------------------- --------------------
Management Fees 1.00% 1.10%
Distribution (Rule 12b-1) Fees 0.50% 0.50%
Other Expenses 0.90% 0.47%
----- -----
Total Fund Operating Expenses 2.40% 2.07%
----- -----
Fee Waiver (0.40)% (0.07)%
------- -------
Net Expenses 2.00%(1) 2.00%(2)
===== =======
</TABLE>
1 Gradison waives fees so that total expenses do not exceed 2.00%.
2 The expenses shown are estimated based on historical expenses of the
Victory International Growth Fund adjusted to reflect anticipated expenses.
KAM has agreed to waive its management fees, or to reimburse expenses as
required by law, to the extent necessary to maintain the total net
operating expenses at a maximum of 2.00% until April 1, 2001.
Example
This Example is intended to help you compare the cost of investing in
the Victory Funds with the cost of investing in the Gradison Funds and other
mutual funds.
The Example assumes that you invest $10,000 in each Gradison and
Victory Fund for the time periods indicated 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
5
<PAGE>
operating expenses remain the same.* Although your actual costs or returns 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>
Gradison U.S. Government Reserves $75 $233 $406 $906
Victory Gradison Government Reserves Fund - Class G $74 $248 $455 $1,054
- ------------------------------------------------------------------------------------------------------------------
Gradison Established Value Fund $112 $350 $606 $1,340
Victory Established Value Fund - Class G $112 $367 $660 $1,494
- ------------------------------------------------------------------------------------------------------------------
Gradison Government Income Fund $92 $287 $498 $1,108
Victory Fund for Income - Class G $91 $301 $547 $1,253
- ------------------------------------------------------------------------------------------------------------------
Gradison Ohio Tax-Free Income Fund $97 $303 $525 $1,166
Victory Ohio Municipal Bond Fund - Class G $93 $313 $575 $1,324
- ------------------------------------------------------------------------------------------------------------------
Gradison Growth & Income Fund $147 $456 $787 $1,724
Victory Diversified Stock Fund - Class G $147 $464 $813 $1,799
- ------------------------------------------------------------------------------------------------------------------
Gradison Opportunity Value Fund $133 $415 $718 $1,579
Victory Small Company Opportunity Fund - Class G $132 $426 $756 $1,690
- ------------------------------------------------------------------------------------------------------------------
Gradison International Fund $203 $627 $1,078 $2,327
Victory International Growth Fund - Class G $203 $635 $1,100 $2,389
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* This Example assumes that Total Annual Fund Operating Expenses for each
Victory Fund's Class G shares will not exceed the Net Expense amount
indicated in the Annual Fund Operating Expense tables shown above until
April 1, 2001, and thereafter will equal the amount indicated as the Fund's
Total Fund Operating Expenses, before fee waiver.
Information About Each Reorganization
This section describes some information you should know about the
reorganization of your Fund.
The Agreement and Plan of Reorganization and Termination.
Each Gradison Trust, on behalf of each of the Gradison Funds, has
entered into an Agreement and Plan of Reorganization and Termination with The
Victory Portfolios, on behalf of the Victory Funds that are described above. In
this Combined Proxy Statement and Prospectus, we refer to the Agreement and Plan
of Reorganization and Termination as the "Plan of Reorganization" and, to the
transactions described in the Plan of Reorganization, as the "reorganization."
Description of Transaction. The Plan of Reorganization provides that
your Gradison Fund will transfer its assets to a corresponding Victory Fund, as
described in the chart above, in exchange for Class G shares of the Victory
Fund. The Victory Fund also will assume all of your Gradison Fund's liabilities.
After this transaction, your Gradison Fund will give you Class G shares of the
corresponding Victory Fund. The total value of the shares you receive will be
equal to the net asset value of the Gradison Fund shares you owned at the end of
business on the day the transaction occurs. You will not pay a sales charge or
any other fee as part of this transaction, although in some cases, the ongoing
fees and expenses paid by the Victory Funds differ from the fees you pay as a
Gradison Fund shareholder. For at least two years, however, the total annual
operating expenses of each Victory Fund (after fee waiver) will not exceed the
6
<PAGE>
current level of operating expenses of the corresponding Gradison Fund for the
year ended December 31, 1998. We described these fees and expenses above.
Please see a copy of the Plan of Reorganization for a more detailed
description of the reorganization. You can find a copy of the Plan of
Reorganization in Part 6 of this Combined Proxy Statement and Prospectus.
The reorganization will be "tax-free." We expect each reorganization to
be "tax-free." That is, each Gradison Fund will obtain an opinion of counsel
saying, in effect, that neither you nor the Fund will have to pay any federal
income taxes solely as a result of the reorganization. Some Gradison Funds,
however, may pay a dividend or distribute a taxable gain prior to the
reorganization. You may be liable for taxes on those distributions.
The Gradison Government Income Fund had a tax loss carryforward for
federal income tax purposes as of December 31, 1997, of approximately
$5,948,000. The Gradison International Fund had a tax loss carryforward for
federal income tax purposes as of March 31, 1998 of approximately $360,000.
Federal tax law may limit the use of these tax loss carryforwards as a result of
the reorganization.
Certain corporate actions. At the time of the reorganization, Gradison
U.S. Government Reserves and the Gradison Established Value Fund will take
certain corporate actions that will enable the corresponding Victory Funds to
operate. For example, they must approve the new investment advisory agreement
between KAM and The Victory Portfolios on behalf of the new Victory Funds. This
action is necessary because the new Victory Funds were formed in order to
continue the operations of Gradison U.S. Government Reserves and Gradison
Established Value Fund.
Conditions of the reorganization. Before the reorganization can occur,
the Gradison Funds and The Victory Portfolios must satisfy certain conditions.
For example:
> The Gradison Funds must receive an opinion of counsel stating,
in effect, that neither you nor the Fund will pay any federal
income taxes solely as a result of the reorganization
> The Gradison Funds and The Victory Portfolios must receive an
opinion of counsel certifying to certain matters concerning
the legal existence of each Fund
> Shareholders of the Gradison Funds must approve each
reorganization
> The Victory Portfolios must receive an exemptive order from
the SEC, if required
Exemptive order. As of December 31, 1998, affiliates of KAM held shares
of Victory Special Growth Fund as record holders for the benefit of their
customers, including employees of KeyCorp and its affiliates. To the extent that
KAM's affiliates owned more than 5% of the "outstanding voting securities" of
any one of the Victory Funds, KAM may be deemed to be an "affiliated person" of
that Victory Fund. This affiliation requires the SEC to issue an exemptive order
that would permit The Victory Portfolios to carry out the reorganization with
respect to Victory Special Growth Fund. The Victory Portfolios has applied for
an exemptive order for the Victory Special Growth Fund that would allow the
reorganization involving that Fund to occur.
7
<PAGE>
Why We Want to Reorganize the Gradison Funds
KAM is the investment adviser of The Victory Portfolios. McDonald
Investments Inc. (McDonald) is the investment adviser of the Gradison Funds. On
October 23, 1998, McDonald's corporate parent merged with KeyCorp, the parent of
KAM. McDonald plans to combine its investment advisory operations with those of
KAM. Thus, the merger brought two mutual fund families -- the Gradison Funds and
The Victory Portfolios -- under a single management structure.
KAM and McDonald believe that the reorganization will benefit the
shareholders of both the Gradison Funds and The Victory Portfolios. Among other
things, KAM and McDonald believe the reorganization will:
o Eliminate duplicate operational and administrative costs associated
with operating and maintaining two separate mutual fund families.
After the reorganization, all of the Funds will have the same
investment adviser, administrator, custodian, transfer agent,
accountants, counsel and Board of Trustees.
o Result in economies of scale by spreading fixed costs over a larger
asset base.
o Improve marketing through The Victory Portfolios' wider distribution
network.
o Offer greater investment opportunities by enabling shareholders to
exchange shares for shares of other Victory Funds without paying a
sales load.
o Eliminate shareholder and investor confusion that can arise out of
having two funds in the same complex with similar (and in some cases,
identical) investment objectives and strategies.
Considerations by the Boards of Trustees
The Board of Trustees of each Gradison Trust unanimously approved the
proposed Plan of Reorganization on November 6, 1998. The Gradison Trustees
concluded that the reorganization of each Gradison Fund
o was in the best interests of the Gradison Funds shareholders, and
o would not result in any dilution of the value of your investment.
In approving the Plan of Reorganization, the Gradison Trustees
(including a majority of the Trustees who are not "interested persons")
considered that, among other things:
o The investment objectives and policies of the Victory Funds are similar
to those of the Gradison Funds.
o KAM and McDonald are combining to manage the Victory Funds after the
reorganization.
o You will not pay a sales charge to become a shareholder of the Victory
Funds.
o For at least two years after the reorganization, KAM will waive its
management fee, or reimburse expenses as allowed by law, to maintain
the total operating expenses of the Victory Funds at a rate no higher
than the total operating expenses of the corresponding Gradison Funds
for the year ended December 31, 1998.
8
<PAGE>
o Current Gradison Fund shareholders will be able to exchange their Class
G shares for shares of other Victory Funds (including Victory Funds
that do not offer Class G shares) without paying any sales charge.
o KeyCorp, combined with McDonald, can enhance the portfolio management
capability available to the Funds.
o The Victory Funds have a wider distribution network, which may help the
Funds increase their assets.
o The Victory Funds have a larger asset base, which may result in
economies of scale, and offer improved services to shareholders.
o Shareholders will not have to pay any federal income tax solely as a
result of the reorganization.
o The relative performance of the Victory Funds and The Gradison Funds.
Similarly, the Board of Trustees of The Victory Portfolios unanimously
approved the Plan of Reorganization on December 11, 1998. The Victory
Portfolios' Trustees concluded that the reorganization of each Victory Fund
o was in the best interests of the Victory Funds' shareholders; and
o would not dilute the value of their investments.
How the Gradison Funds Compare to The Victory Portfolios
For complete information about each of the Gradison Funds, please refer
to your Gradison Fund prospectus. You also can call us at (513) 579-5700 from
Cincinnati or 1-800-869-5999 for a free copy of your Gradison Fund's prospectus.
The information contained in your Fund's prospectus is incorporated by reference
into this Combined Proxy Statement and Prospectus.
For complete information about the Victory Funds (other than Victory
Gradison Government Reserves Fund and Victory Established Value Fund), please
refer to the prospectus included with this Combined Proxy Statement and
Prospectus.
Comparison of Investment Objectives.
The following tables compare the investment objectives of the Gradison
Funds and their corresponding Victory Funds.
9
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------- ---------------------------------------------------
Gradison U.S. Government Reserves Gradison Government Reserves Fund
- --------------------------------------------------------- ---------------------------------------------------
<S> <C>
To maximize current income to the extent consistent Same
with preservation of capital and the maintenance of
liquidity
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Established Value Fund Victory Established Value Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide long-term capital growth by investing Same
primarily in common stocks
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Government Income Fund Victory Fund for Income
- --------------------------------------------------------- ---------------------------------------------------
To provide high current income through investment in Seeks to provide a high
U.S. Government obligations and obligations of agencies level of current income consistent with
and instrumentalities of the U.S. Government preservation of shareholders' capital
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Ohio Tax-Free Income Fund Victory Ohio Municipal Bond Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide as high a level of after-tax current income Seeks to provide a high level of current interest
as is consistent with preservation of capital through income which is exempt from both federal income
investment primarily in obligations the interest of tax and Ohio personal income tax
which is exempt from Federal income tax and from
Ohio state personal income tax
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Growth & Income Fund Victory Diversified Stock Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide long-term growth of capital, current Seeks to provide growth of capital
income, long-term and growth of income consistent with
reasonable investment risk
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Opportunity Value Fund Victory Small Company Opportunity Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide long-term capital growth by investing Seeks to provide capital appreciation
primarily in common stocks
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison International Fund Victory International Growth Fund
- --------------------------------------------------------- ---------------------------------------------------
To provide growth of capital Seeks to provide capital growth consistent with
reasonable investment risk
- --------------------------------------------------------- ---------------------------------------------------
Comparison of Investment Policies and Strategies.
The following tables compare the principal investment policies and
strategies of the Gradison Funds and their corresponding Victory Funds.
10
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison U.S. Government Reserves Gradison Government Reserves Fund
- --------------------------------------------------------- ---------------------------------------------------
Substantially the same. The Gradison Government Reserves Fund pursues its
investment objective by investing only in
securities issued by the U.S. Government and its
agencies and instrumentalities. The Fund plans,
as much as possible, to invest in securities
whose interest payments are exempt from state and
local taxes.
The Fund currently invests only in obligations
issued by the Federal Home Loan Banks, the Federal
Farm Credit Bank System and the Student Loan
Marketing Association.
Important Characteristics of the Fund:
Quality: The Fund invests only in U.S.
Government securities. The Board of Trustees has
established policies to ensure that the Fund
invests in high quality, liquid instruments.
Maturity: The Fund has a weighted average
maturity of 90 days or less. Individual
investments may be purchased with
remaining maturities ranging from one day
to 397 days. Variable and floating rate
instruments are considered to be
within this maturity range, despite having
nominal remaining maturities greater
than 397 days, because of their reset or
floating rate features.
- --------------------------------------------------------- ---------------------------------------------------
11
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Established Value Fund Victory Established Value Fund
- --------------------------------------------------------- ---------------------------------------------------
Substantially the same. The Established Value Fund pursues its investment
objective by investing primarily in equity
securities of companies with market
capitalization of $1 billion or more. The
companies are usually selected from those in the
Standard & Poor's Composite Stock Price Index
(S&P 500).
In making investment decisions, KAM looks
for companies whose values are less than
what KAM believes are the true values. KAM
may consider a company's earnings,
price-to-earnings ratios, price-to-book
ratios, return on equity, and other
factors. KAM uses a computer model to
select securities that appear favorably
priced.
Under normal market conditions, the Fund:
o Will invest at least 80% of its total
assets in equity securities of companies with
market capitalization of $1 billion or more.
These equity investments include:
o Common stock
o Convertible preferred stock
o Debt convertible or exchangeable into
equity securities
o Securities convertible into common stock
o May invest up to 20% of its total assets
in:
o Short-term U.S. Government obligations
o Repurchase agreements
o Other money market obligations
- --------------------------------------------------------- ---------------------------------------------------
12
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Government Income Fund Victory Fund for Income
- --------------------------------------------------------- ---------------------------------------------------
The Gradison Government Income Fund invests primarily The Fund for Income invests primarily in
in securities issued by the U.S. Government and its securities issued by the U.S. Government and its
agencies and instrumentalities. The Gradison agencies and instrumentalities.
Government Income currently invests only in securities The Fund for Income Fund currently invests only in
that securities that are guaranteed by the full faith the U.S. Government and repurchase agreements
and are guaranteed by the full faith and credit of collateralized by such securities.
credit of the U.S. Government and repurchase
agreements collateralized by such securities.
Under normal market conditions, the Gradison Under normal market conditions, the Fund
Government Income Fund primarily invests in: for Income for Income primarily invests in:
o Mortgage-backed obligations and collateralized o Mortgage-backed obligations and collateralized
mortgage obligations (CMOs) issued by the mortgage obligations (CMOs) issued by the
Government Government National Mortgage National Mortgage Association
Association (GNMA) (GNMA). The Fund for Income will invest at
least 65% of its total assets in
GNMA securities
o Obligations issued or guaranteed by the
o Obligations issued or guaranteed by the U.S. U.S. Government or by its agencies or
Government or by its agencies or instrumentalities or instrumentalities with maturities generally
with maturities generally in the range of 2 to 30 in the range of 2 to 30 years
years
The Fund For Income also may engage to a
following investment practices:
o Writing covered call options
o Engaging in closing options transactions
o Obligating itself to purchase or sell
securities with delivery and payment to occur
at a later date
- --------------------------------------------------------- ---------------------------------------------------
13
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Ohio Tax-Free Income Fund Victory Ohio Municipal Bond Fund
- --------------------------------------------------------- ---------------------------------------------------
The Ohio Tax-Free Income Fund normally pursues its The Ohio Municipal Bond Fund pursues its
investment objective by investing at least 80% of its investment objective by investing at least 80% of
total assets in securities, the interest from which is its total assets in investment grade
exempt from federal income tax and Ohio state personal obligations. The interest on these obligations
income tax and is not a tax preference item for is exempt from federal income taxes, including
purposes of the federal alternative minimum tax. 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 are also exempt from Ohio
state personal income tax.
Under normal market conditions, the Ohio Tax-Free Under normal market conditions, the Ohio
Income Fund invests in: Municipal Bond Fund primarily invests in:
o Municipal bonds o Municipal securities with fixed, variable,
o Short term tax-exempt securities, usually for or floating interest rates
temporary purposes o Zero coupon, tax, revenue, and bond
o Participations in lease obligations or installment anticipation notes
purchase contract obligations of municipal o Tax-exempt commercial paper
authorities or entities
o Zero coupon municipal bonds
o Ohio tax-free money market funds
Important characteristics of the Ohio Tax-Free Income Important characteristics of the Ohio Municipal
Fund include the ability to: Bond Fund's investments:
o Purchase and sell securities on a "when issued" o Quality: Municipal securities rated A or
and "delayed delivery" basis; above at the time of purchase by S&P, Fitch,
o Hold cash that is not earning interest and invest Moody's, or another nationally recognized
in short-term obligations issued or guaranteed by statistical ratings organization, or if
the U.S. Government, its agencies or unrated, of comparable quality.
instrumentalities; and o Maturity: The dollar-weighted effective
o Engage in short-term trading. average maturity of the Ohio Municipal Bond
o Quality: Municipal securities rated investment Fund generally will range from 5 to 15
grade, that is, rated within the top four quality years. Under certain market conditions,
the categories by S&P, Fitch or Moody's, or if the Portfolio Manager may go outside these
unrated, determined to be equal in quality by boundaries.
McDonald.
o Maturity: The dollar-weighted effective
average maturity of the Ohio Tax-Free Income
Fund generally will range from 20 to 30 years.
Short-term trading may increase the Fund's turnover rate,
generally resulting in higher transactions costs and
possibly capital gains, subject to tax.
As of September 30, 1998, the weighted average As of September 30, 1998, the weighted average
of maturity the Fund's portfolio was 19 years. maturity of the Fund's portfolio was 7.64 years.
- --------------------------------------------------------- ---------------------------------------------------
14
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Growth & Income Fund Victory Diversified Stock Fund
- --------------------------------------------------------- ---------------------------------------------------
The Growth & Income Fund pursues its investment The Diversified Stock Fund its investment objective
by investing primarily in common stocks of objective by investing primarily in equity
companies considered by McDonald to be undervalued and securities and securities convertible into common
which offer earnings growth potential while paying stocks issued by large, established
current dividends. companies.
McDonald seeks to identify dividend paying securities KAM seeks to invest in both growth and value
issued by companies, which have, on average, records of securities. In making investment decisions, KAM
historic growth in earnings that are higher than the may consider cash flow, book value, dividend
growth in earnings of the S&P 500. In addition, yield, growth potential, quality of management,
McDonald seeks companies which have had higher returns adequacy of revenues, earnings, capitalization,
on shareholder equity than the S&P 500. McDonald will relation to historical earnings, the value of the
generally pursue investments in securities of companies issuer's underlying assets, and expected future
with capitalizations in excess of $500 million, the relative earnings growth. KAM will pursue
securities of which are traded on recognized securities investments that provide above average dividend
exchanges or in the over-the-counter market. yield or potential for appreciation.
Under normal market conditions, the Growth & Income Under normal market conditions, the Fund:
Fund:
o Will invest at least 80% of its total assets
o Will invest principally in common stocks and in equity securities of large, established
will avoid market-timing or speculating on companies and securities convertible or
broad market conditions exchangeable into common stock, including:
o Growth stocks, which are stocks of
May also invest in: companies that KAM believes will
o Securities convertible into common stocks regularly experience earnings growth,
o Warrants and
o Cash equivalents o Value stocks, which are stocks that KAM
o U.S. Government securities believes are intrinsically worth more
o Non-convertible preferred stocks than their market value
o Straight debt securities (rated in the top three
quality categories by S&P or Moody's, or o May invest up to 20% of its total assets in:
determined to be equal in quality by McDonald) o Preferred stocks
o Investment grade corporate debt
securities
o Short-term debt obligations
o U.S. Government obligations
Generally, the Growth & Income Fund will not engage in The Fund may, but is not required to, use
trading for short-term profits. Nevertheless, changes derivative instruments.
to the portfolio will be made promptly under unforeseen
circumstances
- --------------------------------------------------------- ---------------------------------------------------
15
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Opportunity Value Fund Victory Small Company Opportunity Fund
- --------------------------------------------------------- ---------------------------------------------------
The Opportunity Value Fund invests primarily in The Small Company Opportunity Fund invests
common stocks of companies that are considered to be primarily in common stocks of smaller companies
undervalued, selected from those in the S&P's 500 that are exhibiting the potential for high
Composite Stock Price Index and from among other earnings growth in relation to their
companies generally with capitalizations of less than price-earnings ratio. Of the 5,000 U.S.
$1 billion. 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.
In the Opportunity Value Fund, investments are KAM uses a computer model to select securities
made in companies that meet certain objective that appear to be favorably priced.
requirements with respect to:
o Earnings
o Price-earnings ratios
o Price-book ratios KAM uses a computer model
to select securities
o Rate of return on shareholders' equity and other that
similar factors.
Under normal market conditions, the Fund:
Under normal market conditions, at least 70% of the o Will invest at least 80% of its total assets
Opportunity Value Fund's assets will be invested in in equity securities of small companies.
common stocks. It may invest its remaining assets in: These equity investments include:
o U.S. Government obligations o Common stock
o Certificates of deposit o Convertible preferred stock
o Commercial paper o Debt convertible or exchangeable into
o Other money market obligations equity securities
o Repurchase agreements o Securities convertible into common stock
o May invest up to 20% of its total assets in:
o Equity securities of larger companies
(those with market capitalizations in
the top 20% of the 5,000 largest U.S.
companies)
o Investment-grade debt securities
o Preferred stocks
o Short-term debt obligations
o Repurchase agreements
- --------------------------------------------------------- ---------------------------------------------------
16
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison International Fund Victory International Growth Fund
- --------------------------------------------------------- ---------------------------------------------------
The International Fund primarily invests in securities The International Growth Fund pursues its
of companies traded on exchanges outside of the U.S. investment objective by investing primarily in
including "emerging market" countries and more equity securities of foreign corporations, most
developed countries. It generally invests a maximum of which are denominated in foreign currencies.
of 30% of its assets in the securities of issuers in The Fund will invest most of its assets in securities
emerging markets. of companies traded on exchanges outside of the U.S.
including developed and emerging countries.
In making investment decisions, KAM (or the 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 invests at least 65% of its total assets in
common stock of non-U.S. companies. It may maintain a
portion of its assets, which usually will not exceed
10%, in:
o U.S. Government securities; o Under normal market conditions, the Fund
o High-quality debt securities (with maturities not will invest at least 65% of its total assets
exceeding 5 years); in:
o Money market obligations; and o Securities (including "sponsored" and
o Cash. "unsponsored" American Depositary Receipts)
of companies that derive more than 50% of
The International Fund has a policy to be as fully their gross revenues from, or have more than
invested in common stock as possible at all times and 50% of their assets, outside the United
not to attempt to "time" the market. As a result, States
there is the risk of general declines in stock o Securities for which the principal trading
prices. However, when defensive measures are called markets are located in at least three
for, McDonald may invest an unlimited portion of its different countries (excluding the United
assets in U.S. Government securities. States)
o May invest up to 20% of its total assets in
o May invest up to 35% of its total
The International Fund may invest in illiquid securities assets in cash equivalents and fixed income
of companies located in emerging securities but may not securities, including U.S. Government
invest in securities that are countries illiquid obligations
because they are subject to certain legal or
contractual restrictions.
The 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.
- --------------------------------------------------------- ---------------------------------------------------
17
<PAGE>
Comparison of Principal Investment Risks. The following tables compare
the principal investment risks of investing in the Gradison Funds and the
corresponding Victory Funds.
- --------------------------------------------------------- ---------------------------------------------------
Gradison U.S. Government Reserves Gradison Government Reserves Fund
- --------------------------------------------------------- ---------------------------------------------------
Substantially the same. The Gradison Government Reserves Fund is subject to
the following principal risks. Your investment
return could be adversely affected if
any of the following occurs:
o An agency or instrumentality defaults on
its obligation and the U. S. Government does
not provide financial support
o The market value of floating or
variable rate securities falls
to the extent that the Fund's
share price declines below
$1.00
o Rapidly rising interest rates cause the
Fund's share price to decline below $1.00
o Interest rates decline, resulting in the
Fund achieving a lower yield
- --------------------------------------------------------- ---------------------------------------------------
Gradison Established Value Fund Victory Established Value Fund
- --------------------------------------------------------- ---------------------------------------------------
Substantially the same. The Established Value Fund is subject to the
following principal risks. Your investment
return could be adversely affected if any of the
following occurs:
o The market value of securities acquired
by the Fund declines
o Value stocks fall out of favor relative
to growth stocks or other types of stocks
o A particular strategy does not
produce the intended result
or the portfolio manager does not
execute the strategy
effectively
o A company's earnings do not increase as
expected
- --------------------------------------------------------- ---------------------------------------------------
18
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Government Income Fund Victory Fund for Income
- --------------------------------------------------------- ---------------------------------------------------
Substantially the same. The Fund for Income is subject to the following
principal risks. Your investment return could be
adversely affected if any of the following occurs:
o The market value of securities acquired
by the Fund for Income declines
o A particular strategy does not produce
the intended result or the portfolio manager
does not execute the strategy effectively
o Interest rates rise
o An issuer's credit quality is downgraded
o The Fund for Income must reinvest
interest or sale proceeds at lower rates
o The rate of inflation increases
o The average life of a mortgage-related
security is shortened or lengthened
o A security on which the Fund for Income
has written a call option increases in value
and is called away from the Fund
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Ohio Tax-Free Income Fund Victory Ohio Municipal Bond Fund
- --------------------------------------------------------- ---------------------------------------------------
The Gradison Ohio Tax-Free Income Fund is subject to The Ohio Municipal Bond Fund is subject to the the
following principal risks. Your investment return following principal risks.
the following return could be adversely affected if any Your investment could be adversely affected if any of
of the occurs: following occurs:
o Interest rates rise, an issuer's credit quality is o Economic or political events take place
downgraded, the Ohio Tax-Free Income Fund must in Ohio that make the market value of Ohio
reinvest interest or sale proceeds at lower rates, obligations go down
or the rate of inflation increases
o Economic or political events take place in Ohio o A particular strategy does not produce
which make the market value of Ohio obligations go the intended result or the portfolio manager
down does not execute the strategy effectively
o Interest rates rise
o A decrease in the rating of portfolio securities o An issuer's credit quality is downgraded
o The inability of issuers to make payment of o The Fund must reinvest interest or sale
principal and interest proceeds at lower rates
o Regarding Municipal Leases with "nonappropriation" o The rate of inflation increases
clauses, the municipality fails to appropriate o The average life of a mortgage-related
money to pay the lease security is shortened or lengthened
o Hedges created by using derivative
In addition, securities with longer maturities instruments, including futures or options
generally experience greater volatility than securities contracts, do not respond to economic or
with shorter maturities. market conditions as expected
In addition, as a non-diversified Fund, it may
devote a larger portion of its assets to the
securities of a single issuer than if it were
diversified.
- --------------------------------------------------------- ---------------------------------------------------
19
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison Growth & Income Fund Victory Diversified Stock Fund
- --------------------------------------------------------- ---------------------------------------------------
Substantially the same, except Gradison Growth & Income The Diversified Stock Fund is subject to the
Fund primarily invests in value stocks. following principal risks. Your investment return
could be adversely affected if any of the
following occurs:
o The market value of securities acquired
by the Fund declines
o Growth stocks fall out of favor because
the companies' earnings growth does
not meet expectations
o Value stocks fall out of favor relative
to growth stocks and other types of
stocks
o A particular strategy does not produce the
intended result or the portfolio
manager does not execute the strategy
effectively
o A company's earnings do not increase as
expected
o Interest rates rise
o An issuer's credit quality is downgraded
o The Fund must reinvest interest or sale
proceeds at lower rates
o The rate of inflation increases
o Hedges created by using derivative
instruments, including futures or options
contracts, do not respond to economic or
market conditions as expected
- --------------------------------------------------------- ---------------------------------------------------
- --------------------------------------------------------- ---------------------------------------------------
Gradison Opportunity Value Fund Victory Small Company Opportunity Fund
- --------------------------------------------------------- ---------------------------------------------------
Substantially the same. The Small Company Opportunity Fund is subject to
the following principal risks. Your investment
return could be adversely affected if any of the
following occurs:
o The market value of securities acquired
by the Fund declines
o Value stocks fall out of favor relative
to growth stocks and other types of stocks
o A particular strategy does not
produce the intended result
or the portfolio manager does not
execute the strategy effectively
o A company's earnings do not increase as
expected
o Interest rates rise
o An issuer's credit quality is downgraded
o The Fund must reinvest interest or sale
proceeds at lower rates
o The rate of inflation increases
- --------------------------------------------------------- ---------------------------------------------------
20
<PAGE>
- --------------------------------------------------------- ---------------------------------------------------
Gradison International Fund Victory International Growth Fund
- --------------------------------------------------------- ---------------------------------------------------
Substantially the same, except that generally the The International Growth Fund
Gradison International Fund may have greater is subject to the following principal risks.
exposure to securities issued by Your investment return could be adversely
companies in emerging markets. affected if any of the following occurs:
o 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
o The prices of foreign securities issued
in emerging countries experience more
volatility because the securities
markets in these countries may not
be well established
o The market value of securities acquired
by the Fund declines
o A particular strategy does not produce the
intended result or the portfolio
manager does not execute the strategy
effectively
o Interest rates rise
o An issuer's credit quality is downgraded
o The Fund must reinvest interest or sale
proceeds at lower rates
o The rate of inflation increases
o The average life of a mortgage-related
security is shortened or lengthened
o Hedges created by using derivative
instruments, including futures or options
contracts, do not respond to economic or
market conditions as expected
- --------------------------------------------------------- ---------------------------------------------------
</TABLE>
Comparison of Potential Risks and Rewards.
Each of the Gradison Funds and the corresponding Victory Funds has its
own risks and potential rewards. The bar charts and tables below compare the
potential risks and rewards of investing in the Gradison Funds and the currently
existing Victory Funds.
Each bar chart provides an indication of the risks of investing in each
Fund by showing changes in the Fund's performance from year to year for the last
ten years or since the inception of the Fund. The table shows how each Fund's
average annual returns for one year, five years and ten years (or since
inception) compare to the returns of a broad-based securities market index. The
figures shown assume reinvestment of dividends and distributions.
The information shown below reflects the performance of the Class A
shares (without sales charges) of three Victory Funds: Ohio Municipal Bond Fund,
Diversified Stock Fund and International Growth Fund. Returns for the Class G
shares of these Victory Funds would be
21
<PAGE>
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.
After the reorganization, the Victory Fund for Income and Victory Small
Company Opportunity Fund will assume the performance information of the Gradison
Government Income Fund and the Gradison Opportunity Value Fund, respectively.
Accordingly, the performance information shown below relates to these two
Gradison Funds.
Keep in mind that past performance does not indicate future results.
Victory Fund for Income (Gradison Government Income Fund)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
40.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
30.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
20.00%
12.75% 14.08% 17.20%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
10.00%
8.79% 6.29% 7.52% 3.51% 8.36% 7.37%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
0.00%
-3.69%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
-10.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
-20.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
Victory Ohio Municipal Bond Fund (Class A shares)
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
40.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
30.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
20.00%
10.75% 12.64% 17.72%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
10.00%
5.12% 7.76% 4.32% 7.87% 6.56%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
0.00%
-4.46%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
-10.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
-20.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
Victory Diversified Stock Fund (Class A shares)
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
40.00%
35.37%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
30.00%
23.98% 24.72% 28.28% 23.15%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
20.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
10.00%
22
<PAGE>
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
3.81% 0.57% 9.43% 9.97% 3.96%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
0.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
-10.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
-20.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
Victory Small Company Opportunity Fund (Gradison Opportunity Value Fund)
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
40.00%
35.92% 31.18%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
30.00%
23.13% 26.76%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
20.00%
14.31% 11.07% 19.47%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
10.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
0.00%
-2.18% -6.93%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
-10.00%
-13.05%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
-20.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ---------- ---------
International Growth Fund (Class A shares)
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
40.00%
35.91%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
30.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
20.00%
17.48%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
10.00%
9.75% 2.72% 7.71% 6.29% 2.33%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
0.00%
-6.56% -6.41%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
-10.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
-20.00%
---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------ ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
Fund Highest Quarterly Return Lowest Quarterly Return
Gradison Government Income Fund --
Victory Fund for Income* 5.57% in 2d Quarter 1989 (3.05)% in 1st Quarter 1994
Gradison Ohio Tax-Free Income Fund 7.12% in 1st Quarter 1995 (6.08)% in 1st Quarter 1994
Victory Ohio Municipal Bond Fund - Class A 6.68% in 1st Quarter 1995 (5.07)% in 4th Quarter 1994
Gradison Growth & Income Fund 16.85% in 4th Quarter 1998 (7.57)% in 3d Quarter 1998
Victory Diversified Stock Fund - Class A 17.60% in 4th Quarter 1998 (12.43)% in 3d Quarter 1990
23
<PAGE>
Gradison Opportunity Value Fund --
Victory Small Company Opportunity Fund* 20.24% in 1st Quarter 1991 (19.96)% in 3d Quarter 1998
Gradison International Fund 17.90% in 4th Quarter 1998 (17.63)% in 3d Quarter
Victory International Growth Fund - Class A 19.78% in 4th Quarter 1998 (15.23)% in 3d Quarter 1998
* After the reorganization, the Victory Fund for Income and Victory Small
Company Opportunity Fund will assume the performance information of the
Gradison Government Income Fund and the Gradison Opportunity Value Fund,
respectively.
The Average Annual Total Returns for the Gradison Government Income
Fund, Class A shares of the Victory Ohio Municipal Bond Fund and Diversified
Stock Fund, the Gradison Opportunity Value Fund, and Class A shares of the
Victory International Growth Fund for the periods ended December 31, 1998, are
as follows:
- ------------------------------------------------------- -------------------- -------------------- --------------------
Average Annual Total Returns
(for the Periods ended December 31, 1998) Past One Year Past 5 Years Past 10 Years
- ------------------------------------------------------- -------------------- -------------------- --------------------
Gradison Government Income Fund -- Victory Fund for
Income* 7.37% 6.33% 8.08%
- ------------------------------------------------------- -------------------- -------------------- --------------------
Lehman GNMA Index** 6.91% 7.33% 9.24%
- ------------------------------------------------------- -------------------- -------------------- --------------------
* After the reorganization, the Victory Fund for Income will assume the
performance information of the Gradison Government Income Fund.
** The Lehman GNMA Index is a broad-based unmanaged index that represents the
general performance of GNMA securities.
- ----------------------------------------------------------- ------------------- ------------------ -------------------
Average Annual Total Returns Past One Year Past 5 Years Since Inception**
(for the periods ended December 31, 1998)
- ----------------------------------------------------------- ------------------- ------------------ -------------------
Gradison Ohio Tax-Free Income Fund 5.64% 5.63% 7.01%
- ----------------------------------------------------------- ------------------- ------------------ -------------------
Lehman Brothers 20-Year Municipal Bond Index* 6.82% 6.75% 8.03%
- ----------------------------------------------------------- ------------------- ------------------ -------------------
Victory Ohio Municipal Bond Fund - Class A 6.56% 6.16% 7.77%
- ----------------------------------------------------------- ------------------- ------------------ -------------------
Lehman Brothers 10-Year Municipal Bond Index* 6.80% 6.30% 8.48%
- ----------------------------------------------------------- ------------------- ------------------ -------------------
* The Lehman Brothers 10-Year Municipal Bond Index and The Lehman Brothers
20-Year Municipal Bond Index are broad-based unmanaged indices that
represent the general performance of investment-grade municipal bonds.
** Reflects performance since the Gradison Ohio Tax-Free Income Fund's
inception on August 18, 1992 and the Victory Ohio Municipal Bond Fund -
Class A's inception on May 18, 1990.
- ------------------------------------------------------------ -------------------- ----------------- ------------------
Average Annual Total Returns Since Inception**
(for the periods ended December 31, 1998) Past One Year Past 5 Years
- ------------------------------------------------------------ ------------------- ----------------- ------------------
Gradison Growth & Income Fund 14.45% N/A 21.66%
- ------------------------------------------------------------ -------------------- ----------------- ------------------
S&P 500 Stock Index* 28.58% N/A 29.77%
- ------------------------------------------------------------ -------------------- ----------------- ------------------
Victory Diversified Stock Fund - Class A 23.15% 22.62% 17.24%
- ------------------------------------------------------------ -------------------- ----------------- ------------------
S&P 500 Stock Index* 28.58% 24.06% 17.63%
- ------------------------------------------------------------ -------------------- ----------------- ------------------
* The Standard & Poor's 500 Composite Stock Price 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 Gradison Growth & Income Fund's inception on
February 28, 1995 and the Victory Diversified Stock Fund - Class A's
inception on October 20, 1989.
24
<PAGE>
- ------------------------------------------------------------- -------------------- ----------------- -----------------
Average Annual Total Returns
(for the Periods ended December 31, 1998) Past One Year Past 5 Years Past 10 years
- ------------------------------------------------------------- -------------------- ----------------- -----------------
Gradison Opportunity Value Fund --
Victory Small Company Opportunity Fund* (6.93)% 12.58% 12.82%
- ------------------------------------------------------------- -------------------- ----------------- -----------------
Russell 2000 Index** (2.55)% 11.87% 12.92%
- ------------------------------------------------------------- -------------------- ----------------- -----------------
* After the reorganization, the Victory Small Company Opportunity Fund will
assume the performance information of the Gradison Opportunity Value Fund.
** The Russell 2000 Index is a broad-based unmanaged index that represents the
general performance of domestically traded common stocks of small
companies.
- ----------------------------------------------------------- --------------------- ----------------- ------------------
Average Annual Total Returns Since Inception**
(for the periods ended December 31, 1998) Past One Year Past 5 Years
- ----------------------------------------------------------- --------------------- ----------------- ------------------
Gradison International Fund 12.95% N/A 7.01%
- ----------------------------------------------------------- --------------------- ----------------- ------------------
International Index* 14.94% N/A 7.36%
- ----------------------------------------------------------- --------------------- ----------------- ------------------
Victory International Growth Fund - Class A 17.48% 7.17% 7.36%
- ----------------------------------------------------------- --------------------- ----------------- ------------------
Morgan Stanley Capital International All Country World 14.46% 7.80% 6.30%
Free ex-U.S. Index***
- ----------------------------------------------------------- --------------------- ----------------- ------------------
</TABLE>
* The International Index is comprised of the Morgan Stanley Capital
International (MSCI) EAFE and EM Index.
** Reflects performance since the Gradison International Fund's inception on
May 31, 1995 and the Victory International Growth Fund - Class A's
inception on May 18, 1990.
***The Morgan Stanley Capital International All Country World Free ex-U.S.
Index is comprised of securities issued by companies in developed countries,
other than the U.S. and emerging countries and weighted by market
capitalization.
Comparison of Operations.
Investment Advisory Agreements
McDonald, through its Gradison Division, serves as investment adviser
to the Gradison Funds. McDonald is registered as an investment adviser with the
SEC and is a wholly owned subsidiary of KeyCorp, 127 Public Square, Cleveland,
Ohio 44114. Subject to the authority of the Board of Trustees, Gradison manages
the investment and reinvestment of the assets of the Gradison Funds, and
provides its employees to act as the officers of the Funds, who are responsible
for the overall management of the Gradison Funds. Blairlogie serves as the
investment sub-adviser to Gradison International Fund. Blairlogie is a Scottish
investment management firm, organized as a limited partnership. Blairlogie's
address is 4th Floor, 125 Princes Street, Edinburgh EH2 4AD, Scotland.
KAM serves as investment adviser to the Victory Funds. KAM is a New
York corporation registered as an investment adviser with the SEC. KAM, a
subsidiary of KeyCorp, oversees the operations of the Victory Funds according to
investment policies and procedures adopted by the Board of Trustees. Affiliates
of KAM manage approximately $62 billion for a limited number of individual and
institutional clients. KAM's address is 127 Public Square, Cleveland, Ohio
44114.
25
<PAGE>
In executing brokerage trades, KAM will seek best execution, but may
pay more than the lowest amount of commission if KAM requires research or other
services that benefit its managed accounts. KAM may allocate brokerage
commissions to its affiliates.
KAM serves as a Manager of Managers of the International Growth Fund.
In this capacity, KAM may select one or more sub-advisers to manage the
International Growth Fund's assets. Under its Advisory Agreement with Victory,
KAM oversees the investment advisory services that a sub-adviser provides to the
International Growth Fund.
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.
Distribution and Service Plans
The Gradison Funds have adopted a distribution and servicing plan. The
Gradison Funds pay fees as follows:
o An annual service fee of up to 0.25% of average daily net
assets of the Gradison Government Income Fund and the
Gradison Ohio Tax-Free Income Fund.
o An annual service fee of up to 0.25% of average daily net
assets and an annual distribution fee of up to 0.25% of
average daily net assets of the Gradison Established Value
Fund, the Gradison Growth & Income Fund, the Gradison
Opportunity Value Fund, and the Gradison International
Fund.
o An annual service fee of up to 0.10% of average daily net
assets of Gradison U.S. Government Reserves.
These fees are paid monthly. The service fee is paid to securities
broker-dealers for providing personal services to shareholders of the Fund,
including responding to shareholder inquiries and providing information to
shareholders about their Fund accounts. The distribution fee may be used to pay
for advertising and printing prospectuses, annual reports, and other promotional
material for prospective investors, and for other distribution activities. Over
time these fees will increase the cost of your investment.
The G class of each Victory Fund has adopted a similar plan that
provides for the same fees.
26
<PAGE>
Administrator and Distributor
McDonald, through its Gradison Division, acts as administrator,
transfer agent, and accounting service provider for all of the Gradison Funds,
except the Gradison Government Income Fund.
McDonald receives the following fees for acting as transfer agent and
accounting service provider:
Gradison U.S. Government Reserves
- ---------------------------------
Transfer Agent Services - $23.50 per shareholder non-zero balance account and
$5.00 per closed or zero balance account per year, plus out-of-pocket costs.
<TABLE>
<CAPTION>
<S> <C>
Accounting Services - .0150% of the first $400 million of average daily assets
.0125% of the next $300 million of average daily assets
.0100% of the next $300 million of average daily assets
.0075% of average daily net assets in excess of $1 billion
Minimum yearly fee is $20,000.
Gradison Ohio Tax-Free Income Fund
- ----------------------------------
Transfer Agent Services - $23.00 per shareholder non-zero balance account and
$5.00 per closed or zero balance account per year, plus out-of-pocket costs.
Accounting Services - .035% of the first $100 million of average daily assets
.025% of the next $100 million of average daily assets
.015% of average daily net assets in excess of $200 million
Minimum yearly fee is $48,000
Gradison Established Value Fund
- -------------------------------
Gradison Opportunity Value Fund
- -------------------------------
Gradison Growth & Income Fund
- -----------------------------
Transfer Agent Services - $18.50 per shareholder non-zero balance account and
$5.00 per closed or zero balance account per year, plus out-of-pocket costs.
Accounting Services - .03% of the first $100 million of average daily assets
.02% of the next $100 million of average daily assets
.01% of average daily net assets in excess of $200 million
Minimum yearly fee per fund is $40,000.
Gradison International Fund
- ---------------------------
Transfer Agent Services - $18.50 per shareholder non-zero balance account and
$5.00 per closed or zero balance account per year, plus out-of-pocket costs.
27
<PAGE>
Accounting Services - .045% of the first $100 million of average daily assets
.030% of the next $100 million of average daily assets
.015% of average daily net assets in excess of $200 million
Minimum yearly fee is $60,000.
</TABLE>
With respect to the Gradison Government Income Fund, Gradison provides
administrative and accounting services to the Fund at cost and provides data
processing services at a cost of $8.25 per account per year.
McDonald provides its employees to act as the officers of the Trust who
are responsible for the overall management of the Funds except for one officer
who is an employee of BISYS Fund Services Limited Partnership ("BISYS"). BISYS
is the distributor for the Gradison Funds.
BISYS serves as the administrator, distributor, and fund accountant for
the Victory Funds pursuant to administration, distribution and accounting
agreements with Victory. For expenses incurred and services provided as
administrator of the Victory Funds, BISYS receives a fee at the following annual
rate based on each Victory Fund's average daily net assets: 0.15% for portfolio
assets up to $300 million; 0.12% for the next $300 million of portfolio assets;
and 0.10% for portfolio assets in excess of $600 million.
BISYS also serves as the distributor of the Victory Funds. BISYS does
not charge the Victory Funds a fee for its services as distributor, but receives
sales charges paid by shareholders. Under its distribution agreement with
Victory, BISYS may provide sales support, including cash or other compensation
to dealers for selling shares of the Victory Funds. BISYS does this at its own
expense and not at the expense of any Fund or its shareholders.
Sub-Administrator
There is no sub-administrator of the Gradison Funds.
KAM serves as sub-administrator of the Victory Funds. For its services
as sub-administrator of the Victory Funds, BISYS pays KAM an annual fee of up to
0.05% of the average daily net assets of the Victory Funds.
Dividends and Other Distributions
The Gradison Established Value Fund and the Gradison Growth & Income
Fund pay dividends quarterly; the Gradison Opportunity Value Fund pays dividends
semi-annually; and the Gradison International Fund pays dividends yearly. The
Gradison Government Income Fund and the Gradison Ohio Tax-Free Income Fund
declare dividends from accrued income daily and pay the dividends monthly.
Gradison U.S. Government Reserves declares dividends daily and pays dividends
monthly. Generally, each Gradison Fund pays realized capital gains, if any, at
least once a year.
Ordinarily, the Victory Fund for Income and Ohio Municipal Bond Fund
declare and pay the dividends monthly. The Established Value Fund, Diversified
Stock Fund, Small Company
28
<PAGE>
Opportunity Fund and International Growth Fund declare and pay dividends
quarterly. Gradison Government Reserves Fund declares dividends daily and pays
dividends monthly. Generally, each Fund pays realized capital gains, if any, at
least once a year. Each class of shares declares and pays dividends separately.
A Gradison Fund's distributions can be received in one of the following
ways:
o Reinvestment Option. You can have distributions automatically reinvested in
additional shares of a Fund. If you do not indicate another choice on your
Account Application, you will be assigned this option automatically.
o Cash Option. The Fund will send you a check no later than seven days after
the pay date.
o 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.
A Victory Fund's distributions can be received in one of the following
ways in addition to the three methods described above:
o 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.
o 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 your account.
Purchase Procedures
You may purchase shares of any Gradison Fund without an initial sales
charge. The minimum investment required to open an account in a Fund is $1,000
and additional investments must be at least $50. These minimums may be waived
for certain group purchases. Purchase orders become effective when the Fund
receives the necessary information about the purchaser's account and provision
for payment has been made.
You may purchase Class G shares of any Victory Fund without an initial
sales charge. The Victory Funds offer different classes of shares, which have
varying purchase procedures, sales charges, and ongoing fees. The minimum
investment required to open an account in most Victory Funds is $500 ($100 for
IRAs) and additional investments must be at least $25.
Exchange Rights
Shares of the Gradison Funds may be exchanged, without administrative
fees, for shares of any other Gradison Fund and for shares of certain
federal/Ohio tax-free money market funds.
29
<PAGE>
You may request exchanges by telephoning or writing the Funds. An exchange may
not be made from a Fund to the fund in which you are investing unless the shares
of that fund are registered for sale in the state in which you reside. The terms
of the exchange feature are subject to change and the exchange feature is
subject to termination upon 60 days' written notice, except that no notice shall
be required under certain circumstances, according to SEC rules.
You may exchange shares of a Victory Fund, without a sales charge, for
shares of any other series of The Victory Portfolios that are of the same class
as the shares being exchanged. However, when you exchange shares of a Victory
Fund, you should keep the following in mind:
o Shares of the Fund selected for exchange must be available for sale in your
state of residence.
o The Fund whose shares you would like to exchange and the Fund whose shares
you want to buy must both offer the exchange privilege.
o 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 offers both Class G and
Class A Shares, you can exchange into only Class G Shares. However, you can
exchange your Class G shares into Class A Shares of any Victory Fund that
does not offer Class G Shares without paying a sales charge.
o You must meet the minimum purchase requirements for the Fund you purchase
by exchange.
o The registration and tax identification numbers of the two accounts must be
identical.
o You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
o When you exchange shares of a Fund, it generally is a taxable event.
Redemption Procedures
You may sell your shares of each Gradison Fund by sending a signed
redemption request to the Fund identifying the Fund account number, the amount
of redemption in shares or dollar amount and where to send the proceeds. You may
sell shares by telephone and have the proceeds mailed to the address on the
Fund's records. The Funds generally make payment for sold shares within one
business day and, except in extraordinary circumstances, within seven days after
receipt of a properly executed request. The Funds may delay payment for the sale
of shares where the shares were purchased with a personal check (or any other
method of payment subject to collection) but only until the purchase payment has
cleared, which may be up to 15 days from the day the purchase payment is
received by a Fund. All proceeds are paid by checks or wire.
You may sell shares of the Victory Funds by mail or telephone. If your
request is received and accepted by 4:00 p.m., it will be processed the same day
and proceeds will be sent the next business day. When using either Regular U.S.
Mail or Overnight Mail to request a sale, you need to send Victory a letter of
instruction indicating your Fund account number, the amount you wish to sell and
where to send the proceeds. To sell shares by telephone, you need to call
800-539-FUND, and make sure to check the box marked "Telephone Authorization"
when you fill out your original application. If you want your proceeds wired,
you must establish an
30
<PAGE>
account at a domestic financial institution to accommodate the wire transaction.
Your funds will be wired on the next business day. For the new Gradison
Government Reserves Fund, your proceeds will be wired the same day if your
request to sell is received and accepted by 12:00 p.m. Eastern Time. The Victory
Funds reserve the right to pay some portion of the proceeds from a sale of
shares in portfolio securities. However, they are obligated to pay cash to any
one shareholder during any 90-day period up to the lesser of $250,000 or 1% of
the Fund's net assets.
Trustees
Each Gradison Board of Trustees is responsible for the direction and
supervision of the Gradison Funds' operations. Victory's Board of Trustees is
responsible for the management of the Victory Funds.
Comparison of Shareholder Rights.
The chart below describes some of the differences between your rights
as a shareholder of The Victory Portfolios and your rights as a shareholder of
the Gradison Funds.
31
<PAGE>
<TABLE>
<CAPTION>
=============================== ========================= ============================= ============================
Category The Victory Portfolios Gradison Growth Trust Gradison-McDonald Cash
Reserves Trust
<S> <C> <C> <C>
- ------------------------------- ------------------------- ----------------------------- ----------------------------
1. Par Value Each share has a par Without par value Each share has a par value
value of $0.001 of $.01
- ------------------------------- ------------------------- ----------------------------- ----------------------------
2. Preemptive rights None None None
- ------------------------------- ------------------------- ----------------------------- ----------------------------
3. Preference None None None
- ------------------------------- ------------------------- ----------------------------- ----------------------------
4. Appraisal Rights None None None
- ------------------------------- ------------------------- ----------------------------- ----------------------------
5. Conversion Rights None None except contemplated a None except contemplated a
right to convert shares right to convert shares
into another Series into another Series
- ------------------------------- ------------------------- ----------------------------- ----------------------------
6. Exchange Rights (not None None None
including the right to
exchange among Funds)
- ------------------------------- ------------------------- ----------------------------- ----------------------------
7. Shareholder Rights No right to call for No right to call for any No right to call for any
any partition or partition or division of partition or division of
division of property, property, profits, rights property, profits, rights
profits, rights or or interests of the Trust or interests of the Trust
interests of the Trust
- ------------------------------- ------------------------- ----------------------------- ----------------------------
8. Personal Liability of None None None, although
Shareholders shareholders have
theoretical potential
liability
- ------------------------------- ------------------------- ----------------------------- ----------------------------
9. Annual meetings No annual meetings Not held except as required No annual meetings required
required by the 1940 Act
- ------------------------------- ------------------------- ----------------------------- ----------------------------
10. Right to call special Shall be called upon Shall be called upon Shall be called upon
meeting of request of shareholders request of shareholders request of shareholders
shareholders owning at least 10% of holding at least 25% of the holding at least 10% of
the outstanding shares outstanding shares the outstanding shares
- ------------------------------- ------------------------- ----------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
=============================== =========================== =============================
Category Gradison Custodian Trust Gradison-McDonald Municipal
Custodian Trust
<S> <C> <C>
- ------------------------------- --------------------------- -----------------------------
1. Par Value Without par value Without par value
- ------------------------------- --------------------------- -----------------------------
2. Preemptive rights None None
- ------------------------------- --------------------------- -----------------------------
3. Preference None None
- ------------------------------- --------------------------- -----------------------------
4. Appraisal Rights None None
- ------------------------------- --------------------------- -----------------------------
5. Conversion Rights None except contemplated None except contemplated a
a right to convert shares right to convert shares
into another Series into another Series
- ------------------------------- --------------------------- -----------------------------
6. Exchange Rights (not None None
including the right to
exchange among Funds)
- ------------------------------- --------------------------- -----------------------------
7. Shareholder Rights No right to call for any No right to call for any
partition or division of partition or division of
property, profits, rights property, profits, rights
or interests of the Trust or interests of the Trust
- ------------------------------- --------------------------- -----------------------------
8. Personal Liability of None None
Shareholders
- ------------------------------- --------------------------- -----------------------------
9. Annual meetings Not held except as Not held except as
required by the 1940 Act required by the 1940 Act
- ------------------------------- --------------------------- -----------------------------
10. Right to call special Shall be called upon Shall be called upon
meeting of request of shareholders
shareholders holding at least 10% of holding at least 10% of the
the outstanding shares outstanding shares
- ------------------------------- --------------------------- ---------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
=============================== ========================= ============================= ============================ =
Category The Victory Portfolios Gradison Growth Trust Gradison-McDonald Cash
Reserves Trust
<S> <C> <C> <C>
- ------------------------------- ------------------------- ----------------------------- ----------------------------
11. Notice of meetings Sent by first class Mailed to each shareholder Mailed to each shareholder
mail or such other entitled to vote at least 7 entitled to vote at least
means determined by the and not more than 60 days 7 and not more than 60
trustees at least 10 before meeting days before meeting
days prior to any such
meeting
- ------------------------------- ------------------------- ----------------------------- ----------------------------
12. Record date for meetings 1. Trustees may close 1. Trustees may close 1. Trustees may close
transfer books transfer books not transfer books not
not exceeding 60 days exceeding 30 days or exceeding 30 days or
prior to shareholder 2. Trustees may fix a 2. Trustees may fix a
meeting or date not more than 60 date not more than
2. Trustees may fix a days prior to 60 days prior to
date not exceeding 60 shareholder meeting shareholder meeting
days prior to
shareholder meeting
- ------------------------------- ------------------------- ----------------------------- ----------------------------
13. Election of Trustees A plurality A majority of shares A majority of shares
entitled to vote present in entitled to vote present
person or by proxy in person or by proxy
- ------------------------------- ------------------------- ----------------------------- ----------------------------
14. Adjournment of Meetings Majority of votes cast Majority of shares Majority of shares
upon question of represented at meeting represented at meeting
adjournment
- ------------------------------- ------------------------- ----------------------------- ---------------------------- -
</TABLE>
<TABLE>
<CAPTION>
=============================== =========================== =============================
Category Gradison Custodian Trust Gradison-McDonald Municipal
Custodian Trust
<S> <C> <C>
- ------------------------------- --------------------------- ---------------------------
11. Notice of meetings Mailed to each Mailed to each shareholder
shareholder entitled to entitled to vote at least 7
vote at least 7 and not and not more than 60 days
more than 60 days before before meeting
meeting
- ------------------------------- --------------------------- ---------------------------
12. Record date for meetings 1. Trustees may close 1. Trustees may close
transfer books not transfer books not
exceeding 30 days or exceeding 30 days or
2. Trustees may fix a 2. Trustees may fix a
date not more than date not more than 60
60 days prior to days prior to
shareholder meeting shareholder meeting
- ------------------------------- --------------------------- ---------------------------
13. Election of Trustees A majority of shares A majority of shares
entitled to vote present entitled to vote present in
in person or by proxy person or by proxy
- ------------------------------- --------------------------- ---------------------------
14. Adjournment of Meetings Majority of shares Majority of shares
represented at meeting represented at
meeting
- ------------------------------- --------------------------- -----------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
=============================== ========================= ============================= ============================
Category The Victory Portfolios Gradison Growth Trust Gradison-McDonald Cash
Reserves Trust
<S> <C> <C> <C>
- ------------------------------- ------------------------- ----------------------------- ----------------------------
15. Removal of Trustees by May be removed at May be removed by holders Removal by shareholders
Shareholders shareholder meeting by of record of at least 2/3 not provided for
a vote of shareholders of the outstanding shares
owning at least 2/3 of of the Trust either
the outstanding shares 1. by a declaration in
of the Trust writing or
2. by votes cast at a
meeting called by
trustees when
requested in writing
by record holders of
not less than 10% of
outstanding shares
=============================== ========================= ============================= ============================
</TABLE>
<TABLE>
<CAPTION>
=============================== =========================== =============================
Category Gradison Custodian Trust Gradison-McDonald Municipal
Custodian Trust
<S> <C> <C>
- ------------------------------- --------------------------- ---------------------------
15. Removal of Trustees by May be removed by holders May be removed by holders
Shareholders of record of at least a of record of at least a
majority of outstanding majority of outstanding
shares of the Trust either shares of the Trust either
1. by a declaration in 1. by a declaration in
writing or writing or
2. by votes cast at a 2. by votes cast at a
meeting called by meeting called by
trustees when trustees when
requested in requested in writing
writing by record by record holders of
holders of not less not less than 10% of
than 10% of outstanding shares
outstanding shares
=============================== =========================== =============================
</TABLE>
34
<PAGE>
Capitalization of the Funds.
The tables below show existing capitalization as of October 31, 1998,
as well as pro forma capitalization as of that date, which reflects the impact
of any corporate actions, including stock splits and accounting adjustments,
required to facilitate the reorganization. For these reasons, the total pro
forma combined Total Net Assets may differ from the combined net assets of the
Funds prior to the reorganization.
<TABLE>
<CAPTION>
Total Net Assets (000) Shares Outstanding (000)
---------------------- ------------------------
<S> <C> <C>
Gradison Government Income Fund $160,618 12,051
Victory Fund for Income 28,743 2,923
Pro Forma Combined 189,361 14,207
Total Net Assets (000) Shares Outstanding (000)
---------------------- ------------------------
Gradison Ohio Tax-Free Income Fund $114,490 8,201
Victory Ohio Municipal Bond Fund 82,704 6,872
Pro Forma Combined 197,194 16,381
Total Net Assets (000) Shares Outstanding (000)
---------------------- ------------------------
Gradison Growth & Income Fund $64,444 2,338
Victory Diversified Stock Fund 984,120 52,247
Pro Forma Combined 1,048,562 55,666
Total Net Assets (000) Shares Outstanding (000)
---------------------- ------------------------
Gradison Opportunity Value Fund $146,389 6,709
Victory Small Company Opportunity Fund 81,599 8,537
Pro Forma Combined 227,988 10,449
Total Net Assets (000) Shares Outstanding (000)
---------------------- ------------------------
Gradison International Fund $31,969 1,857
Victory International Growth Fund 134,843 10,223
Pro Forma Combined 166,804 12,646
</TABLE>
Required Vote
Approval of Proposal 1 by a Gradison Fund requires a vote of a simple
majority of the Fund's outstanding shares. A simple majority of outstanding
shares of a Fund means one more than half of the number of shares of that Fund
that were issued and outstanding as of the record date, voting at the meeting in
person or by proxy. Approval of Proposal 1 by the shareholders of one Gradison
Fund is not contingent upon the approval of Proposal 1 by the shareholders of
any other Gradison Fund.
35
<PAGE>
Board Recommendation
EACH BOARD RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" PROPOSAL 1.
---------------------------
PROPOSAL 2.
TO APPROVE A NEW INVESTMENT ADVISORY
AGREEMENT FOR EACH GRADISON FUND
Introduction
The Board of Trustees of each Gradison Trust has approved a new
Investment Advisory Agreement for each Gradison Fund.
>> The primary purpose of this proposal is to allow McDonald to
continue to serve as investment adviser of your Fund until the
reorganization with The Victory Portfolios (and after, if
shareholders do not approve the reorganization), and to allow
McDonald to receive advisory fees for the period since
McDonald's parent merged with KeyCorp.
On October 23, 1998, KeyCorp acquired McDonald & Company Investments,
Inc., the corporate parent of McDonald & Company Securities, Inc. (McDonald
Securities). McDonald Securities subsequently changed its name to McDonald
Investments Inc. (McDonald). Effective on that date, each Gradison Fund entered
into a new investment advisory agreement with McDonald because the prior
investment advisory agreement may have terminated due to the acquisition. The
SEC has issued an exemptive order that permits each Gradison Fund to obtain your
approval of the new investment advisory agreement within 150 days after the
acquisition (by March 22, 1999), instead of prior to the acquisition. Until your
approval is obtained, the exemptive order requires that advisory fees paid
pursuant to the new investment advisory agreement be escrowed.
Why We Are Asking Shareholders to Approve New Investment Advisory Agreements
This proposal is intended to accomplish two goals. First, approval of
the new investment advisory agreement for your Fund permits McDonald to continue
to serve as the investment adviser to your Fund either (1) on an ongoing basis,
if you do not approve the reorganization of your Gradison Fund described in
Proposal 1, or (2) until the time of the reorganization, if you approve the
reorganization of your Gradison Fund. If you do not approve either the
reorganization of your Fund or the new investment advisory agreement, the
investment advisory agreement for your Fund will terminate. In that event, the
Board will consider what additional steps to take for your Fund. Second,
approval of the investment advisory agreement for your Gradison Fund allows
McDonald to receive the advisory fees that have been escrowed since October 23,
1998.
36
<PAGE>
Considerations by the Boards of Trustees
The new investment advisory agreements were presented to the Boards of
the Gradison Funds on September 14, 1998. KAM, which was acquiring the
investment advisory operations of McDonald, provided information to the Boards
regarding the impact of the purchase on the Gradison Funds, including on the
advisory services provided to them. In particular, KAM provided information
regarding its experience and record as an investment adviser, its internal
procedures, its staffing, other details of its operations, and its plans and
expectations regarding the advisory services that will be provided to each of
the Funds by McDonald as part of KAM.
In considering the new investment advisory agreements, the Boards
considered the information presented by KAM and other factors they deemed
relevant, including the following:
1. that the advisory fees and expense ratios of the Funds would not
exceed their current levels for a two-year period after the new
investment advisory agreement becomes effective;
2. that the financial and other resources of McDonald, as part of
KAM, and the continuance of appropriate incentives would assure
that McDonald would be able to furnish high quality services to
each Fund;
3. that the terms of the new investment advisory agreements are
substantially similar to those currently in effect;
4. that the quality of the services McDonald would be able to
furnish to each Gradison Fund would be of at least equal quality
to the services now rendered to the Funds and may ultimately be
strengthened; and
5. that benefits accrue to McDonald from serving as adviser to each
Gradison Fund.
The Boards also considered KAM's intention that, for a period of three
years after the purchase, at least 75% of each Board would not be "interested
persons" (as defined under the 1940 Act) (the "Independent Trustees") and that,
for a period of two years after the closing, there would be no unfair burden
imposed on any Fund.
After full consideration of these and other factors, the Boards,
including all of the Independent Trustees, unanimously approved the new
investment advisory agreements and recommended that they be submitted to
shareholders for approval.
Terms of the Investment Advisory Agreements
The services that McDonald will provide (and currently provides) under
each of the new investment advisory agreements are generally identical to the
services that McDonald provided under each of the old investment advisory
agreements. In addition, the fees that McDonald will charge (and currently
charges) pursuant to each of the new investment advisory agreements are
37
<PAGE>
identical to the fees that McDonald charged under each of the old investment
advisory agreements.
All other provisions of the new investment advisory agreements and the
old investment advisory agreements are substantially identical, except for the
dates of execution and termination and except for a provision permitting, with
the approval of the Board and to the extent permitted by the 1940 Act, the new
investment advisory agreement to be transferred to KAM.
Required Vote
Approval of Proposal 2 by a Gradison Fund requires the affirmative vote
of the lesser of (1) 67% or more of the shares of that Fund present at the
meeting or represented by proxy if more than 50% of the outstanding shares of
the Fund are so present or represented or (2) more than 50% of the outstanding
shares of the Fund. Approval of Proposal 2 by the shareholders of one Gradison
Fund is not contingent upon the approval of Proposal 2 by the shareholders of
any other Gradison Fund.
Board Recommendation
EACH BOARD RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" PROPOSAL 2.
----------------------------------
PROPOSAL 3.
TO APPROVE A NEW INVESTMENT
SUB-ADVISORY AGREEMENT
FOR THE GRADISON INTERNATIONAL FUND
Introduction
The Board of Trustees of the Gradison Growth Trust has approved a new
Investment Sub-Advisory Agreement for the International Fund.
>> The primary purpose of this proposal is to allow Blairlogie to
serve as sub-adviser to the International Fund until the
reorganization with The Victory Portfolios (and after if
shareholders do not approve the reorganization) and to let
McDonald pay certain fees to Blairlogie.
Effective October 23, 1998, the date that KeyCorp acquired McDonald's
parent company, McDonald and Blairlogie Capital Management (Blairlogie) entered
into a new investment sub-advisory agreement with respect to Gradison
International Fund because the prior investment sub-advisory agreement may have
terminated due to the acquisition. The SEC has issued an exemptive order that
permits your Fund to obtain your approval of the new investment sub-advisory
agreement within 150 days after the acquisition (by March 22, 1999), instead of
prior to
38
<PAGE>
the acquisition. Until your approval is obtained, the exemptive order requires
that sub-advisory fees paid pursuant to the new investment sub-advisory
agreement be escrowed.
Separately, PIMCO Advisors L.P., 840 Newport Center Drive, Suite 360,
Newport Beach, California 92660, the owner of a 75% interest in Blairlogie, has
entered into an agreement to sell its interest in Blairlogie to Alleghany Asset
Management, the investment management subsidiary of Alleghany Corporation. This
acquisition is scheduled to occur in February 1999. As in the transaction
described above, the change in control of Blairlogie would result in the
termination of its investment sub-advisory agreement with McDonald, requiring
shareholder approval of a new sub-advisory agreement. The SEC is currently
considering an application for an exemptive order to permit Blairlogie to
continue to serve as the investment sub-adviser to your Fund after Blairlogie's
change in control.
Why We Are Asking International Fund Shareholders to Approve the Investment
Sub-Advisory Agreement
This proposal is intended to accomplish the following goals. First, if
you do not approve the reorganization of Gradison International Fund described
in Proposal 1, approval of the investment sub-advisory agreement permits
Blairlogie to continue to serve as the investment sub-adviser to your Fund. If
you do not approve either the reorganization of Gradison International Fund or
the new investment sub-advisory agreement, the investment sub-advisory agreement
with respect to Gradison International Fund will terminate. In that event, the
Board will consider what additional steps to take with respect to Gradison
International Fund. Second, assuming that McDonald receives payments of its
escrowed fees, approval of the investment sub-advisory agreement allows
Blairlogie to receive from McDonald (and not from the Fund) its sub-advisory
fees that have been escrowed since October 23, 1998 until there has been a
change in control of Blairlogie (or after that time, if the SEC grants the
exemptive relief requested in connection with the change in control).
Considerations by the Board of Trustees
The new investment sub-advisory agreement was presented to the Board of
your Fund on September 14, 1998. KAM and Blairlogie provided information to the
Board regarding the impact on Gradison International Fund of the
McDonald/KeyCorp merger and the anticipated acquisition of Blairlogie, including
the effects on the sub-advisory services provided by Blairlogie. In considering
the new investment sub-advisory agreement, the Board examined factors it deemed
relevant, including the following:
1. that the quality of the services Blairlogie would be able to
furnish to Gradison International Fund would be of at least equal
quality to the services now rendered to the Fund;
2. that the sub-advisory fee would not exceed its current level; and
3. that the terms of the new sub-advisory agreement are
substantially similar to those currently in effect.
39
<PAGE>
After full consideration of these and other factors, the Board,
including a majority of the Independent Trustees, approved the new investment
sub-advisory agreement arising out of KeyCorp's acquisition of McDonald and
recommended that it be submitted to shareholders for approval. The Board also
approved a sub-advisory agreement in the same form to be entered into upon
Alleghany's acquisition of Blairlogie.
Terms of the Investment Sub-Advisory Agreement
The services that Blairlogie will provide (and currently provides)
under the new investment sub-advisory agreement are generally identical to the
services that Blairlogie provided under the old investment sub-advisory
agreement. In addition, the fee that Blairlogie will charge (and currently
charges) pursuant to the new investment sub-advisory agreement is identical to
the fees that Blairlogie charged under the old investment sub-advisory
agreement.
Finally, all other provisions of the new sub-advisory agreements and
the old sub-advisory agreement are substantially identical, except for the dates
of execution and termination.
Required Vote
Approval of Proposal 3 by Gradison International Fund requires the
affirmative vote of the lesser of (1) 67% or more of the shares of the Fund
present at the Meeting or represented by proxy if more than 50% of the
outstanding shares of the Fund are so present or represented or (2) more than
50% of the outstanding shares of the Fund.
Board Recommendation
THE BOARD RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" PROPOSAL 3.
----------------------------
OTHER INFORMATION
Principal Executive Officer and Directors of McDonald
<TABLE>
<CAPTION>
- -------------------------------------------------- -------------------------------------------------------------------
Name, Address, and Position with McDonald Principal Occupations
<S> <C>
- -------------------------------------------------- -------------------------------------------------------------------
William B. Summers, Jr., Chairman of the Board of Directors and Chief Executive Officer of
Director and Chief Executive Officer McDonald
800 Superior Avenue
Cleveland, Ohio 44114
- -------------------------------------------------- -------------------------------------------------------------------
40
<PAGE>
- -------------------------------------------------- -------------------------------------------------------------------
Robert T. Clutterbuck, President of McDonald
Director
800 Superior Avenue
Cleveland, Ohio 44114
- -------------------------------------------------- -------------------------------------------------------------------
Robert B. Heisler, Jr., Executive Vice President of KeyCorp
Director
127 Public Square
Cleveland, Ohio 44114
- -------------------------------------------------- -------------------------------------------------------------------
Principal Executive Officer and Directors of Blairlogie
- --------------------------------------------------------------- ------------------------------------------------------
Name, Address, and Position with Blairlogie Principal Occupations
- --------------------------------------------------------------- ------------------------------------------------------
Gavin Dobson, Managing Director and Chief Executive Officer
Managing Director and Chief Executive Officer
125 Princes Street
Edinburgh EH2 4AD
Scotland
- --------------------------------------------------------------- ------------------------------------------------------
James G.S. Smith, Managing Director and Chief Investment Officer
Managing Director
125 Princes Street
Edinburgh EH2 4AD
Scotland
- --------------------------------------------------------------- ------------------------------------------------------
</TABLE>
Officers and Trustees of the Gradison Funds
The following chart shows the name of each officer or trustee of the
Gradison Funds who is also an officer, employee, director, general partner, or
shareholder of McDonald. None of the trustees and officers of the Gradison Funds
who are affiliated with McDonald receives remuneration from the Gradison Funds.
<TABLE>
<CAPTION>
- ----------------------------------------------------------- ----------------------------------------------------------
Name and Position with the Gradison Funds Position with McDonald
<S> <C>
- ----------------------------------------------------------- ----------------------------------------------------------
Donald E. Weston, Chairman of the Gradison Division of McDonald (Gradison)
Trustee and Chairman of the Board of all Gradison Trusts
- ----------------------------------------------------------- ----------------------------------------------------------
Stephen C. Dilbone, Senior Vice President of Gradison
Vice President of Gradison-McDonald Municipal Custodian
Trust
- ----------------------------------------------------------- ----------------------------------------------------------
41
<PAGE>
- ----------------------------------------------------------- ----------------------------------------------------------
Richard S. Demko, Senior Managing Director of McDonald
Vice President of Gradison-McDonald Municipal Custodian
Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Thomas M. Seay, Senior Vice President of Gradison
Vice President of Gradison Custodian Trust
- ----------------------------------------------------------- ----------------------------------------------------------
William J. Leugers, Jr., Managing Director of Gradison
Vice President of Gradison Growth Trust
- ----------------------------------------------------------- ----------------------------------------------------------
C. Stephen Wesselkamper, First Vice President of Gradison
Vice President of Gradison-McDonald Cash Reserves Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Daniel R. Shick, Managing Director of Gradison
Vice President of Gradison Growth Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Gary H. Miller, Vice President of Gradison
Vice President of Gradison Growth Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Julian Ball, First Vice President of Gradison
Vice President of Gradison Growth Trust
- ----------------------------------------------------------- ----------------------------------------------------------
Richard M. Wachterman, Senior Vice President and General Counsel of Gradison
Secretary of all Gradison Trusts
- ----------------------------------------------------------- ----------------------------------------------------------
Patricia J. Jamieson, Senior Managing Director, Treasurer, and Chief Financial
Treasurer of all Gradison Trusts Officer of McDonald
- ----------------------------------------------------------- ----------------------------------------------------------
Mark A. Frietch, Senior Vice President of Gradison
Assistant Treasurer of all Gradison Trusts
- ----------------------------------------------------------- ----------------------------------------------------------
</TABLE>
42
<PAGE>
Old Investment Advisory Agreements
The chart below contains some information about the old investment
advisory agreements (and the old investment sub-advisory agreement with respect
to Gradison International Fund). In particular, the chart shows the advisory fee
schedule applicable to each Gradison Fund, the dollar amount of advisory fees
paid in each Fund's last fiscal year, the date of the old advisory agreement (or
sub-advisory agreement), and the date on which the old advisory agreement (or
sub-advisory agreement) was most recently submitted to shareholders.
<TABLE>
<CAPTION>
- ----------------------------------------------------------- --------------------------------------- -------------------
Trust Advisory Fee Advisory Fee
Portfolio (of average daily net assets) (amount paid in
(Date of advisory agreement and date of most recent last fiscal year)
submission to shareholders.)
<S> <C> <C>
- ----------------------------------------------------------- --------------------------------------- -------------------
Gradison Growth Trust
Gradison Established Value Fund 0.65% of first $100 million $ 2,580,124
0.55% of next $100 million
0.45% thereafter
Gradison Opportunity Value Fund 0.65% of first $100 million $ 881,658
0.55% of next $100 million
0.45% thereafter
(Agreement dated October 4, 1991, most recently amended on June 1, 1995, and most recently submitted to shareholders
on May 5, 1995.)
- -----------------------------------------------------------------------------------------------------------------------
Gradison Growth Trust
Gradison Growth & Income Fund 0.65% of first $100 million $ 267,848
0.55% of next $100 million
0.45% thereafter
Gradison International Fund 1.00% of first $100 million $ 223,022*
0.90% of next $150
million 0.80% of
next $250 million
0.75% thereafter
Sub-adviser receives from McDonald: $ 223,022
0.80% of first $25 million
0.70% of next $25 million
0.60% of next $50 million
0.50% of next $150 million
0.40% thereafter
(Growth & Income Fund: Agreement dated, and approved by McDonald as sole shareholder on, February 28, 1995.)
(International Fund: Advisory agreement dated June 1, 1995 and sub-advisory agreement dated May 25, 1995; both
approved by McDonald as sole shareholder on May 31, 1995.)
* All fees paid to McDonald with respect to the Gradison International Fund were paid by McDonald to Blairlogie.
- -----------------------------------------------------------------------------------------------------------------------
43
<PAGE>
- ----------------------------------------------------------- --------------------------------------- -------------------
Gradison-McDonald Municipal Custodian Trust
Gradison Ohio Tax-Free Income Fund 0.50% $ 432,146
(Agreement dated August 25, 1992 and approved by McDonald as sole shareholder on August 20, 1992.)
- ----------------------------------------------------------- --------------------------------------- -------------------
Gradison-McDonald Cash Reserves Trust
Gradison U.S. Government Reserves 0.50% of first $400 million $ 7,875,357
0.45% of next $600 million
0.40% of
next $1 billion
0.35% thereafter
(Agreement dated September 24, 1993 and approved by the sole shareholder (an unaffiliated party) on September 16,
1993.)
- ----------------------------------------------------------- --------------------------------------- -------------------
Gradison Custodian Trust
Gradison Government Income Fund 0.50% $ 773,094
(Agreement dated October 4, 1991 and approved by shareholders on September 23, 1991.)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Other Fees Paid to McDonald or its Affiliates
In addition to the advisory fees shown in the chart above, McDonald and
its affiliates were paid the following fees during the most recent fiscal year
of each Gradison Fund:
<TABLE>
<CAPTION>
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Fund Transfer Accounting Distribution Services
Agent Services
<S> <C> <C> <C>
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Established Value Fund $ 303,442 $ 80,669 $ 2,454,412
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Opportunity Value Fund $ 130,769 $ 40,000 $ 710,599
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Growth & Income Fund $ 47,227 $ 40,000 $ 206,037
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison International Fund $ 41,353 $ 60,000 $ 88,483
- ------------------------------------------------------ ------------------- ------------------- -----------------------
44
<PAGE>
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Ohio Tax-Free Income Fund $ 37,821 $ 48,000 $ 216,073
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison U.S. Government Reserves $ 2,612,210 $ 187,038 $ 1,778,775
- ------------------------------------------------------ ------------------- ------------------- -----------------------
Gradison Government Income Fund $ 40,302 $ 53,667 $ 380,694
- ------------------------------------------------------ ------------------- ------------------- -----------------------
</TABLE>
Other Fees Paid to Blairlogie or its Affiliates
Other than the sub-advisory fee shown in the chart above, Blairlogie
and its affiliates did not receive any fees from the Gradison Funds during the
most recent fiscal year.
Affiliated Brokerage Commissions
In the last fiscal year, none of the Gradison Funds paid commissions to
an affiliated broker.
Distribution Plan for the Gradison Ohio Tax-Free Income Fund
The Board of Gradison-McDonald Municipal Custodian Trust previously
undertook to submit the distribution expense plan for The Gradison Ohio Tax-Free
Income Fund (which were approved by McDonald as its sole shareholder) to
shareholders at the Fund's first shareholders meeting, which this meeting is.
Since it is anticipated that this meeting will result in the reorganization of
the Gradison Ohio Tax-Free Income Fund, this matter is not being submitted to
shareholders at this meeting. If the reorganization is not approved, the Board
will promptly call a special shareholder meeting for the purpose of seeking
shareholder approval of the distribution expense plan.
PART 3 - MORE ON PROXY VOTING AND SHAREHOLDER MEETINGS
General information about proxy voting. The Board of Trustees of each
Gradison Trust is soliciting your proxy to vote on the matters described in this
combined proxy statement and prospectus. We expect to solicit proxies primarily
by mail, but representatives of McDonald or its affiliates or others may
communicate with you by mail or by telephone or other electronic means to
discuss your vote. We have also retained Shareholders Communication Corporation
to assist us in this solicitation. Representatives of Shareholders Communication
Corporation may contact you if we do not receive your ballot. We estimate the
cost of soliciting votes to be approximately $400,000 of which half will be paid
by the acquiring Victory Funds and half will be paid by KAM or BISYS. We will
ask broker-dealers and other institutions that hold shares for the benefit of
their customers to send the proxy materials to the beneficial owners and to
obtain authorization to vote on their behalf.
You may vote directly over the telephone by calling 800-786-8764. You
may also fax your ballot to 800-733-1885 or return it by mail. In addition,
internet voting is available at www.proxyvote.com.
45
<PAGE>
Only shareholders of record of the Gradison Funds at the close of
business on the record date, January 6, 1999, may vote at the special meeting.
As of the record date, each of the Gradison Funds had the number of shares
issued and outstanding listed below, each share being entitled to one vote:
Fund Name Total Shares Outstanding
--------- ------------------------
*Gradison U.S. Government Reserves 2,142,048,799
*Gradison Established Value Fund 16,771,521
**Gradison Government Income Fund 11,994,920
**Gradison Ohio Tax-Free Income Fund 8,576,992
**Gradison Growth & Income Fund 2,423,361
**Gradison Opportunity Value Fund 6,491,985
**Gradison International Fund 1,834,205
* Gradison Fund that will be reorganized into Class G of a new Victory
Fund
** Gradison Fund that will reorganize into Class G of an operating
Victory Fund
As of January 6, 1999, the record date, the trustees and officers of
the Gradison Funds, as a group, owned less than 1% of the outstanding shares of
each Gradison Fund. To the best of the knowledge of the Gradison Funds, the
following shareholders beneficially owned 5% or more of the outstanding shares
of a Gradison Fund as of January 6, 1999:
<TABLE>
<CAPTION>
======================== ===================================== ============================= =========================
Percent of Fund Owned of Percent of Fund Owned
Fund Name and Address Record of Record and
Beneficially
<S> <C> <C> <C>
======================== ===================================== ============================= =========================
Gradison Ohio Tax-Free David M. Schneider 9.8 9.8
Income Fund 2767 Belgrade Road
Pepper Pike, OH 44124-4601
======================== ===================================== ============================= =========================
</TABLE>
You may cast one vote for each proposal for each whole share that you
own of a Gradison Fund. We count your fractional shares as fractional votes. If
we receive your proxy before the special meeting date, we will vote your shares
as you instruct the proxies. If you sign and return your proxy, but do not
specify instructions, we will vote your shares in favor of each proposal. You
may revoke your proxy at any time before the special meeting if you notify us in
writing, or if you attend the special meeting in person and vote in person.
If a broker or nominee returns a proxy indicating that it did not
receive voting instructions from the beneficial owner, or if the beneficial
owner marked an abstention, we will count those shares when we determine if a
quorum is present, but those proxies, in effect, will count as a vote "against".
46
<PAGE>
The Gradison Growth Trust consists of four separate Gradison Funds:
Established Value Fund, Growth & Income Fund, Opportunity Value Fund, and
International Fund. If shareholders of any one of the Gradison Growth Trust
Funds do not approve the reorganization relating to that Fund, then the
reorganization of that Fund will not proceed. The reorganization relating to the
other Growth Trust Funds will proceed if shareholders of those other Funds
approve the reorganization. If this occurs, Gradison Growth Trust will continue
operating as an investment company and will not dissolve.
If shareholders of any Gradison Fund do not approve any proposal, the
Boards of Trustees will consider possible alternatives.
Quorum and adjournments. Each Gradison Fund will vote separately on
each proposal. Each Gradison Fund requires that a quorum at the special meeting
be present, in person or by proxy, to conduct the special meeting. A simple
majority of all of the shares outstanding on the record date will be a quorum.
If a quorum is not present at the special meeting, the persons named as proxies
may propose one or more adjournments of the special meeting to permit further
solicitation of proxies. An affirmative vote of a majority of the shares of each
Gradison Fund present at the special meeting may adjourn the special meeting
without further notice, until the Gradison Fund obtains a quorum. In the event a
quorum is present but sufficient votes to approve a proposal are not received,
the persons named as proxies may propose one or more adjournments to permit
further solicitation of proxies. If this should occur, we will vote proxies for
or against a motion to adjourn in the same proportion to the votes received in
favor or against the proposal.
Other business. The Board of Trustees of each Gradison Trust knows of
no other business to be brought before the special meeting. If any other matters
come before the special meeting, proxies that do not contain specific
restrictions to the contrary, the named proxies be voted by all proxies using
their best judgment.
Future shareholder proposals. The Gradison Funds are not required to
hold annual meetings, unless required to do so by law. If you have a proposal
you wish to be considered by shareholders, send your proposal to The Gradison
Funds, 580 Walnut Street, Cincinnati, Ohio 45202. We must receive your proposal
in sufficient time before the next meeting of shareholders for it to be
included. We do not guarantee that we will be able to include any proposal in a
proxy statement.
Recommendation of each Board of Trustees. After carefully considering
all of the issues involved, the Board of Trustees of each Gradison Trust has
unanimously concluded that each proposal is in the best interests of
shareholders. Each Board of Trustees recommends that you vote to approve each
proposal.
PART 4 - FUND INFORMATION
The Victory Portfolios is a business trust established under Delaware
law. The operations of The Victory Portfolios are governed by a Trust Instrument
dated December 5, 1995, as amended.
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Each Victory Fund is a separate series of The Victory Portfolios and,
as such, has similar rights under the Trust Instrument of The Victory Portfolios
and applicable Delaware law. You should be aware of the following features of
the Victory Funds:
o Shares of each class of the Victory Funds participate equally in
dividends and other distributions attributable to that class,
including any distributions in the event of a liquidation.
o Each share of each Victory Fund is entitled to one vote for all
purposes.
o Shares of all series of The Victory Portfolios vote for the
election of Trustees and on any other matter that affects each
Victory Fund in substantially the same manner, except as
otherwise required by law.
o As to matters that affect each Fund differently, such as approval
of an investment advisory agreement, shares of each series vote
as a separate series.
o On matters that affect the classes of a series differently,
shares of each class vote separately.
o Delaware law does not require registered investment companies,
such as The Victory Portfolios or its series, to hold annual
meetings of shareholders and it is anticipated that shareholder
meetings will be held only when specifically required by federal
or state law.
o Shareholders have available certain procedures for the removal of
Trustees.
o The Victory Portfolios indemnifies trustees and officers to the
fullest extent permitted under federal and Delaware law.
Financial Statements. PricewaterhouseCoopers LLP, independent auditors
of The Victory Portfolios, has audited the financial statements included in the
Statement of Additional Information for the year ended October 31, 1998.
PART 5 - PROSPECTUS FOR CLASS G SHARES OF FIVE EXISTING VICTORY FUNDS
This prospectus can be found under separate cover provided with your
proxy materials.
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PART 6 - FORMS OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
FORM A
Gradison Established Value Fund
Gradison U.S. Government Reserves
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
This AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement")
is made as of this 11th day of December, 1998, between Gradison Growth Trust, an
Ohio business trust ("Old Trust"), on behalf of Gradison ______________ Fund, a
segregated portfolio of assets ("series") thereof ("Old Fund"), and The Victory
Portfolios, a Delaware business trust ("New Trust"), on behalf of its Victory
____________ Fund series ("New Fund"). (Old Fund and New Fund are sometimes
referred to herein individually as a "Fund" and collectively as the "Funds"; Old
Trust and New Trust are sometimes referred to herein individually as a "Trust"
and collectively as the "Trusts.") All agreements, representations, actions, and
obligations described herein made or to be taken or undertaken by a Fund are
made or shall be taken or undertaken by Old Trust on behalf of Old Fund and by
New Trust on behalf of New Fund.
Old Fund intends to change its identity and place of organization -- by
converting from a series of an Ohio business trust to a series of a Delaware
business trust -- through a reorganization within the meaning of section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("Code"). Old Fund
desires to accomplish such conversion by transferring all its assets to New Fund
(which is being established solely for the purpose of acquiring such assets and
continuing Old Fund's business) in exchange solely for Class G voting shares of
beneficial interest in New Fund ("New Fund Shares") and New Fund's assumption of
Old Fund's liabilities, followed by the distribution of New Fund Shares pro rata
to the holders of shares of beneficial interest in Old Fund ("Old Fund Shares")
in liquidation of Old Fund, all upon the terms and conditions set forth in this
Agreement (which is intended to be, and is adopted as, a "plan of
reorganization" for federal income tax purposes). All such transactions are
referred to herein as the "Reorganization."
In consideration of the mutual promises herein contained, the parties
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
1.1. At the Effective Time (defined in paragraph 2.1), Old Fund agrees
to assign, sell, convey, transfer, and deliver all of its assets described in
paragraph 1.2 ("Assets") to New Fund. New Fund agrees in exchange therefor --
(a) to issue and deliver to Old Fund the number of full and
fractional (rounded to the third decimal place) New Fund Shares equal
to the number of full and fractional Old Fund Shares outstanding; and
(b) to assume all of Old Fund's liabilities described in
paragraph 1.3 ("Liabilities").
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1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Old Fund's books, and other property owned by Old Fund at the
Effective Time.
1.3. The Liabilities shall include (except as otherwise provided
herein) all of Old Fund's liabilities, debts, obligations, and duties of
whatever kind or nature, whether absolute, accrued, contingent, or otherwise,
whether or not determinable at the Effective Time, and whether or not
specifically referred to in this Agreement, including without limitation, Old
Fund's share of the expenses described in Paragraph 5, if any, and the
liabilities to which the Assets are subject.
1.4. At the Effective Time (or as soon thereafter as is reasonably
practicable), Old Fund shall constructively distribute the New Fund Shares
received by it pursuant to paragraph 1.1 to Old Fund's shareholders of record,
determined as of the Effective Time (collectively, "Shareholders" and each
individually, a "Shareholder"), in exchange for their Old Fund Shares and in
liquidation of Old Fund. To accomplish this distribution, New Trust's transfer
agent ("Transfer Agent") shall open accounts on New Fund's share transfer books
in the Shareholders' names and transfer such New Fund Shares thereto. Each
Shareholder's account shall be credited with the pro rata number of full and
fractional (rounded to the third decimal place) New Fund Shares due that
Shareholder. All outstanding Old Fund Shares, including those represented by
certificates, shall simultaneously be canceled on Old Fund's share transfer
books. New Fund shall not issue certificates representing New Fund Shares in
connection with the Reorganization. However, certificates representing Old Fund
Shares shall represent New Fund Shares after the Reorganization.
1.5. As soon as reasonably practicable after distribution of the New
Fund Shares pursuant to paragraph 1.4, Old Fund shall be terminated and any
further actions shall be taken in connection therewith as required by applicable
law. Old Trust shall file such instruments and take all other steps necessary to
effect a complete liquidation and dissolution of Old Fund.
1.6. Any transfer taxes payable on issuance of New Fund Shares in a
name other than that of the registered holder on Old Fund's books of Old Fund
Shares constructively exchanged therefor shall be paid by the person to whom
such New Fund Shares are to be issued, as a condition of such transfer.
1.7. Any reporting responsibility of Old Fund to a public authority is
and shall remain its responsibility up to and including the date on which it is
terminated.
2. CLOSING AND EFFECTIVE TIME
2.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Trusts' principal office on
April 5, 1999, or on such other date and/or at such other place upon which the
parties may agree. All acts taking place at the Closing shall be deemed to take
place simultaneously as of the Trusts' close of business on the date thereof or
at such other time upon which the parties may agree ("Effective Time").
2
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2.2. Old Trust shall deliver to New Trust at the Closing a schedule of
the Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax bases and holding periods by lot.
Old Fund's custodian shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets held by the custodian will be transferred to
New Fund at the Effective Time and (b) all necessary taxes in conjunction with
the delivery of the Assets, including all applicable federal and state stock
transfer stamps, if any, have been paid or provision for payment has been made.
2.3. The Transfer Agent shall deliver at the Closing a certificate as
to the opening on New Fund's share transfer books of accounts in the
Shareholders' names. New Trust shall issue and deliver a confirmation to Old
Trust evidencing New Fund Shares to be credited to Old Fund at the Effective
Time or provide evidence satisfactory to Old Trust that such shares have been
credited to Old Fund's account on such books. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, stock
certificates, receipts, or other documents as the other party or its counsel may
reasonably request.
2.4. Each Trust shall deliver to the other at the Closing a certificate
executed in its name by its President or a Vice President in form and substance
satisfactory to the recipient and dated the Effective Time, to the effect that
the representations and warranties it made in this Agreement are true and
correct in all material respects at the Effective Time, with the same force and
effect as if made on and as of the Effective Time, except as they may be
affected by the transactions contemplated by this Agreement.
3. REPRESENTATIONS AND WARRANTIES.
3.1. Old Fund represents and warrants as follows:
3.1.1. Old Trust is a trust operating under a written
declaration of trust, the beneficial interest in which is divided into
transferable shares, that is duly organized, validly existing, and in
good standing under the laws of the State of Ohio, and a copy of its
Declaration of Trust is on file with the Secretary of State of Ohio;
3.1.2. Old Trust is duly registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
("1940 Act"), and such registration is in full force and effect;
3.1.3. Old Fund is a duly established and designated series of
Old Trust;
3.1.4. At the Closing, Old Fund will have good and marketable
title to the Assets and full right, power, and authority to sell,
assign, transfer, and deliver the Assets free of any liens or other
encumbrances; and upon delivery and payment for the Assets, New Fund
will acquire good and marketable title thereto;
3.1.5. New Fund Shares are not being acquired for the purpose
of making any distribution thereof, other than in accordance with the
terms hereof;
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<PAGE>
3.1.6. Old Fund's current prospectus and statement of
additional information conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended
("1933 Act"), and the 1940 Act and the rules and regulations thereunder
and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading;
3.1.7. Old Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Ohio law or any
provision of Old Trust's Declaration of Trust or By-Laws or of any
agreement, instrument, lease, or other undertaking to which Old Fund is
a party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Old Fund is a party or by which it is
bound, except as previously disclosed in writing to and accepted by Old
Trust;
3.1.8. Except as otherwise disclosed in writing to and
accepted by New Trust, all material contracts and other commitments of
or applicable to Old Fund (other than this Agreement and investment
contracts, including options, futures, and forward contracts) will be
terminated, or provision for discharge of any liabilities of Old Fund
thereunder will be made, at or prior to the Effective Time, without
either Fund's incurring any liability or penalty with respect thereto
and without diminishing or releasing any rights Old Fund may have had
with respect to actions taken or omitted to be taken by any other party
thereto prior to the Closing;
3.1.9. Except as otherwise disclosed in writing to and
accepted by New Trust, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently
pending or (to Old Fund's knowledge) threatened against Old Trust with
respect to Old Fund or any of its properties or assets that, if
adversely determined, would materially and adversely affect Old Fund's
financial condition or the conduct of its business; Old Fund knows of
no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or
subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially or adversely affects its
business or its ability to consummate the transactions contemplated
hereby;
3.1.10. The execution, delivery, and performance of this
Agreement has been duly authorized as of the date hereof by all
necessary action on the part of Old Trust's board of trustees, which
has made the determinations required by Rule 17a-8(a) under the 1940
Act; and, subject to approval by Old Fund's shareholders and receipt of
any necessary exemptive relief or no-action assurances requested from
the Securities and Exchange Commission ("SEC") or its staff with
respect to sections 17(a) and 17(d) of the 1940 Act, this Agreement
will constitute a valid and legally binding obligation of Old Fund,
enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights
and by general principles of equity;
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3.1.11. At the Effective Time, the performance of this
Agreement shall have been duly authorized by all necessary action by
Old Fund's shareholders;
3.1.12. No governmental consents, approvals, authorizations,
or filings are required under the 1933 Act, the Securities Exchange Act
of 1934 ("1934 Act"), or the 1940 Act for the execution or performance
of this Agreement by Old Trust, except for (a) the filing with the SEC
of a registration statement by New Trust on Form N-14 relating to the
New Fund Shares issuable hereunder, and any supplement or amendment
thereto ("Registration Statement"), including therein a
prospectus/proxy statement ("Proxy Statement"), (b) receipt of the
exemptive relief referenced in subparagraph 3.1.9, and (c) such
consents, approvals, authorizations, and filings as have been made or
received or as may be required subsequent to the Effective Time;
3.1.13. On the effective date of the Registration Statement,
at the time of the shareholders' meeting referred to in paragraph 4.2,
and at the Effective Time, the Proxy Statement will (a) comply in all
material respects with the applicable provisions of the 1933 Act, the
1934 Act, and the 1940 Act and the regulations thereunder and (b) not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the shall not apply to statements in or
omissions from the Proxy Statement made in reliance on and in
conformity with information furnished by New Trust for use therein;
3.1.14. The Liabilities were incurred by Old Fund in the
ordinary course of its business and are associated with the Assets;
3.1.15. Old Fund is a "fund" as defined in section 851(g)(2)
of the Code; it qualified for treatment as a regulated investment
company under Subchapter M of the Code ("RIC") for each past taxable
year since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year (and
the Assets will be invested at all times through the Effective Time in
a manner that ensures compliance with the foregoing); it has no
earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it; and it has made all
distributions for each such past taxable year that are necessary to
avoid the imposition of federal excise tax or has paid or provided for
the payment of any excise tax imposed for any such year;
3.1.16. There is no plan or intention by Shareholders who own
5% or more of Old Fund Shares, and to the best of the knowledge of
management of Old Fund, there is no plan or intention on the part of
the remaining Shareholders to redeem or otherwise sell to New Fund or
to New Trust any New Fund Shares to be received by them in the
Reorganization. Old Trust's management does not anticipate dispositions
of New Fund Shares at the time of or soon after the Reorganization to
exceed the usual rate and frequency of redemptions of shares of Old
Fund in the ordinary course of its operation as a series of an open-end
investment company. Consequently, Old Trust's management expects that
the percentage of
5
<PAGE>
Shareholder interests, if any, that will be disposed of as a result of
or at the time of the Reorganization will be de minimis;
3.1.17. Old Fund is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case
within the meaning of section 368(a)(3)(A) of the Code;
3.1.18. Not more than 25% of the value of Old Fund's total
assets (excluding cash, cash items, and U.S. government securities) is
invested in the stock and securities of any one issuer, and not more
than 50% of the value of such assets is invested in the stock and
securities of five or fewer issuers;
3.1.19. Old Fund will, pursuant to the Agreement, distribute,
in liquidation of Old Fund, the New Fund Shares it receives in the
Reorganization as soon as reasonably practicable after the
Reorganization. Each Shareholder will receive solely New Fund Shares in
exchange for its Old Fund Shares. Old Fund will receive solely New Fund
Shares and the assumption by the New Fund of the Liabilities in
exchange for the Assets it transfers to New Fund. None of the
compensation received by any Shareholder that is an employee or a
direct or indirect provider of investment advisory or administrative
services to Old Fund ("Shareholder/Service Provider") (if any) will be
separate consideration for, or allocable to, any of its Old Fund
Shares; none of the New Fund Shares received by any Shareholder/Service
Provider (if any) will be separate consideration for, or allocable to,
any employment agreement or any investment advisory services provided
to Old Fund; and the compensation paid to any Shareholder/Service
Provider (if any) will be for services actually rendered and will be
commensurate with the amounts paid to third parties bargaining at arm's
length for similar services;
3.1.20. As of the Effective Time, Old Fund will not have
outstanding any warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire Old Fund
Shares;
3.1.21. At the Effective Time, the performance of this
Agreement shall have been duly authorized by all necessary action by
Old Fund's shareholders; and
3.1.22. Old Fund will be terminated as soon as reasonably
practicable after the Reorganization. Old Trust shall file such
instruments and take all other steps necessary to effect a complete
liquidation and dissolution of Old Fund.
3.2. New Fund represents and warrants as follows:
3.2.1. New Trust is a business trust that is duly organized,
validly existing, and in good standing under the laws of the State of
Delaware, and a copy of its Certificate of Trust has been duly filed in
the office of the Secretary of State thereof;
3.2.2. Before the Effective Time, New Fund will be a duly
established and designated series of New Trust;
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<PAGE>
3.2.3. New Fund has not commenced operations and will not
commence operations until after the Closing;
3.2.4. Prior to the Effective Time, there will be no issued
and outstanding shares in New Fund or any other securities issued by
New Fund;
3.2.5. No consideration other than New Fund Shares (and New
Fund's assumption of the Liabilities) will be issued in exchange for
the Assets in the Reorganization;
3.2.6. The New Fund Shares to be issued and delivered to Old
Fund hereunder will, at the Effective Time, have been duly authorized
and, when issued and delivered as provided herein, will be duly and
validly issued and outstanding shares of New Fund, fully paid and
non-assessable by New Trust (except as discussed in New Trust's
then-current prospectus and statement of additional information);
3.2.7. New Fund will be a "fund" as defined in section
851(g)(2) of the Code and will meet all the requirements to qualify for
treatment as a RIC for its taxable year in which the Reorganization
occurs;
3.2.8. New Fund has no plan or intention to issue additional
New Fund Shares following the Reorganization except for shares issued
in the ordinary course of its business as a series of an open-end
investment company; nor does New Fund have any plan or intention to
redeem or otherwise reacquire any New Fund Shares issued to the
Shareholders pursuant to the Reorganization, other than in the ordinary
course of its business as an open-end investment company or to the
extent necessary to comply with its legal obligation under section
22(e) of the 1940 Act;
3.2.9. Following the Reorganization, New Fund (a) will
actively continue Old Fund's "historic business" (within the meaning of
Treasury Regulations ss. 1.368-1(d)(2)) in substantially the same
manner that Old Fund conducted that business immediately before the
Reorganization (b) has no plan or intention to sell or otherwise
dispose of any of the Assets, except for dispositions made in the
ordinary course of its business and dispositions necessary to maintain
its status as a RIC, although in the ordinary course of its business
New Fund will continuously review its investment portfolio (as Old Fund
did before the Reorganization) to determine whether to retain or
dispose of particular stocks or securities, including those included in
the Assets, and (c) expects to retain substantially all the Assets in
the same form as it receives them in the Reorganization, unless and
until subsequent investment circumstances suggest the desirability of
change or it becomes necessary to make dispositions thereof to maintain
such status;
3.2.10. There is no plan or intention for New Fund to be
dissolved or merged into another business trust or a corporation or a
"fund" thereof (within the meaning of section 851(g)(2) of the Code)
following the Reorganization; and
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3.2.11. Immediately after the Reorganization, (a) not more
than 25% of the value of New Fund's total assets (excluding cash, cash
items, and U.S. government securities) will be invested in the stock
and securities of any one issuer and (b) not more than 50% of the value
of such assets will be invested in the stock and securities of five or
fewer issuers.
3.3. Each Fund represents and warrants as follows:
3.3.1. The aggregate fair market value of the New Fund Shares
received by each Shareholder, when so received, will be approximately
equal to the aggregate fair market value of the Old Fund Shares
exchanged therefor;
3.3.2. Any amounts payable to Shareholders who seek redemption
of their New Fund Shares, and all other amounts payable to
Shareholders, including amounts due as a result of the declaration of a
dividend or other distribution, will be paid by New Fund and not by Old
Fund;
3.3.3. Immediately following consummation of the
Reorganization, the Shareholders will own all the New Fund Shares and
will own such shares solely by reason of their ownership of Old Fund
Shares immediately before the Reorganization;
3.3.4. Old Fund Shareholders will pay their expenses, if any,
incurred in connection with the Reorganization. New Fund will pay or
assume only those expenses of Old Fund that are solely and directly
related to the Reorganization in accordance with the guidelines
established in Rev. Rul. 73-54, 1073-1 C.B.187;
3.3.5. There is no intercompany indebtedness between the
Funds that was issued or acquired, or will be settled, at a discount;
and
3.3.6. Immediately following consummation of the
Reorganization, New Fund will possess the same assets and liabilities
as those possessed by Old Fund immediately prior to the Reorganization,
excepting assets used to pay expenses incurred in connection with the
Reorganization. Assets used to pay expenses and all redemptions and
distributions (except for redemptions made in the ordinary course of
Old Fund's business as an open-end investment company and distributions
made to conform to Old Fund's policy of distributing all or
substantially all of its income and gains to avoid the obligation to
pay federal income tax and/or the excise tax under section 4982 of the
Code) made by Old Fund immediately preceding the Reorganization will,
in the aggregate, constitute less than 1% of the net assets of Old
Fund.
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4. CONDITIONS PRECEDENT.
Each Fund's obligations hereunder shall be subject to (a) performance
by the other party of all its obligations to be performed hereunder at or before
the Effective Time, (b) all representations and warranties of the other party
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made on
and as of the Effective Time, and (c) the further conditions that, at or before
the Effective Time:
4.1. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. All consents, orders, and permits of federal,
state, and local regulatory authorities (including the SEC and state securities
authorities) deemed necessary by either Trust to permit consummation, in all
material respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain same would not involve a risk of a
material adverse effect on the assets or properties of either Fund, provided
that either Trust may for itself waive any of such conditions;
4.2. Old Trust shall have called a meeting of Old Fund's shareholders
("Shareholders Meeting") to consider and act on this Agreement and the
transactions contemplated thereby, and at such meeting the Agreement and the
transactions contemplated thereby shall have been approved by the affirmative
vote of a simple majority of the outstanding securities of Old Fund;
4.3. Each party shall have received opinions as follows:
4.3.1. Old Trust shall have received an opinion of Kramer
Levin Naftalis & Frankel LLP, counsel to New Trust, substantially to
the effect that:
4.3.1.1. New Fund is a duly established series of New
Trust, a business trust duly organized and validly existing
under the laws of the State of Delaware with power under its
Trust Instrument to own all of its properties and assets and,
to the knowledge of such counsel, to carry on its business as
presently conducted;
4.3.1.2. This Agreement (a) has been duly authorized,
executed, and delivered by New Trust on behalf of New Fund and
(b) assuming due authorization, execution, and delivery of
this Agreement by Old Trust, on behalf of Old Fund, is a valid
and legally binding obligation of New Trust with respect to
New Fund, enforceable in accordance with its terms, except as
the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws
relating to or affecting creditors' rights and by general
principles of equity;
4.3.1.3. The New Fund Shares to be issued and
distributed to the Shareholders under this Agreement, assuming
their due delivery as contemplated by this Agreement, will be
duly authorized and validly issued and outstanding and fully
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paid and non-assessable by New Trust (except as disclosed in
New Fund's then current prospectus and statement of additional
information);
4.3.1.4. The execution and delivery of this Agreement
did not, and the consummation of the transactions contemplated
hereby will not, materially violate New Trust's Trust
Instrument or By-Laws or any provision of any agreement (known
to such counsel, without any independent inquiry or
investigation) to which New Trust (with respect to New Fund)
is a party or by which it is bound or (to the knowledge of
such counsel, without any independent inquiry or
investigation) result in the acceleration of any obligation,
or the imposition of any penalty, under any agreement,
judgment, or decree to which New Trust (with respect to New
Fund) is a party or by which it (with respect to New Fund) is
bound, except as set forth in such opinion or as previously
disclosed in writing to and accepted by Old Trust;
4.3.1.5. To the knowledge of such counsel (without
any independent inquiry or investigation), no consent,
approval, authorization, or order of any court or governmental
authority is required for the consummation by New Trust on
behalf of New Fund of the transactions contemplated herein,
except such as have been obtained under the 1933 Act, the 1934
Act, and the 1940 Act and such as may be required under state
securities laws;
4.3.1.6. New Trust is registered with the SEC as an
investment company, and to the knowledge of such counsel no
order has been issued or proceeding instituted to suspend such
registration; and
4.3.1.7. To the knowledge of such counsel (without
any independent inquiry or investigation), (a) no litigation,
administrative proceeding, or investigation of or before any
court or governmental body is pending or threatened as to New
Trust (with respect to New Fund) or any of its properties or
assets attributable or allocable to New Fund and (b) New Trust
(with respect to New Fund) is not a party to or subject to the
provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects New
Fund's business, except as set forth in such opinion or as
otherwise disclosed in writing to and accepted by Old Trust.
4.3.1.8. In rendering such opinion, such counsel may
(i) rely, as to matters governed by the laws of the State of
Delaware, on an opinion of competent Delaware counsel, (ii)
make assumptions regarding the authenticity, genuineness,
and/or conformity of documents and copies thereof without
independent verification thereof, (iii) limit such opinion to
applicable federal and state law, (iv) define the word
"knowledge" and related terms to mean the knowledge of
attorneys then with such firm who have devoted substantive
attention to matters directly related to this Agreement and
the Reorganization, and (v) rely on certificates of officers
or trustees of the Old Trust; in each case reasonably
acceptable to New Trust.
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4.3.2. New Trust shall have received an opinion of Kirkpatrick
& Lockhart LLP, counsel to Old Trust, substantially to the effect that:
4.3.2.1. Old Fund is a duly established series of Old
Trust, a business trust duly organized and validly existing
under the laws of the State of Ohio with power under its
Declaration of Trust to own all of its properties and assets
and, to the knowledge of such counsel, to carry on its
business as presently conducted;
4.3.2.2. This Agreement (a) has been duly authorized,
executed, and delivered by Old Trust on behalf of Old Fund and
(b) assuming due authorization, execution, and delivery of
this Agreement by New Trust on behalf of New Fund, is a valid
and legally binding obligation of Old Trust with respect to
Old Fund, enforceable in accordance with its terms, except as
the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws
relating to or affecting creditors' rights and by general
principles of equity;
4.3.2.3. The execution and delivery of this Agreement
did not, and the consummation of the transactions contemplated
hereby will not, materially violate Old Trust's Declaration of
Trust or By-Laws or any provision of any agreement (known to
such counsel, without any independent inquiry or
investigation) to which Old Trust (with respect to Old Fund)
is a party or by which it is bound or (to the knowledge of
such counsel, without any independent inquiry or
investigation) result in the acceleration of any obligation,
or the imposition of any penalty, under any agreement,
judgment, or decree to which Old Trust (with respect to Old
Fund) is a party or by which it is bound, except as set forth
in such opinion or as previously disclosed in writing to and
accepted by New Trust;
4.3.2.4. To the knowledge of such counsel (without
any independent inquiry or investigation), no consent,
approval, authorization, or order of any court or governmental
authority is required for the consummation by Old Trust on
behalf of Old Fund of the transactions contemplated herein,
except such as have been obtained under the 1933 Act, the 1934
Act, and the 1940 Act and such as may be required under state
securities laws;
4.3.2.5. Old Trust is registered with the SEC as an
investment company, and to the knowledge of such counsel no
order has been issued or proceeding instituted to suspend such
registration; and
4.3.2.6. To the knowledge of such counsel (without
any independent inquiry or investigation), (a) no litigation,
administrative proceeding, or investigation of or before any
court or governmental body is pending or threatened as to Old
Trust (with respect to Old Fund) or any of its properties or
assets attributable or allocable to Old Fund and (b) Old Trust
(with respect to Old Fund) is not a party to or subject to the
provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Old
Fund's
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business, except as set forth in such opinion or as
otherwise disclosed in writing to and accepted by New Trust.
4.3.2.7. In rendering such opinion, such counsel may
(i) rely, as to matters governed by the laws of the State of
Ohio, on an opinion of competent Ohio counsel, (ii) make
assumptions regarding the authenticity, genuineness, and/or
conformity of documents and copies thereof without independent
verification thereof, (iii) limit such opinion to applicable
federal and state law, (iv) define the word "knowledge" and
related terms to mean the knowledge of attorneys then with
such firm who have devoted substantive attention to matters
directly related to this Agreement and the Reorganization, and
(v) rely on certificates of officers or trustees of the New
Trust; in each case reasonably acceptable to Old Trust.
4.4. Each Trust shall have received an opinion from Kramer Levin
Naftalis & Frankel LLP addressed to and in form and substance satisfactory to
it, as to the federal income tax consequences of the Reorganization ("Tax
Opinion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the
representations made in this Agreement (and/or in separate letters addressed to
such counsel) and each Fund's separate covenants. The Tax Opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein and conditioned on consummation of the Reorganization in accordance with
this Agreement, for federal income tax purposes:
4.4.1. The Reorganization will constitute a reorganization
within the meaning of section 368(a)(1)(F) of the Code, and each Fund
will be "a party to a reorganization" within the meaning of section
368(b) of the Code;
4.4.2. Old Fund will not recognize any gain or loss as a
result of the Reorganization;
4.4.3. New Fund will not recognize any gain or loss on its
receipt of the Assets in exchange for New Fund Shares and its
assumption of the Liabilities;
4.4.4. New Fund's adjusted tax bases in the Assets will be the
same as the adjusted tax bases of such Assets in Old Fund's hands
immediately prior to the Reorganization, and New Fund's holding periods
in the Assets will include the holding periods of such Assets in Old
Fund's hands immediately prior to the Reorganization;
4.4.5. The Shareholders will not recognize any gain or loss
on the exchange of their Old Fund Shares for New Fund Shares in the
Reorganization;
4.4.6. The aggregate tax basis of the New Fund Shares received
by each Shareholder in the Reorganization will be the same as the
aggregate tax basis of the Old Fund Shares exchanged therefor, and
holding period of each Shareholder in the New Fund Shares received in
the Reorganization will include period during which such Shareholder
held the Old Fund Shares exchanged therefor, if such Old Fund Shares
were held as a capital asset by the Shareholder at the Effective Time;
and
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4.5. Immediately upon delivery to Old Fund of New Fund Shares, Old
Trust, as the then sole shareholder of New Fund, shall approve an investment
advisory agreement between New Trust and Key Asset Management Inc., and to the
extent required under the 1940 Act, other matters necessary for New Fund to
commence operations; and
4.6. New Trust (on behalf of and with respect to New Fund) shall have
entered into an investment management agreement, administration agreement,
sub-administration agreement, distribution agreement, plan of distribution
pursuant to Rule 12b-1 under the 1940 Act, and such other agreements as are
necessary for New Fund's operation as a series of an open-end investment
company. Each such agreement shall have been approved by New Trust's trustees
and, to the extent required by law, by such of those trustees who are not
"interested persons" thereof (as defined in the 1940 Act) and by Old Fund as the
sole shareholder of New Fund.
At any time prior to the Closing, any of the foregoing conditions
(except that set forth in paragraph 4.2) may be waived by the trustees of either
Trust if, in their judgment, such waiver will not have a material adverse effect
on the interests of Old Fund's shareholders.
5. EXPENSES.
Except as otherwise provided in subparagraph 3.3.4, all expenses
incurred in connection with the transactions contemplated by this Agreement
(regardless of whether they are consummated) will be borne by the parties as
they mutually agree.
6. ENTIRE AGREEMENT; SURVIVAL.
Neither party has made any representation, warranty, or covenant not
set forth herein, and this Agreement constitutes the entire agreement between
the parties. The representations, warranties, and covenants contained herein or
in any document delivered pursuant hereto or in connection herewith shall
survive the Closing.
7. AMENDMENT.
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Old Fund's shareholders, in such manner as
may be mutually agreed upon in writing by the parties; provided that following
such approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
8. TERMINATION.
This Agreement may be terminated at any time at or prior to the
Effective Time, whether before or after approval by Old Fund's shareholders:
8.1. By either Fund (a) in the event of the other Fund's material
breach of any representation, warranty, or covenant contained herein to be
performed at or prior to the Effective Time, (b) if a condition to its
obligations has not been met and it reasonably appears that such
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condition will not or cannot be met, or (c) if the Closing has not occurred on
or before April 30, 1999; or
8.2. By the parties' mutual agreement.
In the event of termination under paragraphs 8.1(c) or 8.2, there shall be no
liability for damages on the part of either Fund -- or the trustees or officers
of either Trust -- to the other Fund.
9. MISCELLANEOUS.
9.1. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Delaware; provided that, in the case of
any conflict between such laws and the federal securities laws, the latter shall
govern.
9.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
9.3. The execution and delivery of this Agreement have been authorized
by each Trust's trustees, and this Agreement has been executed and delivered by
authorized officers of each Trust acting as such; neither such authorization by
such trustees nor such execution and delivery by such officers shall be deemed
to have been made by any of them individually or to impose any liability on any
of them or any shareholder of either Trust personally, but shall bind only the
assets and property of the respective Funds, as provided in Old Trust's
Declaration of Trust and New Trust's Trust Instrument.
9.4. New Trust agrees to indemnify and hold harmless each trustee of
Old Trust at the time of the execution of this Agreement, whether or not such
person is or becomes a trustee of New Trust subsequent to the Reorganization,
against expenses, including reasonable attorneys' fees, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by such trustee in
connection with any claim that is asserted against such trustee arising out of
such person's service as a trustee of Old Trust, provided that such
indemnification shall be limited to the full extent of the indemnification that
is available to the trustees of New Trust pursuant to the provisions of New
Trust's Declaration of Trust and applicable law.
9.5. For the period beginning at the time of the Reorganization and
ending not less than three years thereafter, New Trust shall provide for a
liability policy covering the actions of each trustee of Old Trust at the time
of the execution of this Agreement for the period they served as such, which may
be accomplished by causing such persons to be added as insured under the
liability policy of New Trust.
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IN WITNESS WHEREOF, each party has caused this Agreement to be executed
and delivered by its duly authorized officers as of the day and year first
written above.
GRADISON _______________ TRUST
on behalf of its series, ________________
By: _________________________
Title: _______________________
THE VICTORY PORTFOLIOS
on behalf of its series, ____________Fund
By: _________________________
Title: _______________________
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FORM B
Gradison Government Income Fund
Gradison Ohio Tax-Free Income Fund
Gradison Growth & Income Fund
Gradison Opportunity Value Fund
Gradison International Fund
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
("Agreement") is made as of December 11, 1998, between The Victory Portfolios, a
Delaware business trust ("Victory"), on behalf of Victory _____________Fund, a
segregated portfolio of assets ("series") thereof ("Acquiring Fund"), and
Gradison McDonald ___________Trust (operating through a single series, Gradison
____________ Fund), an Ohio business trust ("Target"). (Acquiring Fund and
Target are sometimes referred to herein individually as a "Fund" and
collectively as the "Funds," and Victory and Target are sometimes referred to
herein individually as an "Investment Company" and collectively as the
"Investment Companies.")
All agreements, representations, actions, and obligations described
herein made or to be taken or undertaken by Acquiring Fund are made or shall be
taken or undertaken by Victory on its behalf.
This Agreement is intended to be, and is adopted as, a plan of a
reorganization described in section 368(a)(1) of the Internal Revenue Code of
1986, as amended ("Code"). The reorganization will consist of the transfer to
Acquiring Fund of all of Target's assets in exchange solely for Class G voting
shares of beneficial interest in Acquiring Fund ("Acquiring Fund Shares") and
the assumption by Acquiring Fund of Target's liabilities, followed by the
distribution of Acquiring Fund Shares pro rata to the holders of shares of
beneficial interest in Target ("Target Shares") in liquidation of Target, all
upon the terms and conditions set forth in this Agreement. All such transactions
are referred to herein collectively as the "Reorganization."
Acquiring Fund's shares currently are divided into two classes,
designated Class A and Class G shares. Class G has been established but its
shares will not be sold until the Effective Time (as defined in paragraph 3.1).
In consideration of the mutual promises herein, the parties covenant
and agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION OF TARGET
1.1. At the Effective Time (as defined in paragraph 3.1), Target agrees
to assign, sell, convey, transfer, and deliver all of its assets described in
paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring Fund agrees in exchange
therefor --
(a) to issue and deliver to Target the number of full and
fractional Acquiring Fund Shares determined by dividing the net value
of Target (computed as set forth in paragraph 2.1) by the NAV (computed
as set forth in paragraph 2.2) of an Acquiring Fund Share; and
<PAGE>
(b) to assume all of Target's liabilities described in
paragraph 1.3 ("Liabilities").
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target's books, and other property owned by Target at the
Effective Time.
1.3. The Liabilities shall include (except as otherwise provided
herein) all of Target's liabilities, debts, obligations, and duties of whatever
kind or nature, whether absolute, accrued, contingent, or otherwise, whether or
not arising in the ordinary course of business, whether or not determinable at
the Effective Time, and whether or not specifically referred to in this
Agreement, including without limitation Target's share of the expenses described
in paragraph 7.2 and the liabilities to which the Transferred Assets are
subject. Notwithstanding the foregoing, Target agrees to use its best efforts to
discharge all of its known Liabilities prior to the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare
and pay to its shareholders a dividend and/or other distribution in an amount
large enough so that it will have distributed substantially all (and in any
event not less than 90%) of its investment company taxable income (computed
without regard to any deduction for dividends paid) and substantially all of its
realized net capital gain, if any, for the current taxable year through the
Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall constructively distribute the Acquiring Fund Shares
received by it pursuant to paragraph 1.1 to Target's shareholders of record,
determined as of the Effective Time (collectively "Shareholders" and
individually a "Shareholder"), in exchange for their Target Shares and in
liquidation of Target. To accomplish this distribution, the Acquiring Fund's
transfer agent ("Transfer Agent") shall open accounts on Acquiring Fund's share
transfer books in the Shareholders' names and transfer such Acquiring Fund
Shares thereto. Each Shareholder's account shall be credited with the pro rata
number of full and fractional (rounded to the third decimal place) Acquiring
Fund Shares due that Shareholder. All outstanding Target Shares, including any
represented by certificates, shall simultaneously be canceled on Target's share
transfer books. Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with the Reorganization. However,
certificates representing Target Fund Shares shall represent Acquiring Fund
Shares after the Reorganization.
1.6. As soon as reasonably practicable after distribution of the
Acquiring Fund Shares pursuant to paragraph 1.5, Target shall be terminated and
any further actions shall be taken in connection therewith as required by
applicable law. Target shall file such instruments and shall take all other
steps necessary to effect a complete liquidation and dissolution of Target.
1.7. Any reporting responsibility of Target to a public authority is
and shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable upon issuance of Acquiring Fund Shares
in a name other than that of the registered holder on Target's books of the
Target Shares constructively
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exchanged therefor shall be paid by the person to whom such Acquiring Fund
Shares are to be issued, as a condition of such transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a)
the value of the Assets computed as of the close of regular trading on the New
York Stock Exchange ("NYSE") on the date of the Closing ("Valuation Time"),
using the valuation procedures set forth in Target's then-current prospectus and
statement of additional information less (b) the amount of the Liabilities as of
the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of an Acquiring Fund
Share shall be computed as of the Valuation Time, using the valuation procedures
set forth in Acquiring Fund's then-current prospectus and statement of
additional information.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made
by or under the direction of Key Asset Management Inc.
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Funds' principal office on
March 25, 1999, or at such other place and/or on such other date upon which the
parties may agree. All acts taking place at the Closing shall be deemed to take
place simultaneously as of the close of business on the date thereof or at such
other time upon which the parties may agree ("Effective Time"). If, immediately
before the Valuation Time, (a) the NYSE is closed to trading or trading thereon
is restricted or (b) trading or the reporting of trading on the NYSE or
elsewhere is disrupted, so that accurate appraisal of the net value of Target
and the NAV per Acquiring Fund Share is impracticable, the Effective Time shall
be postponed until the first business day after the day when such trading shall
have been fully resumed and such reporting shall have been restored.
3.2. Target shall deliver to Victory at the Closing a schedule of the
Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax bases and holding periods by lot.
Target's custodian shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets held by the custodian will be transferred to
Acquiring Fund at the Effective Time and (b) all necessary taxes in conjunction
with the delivery of the Assets, including all applicable federal and state
stock transfer stamps, if any, have been paid or provision for payment has been
made.
3.3. The Transfer Agent shall deliver at the Closing a certificate as
to the opening on Acquiring Fund's share transfer books of accounts in the
Shareholders' names. Victory shall issue and deliver a confirmation to Target
evidencing the Acquiring Fund Shares to be credited to Target at the Effective
Time or provide evidence satisfactory to Target that such Acquiring Fund Shares
have been credited to Target's account on Acquiring Fund's books. At the
Closing,
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<PAGE>
each party shall deliver to the other such bills of sale, checks, assignments,
stock certificates, receipts, or other documents as the other party or its
counsel may reasonably request.
3.4. Each Investment Company shall deliver to the other at the Closing
a certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to the
effect that the representations and warranties it made in this Agreement are
true and correct in all material respects at the Effective Time, with the same
force and effect on it made on and as at the Effective Time, except as they may
be affected by the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Target represents and warrants as follows:
4.1.1. Target is operating under a written declaration of
trust, the beneficial interest in which is divided into transferable
shares, it is duly organized, validly existing, and in good standing
under the laws of the State of Ohio; and a copy of its Declaration of
Trust is on file with the Secretary of the State of Ohio;
4.1.2. Target is duly registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
("1940 Act"), and such registration will be in full force and effect at
the Effective Time;
4.1.3. At the Closing, Target will have good and marketable
title to the Assets and full right, power, and authority to sell,
assign, transfer, and deliver the Assets free of any liens or other
encumbrances; and upon delivery and payment for the Assets, Acquiring
Fund will acquire good and marketable title thereto;
4.1.4. Acquiring Fund Shares are not being acquired for the
purpose of making any distribution thereof, other than in accordance
with the terms hereof;
4.1.5. Target's current prospectus and statement of additional
information conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended ("1933 Act"),
and the 1940 Act and the rules and regulations thereunder and do not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
4.1.6. Target is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Ohio law or any
provision of Target's Declaration of Trust or By-Laws or of any
agreement, instrument, lease, or other undertaking to which Target is a
party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any
4
<PAGE>
penalty, under any agreement, judgment, or decree to which Target is a
party or by which it is bound, except as previously disclosed in
writing to and accepted by Victory;
4.1.7. Except as otherwise disclosed in writing to and
accepted by Victory, all material contracts and other commitments of or
applicable to Target (other than this Agreement and investment
contracts, including options and futures) will be terminated, or
provision for discharge of any liabilities of Target thereunder will be
made, at or prior to the Effective Time, without either Fund's
incurring any liability or penalty with respect thereto and without
diminishing or releasing any rights Target may have had with respect to
actions taken or omitted to be taken by any other party thereto prior
to the Closing;
4.1.8. Except as otherwise disclosed in writing to and
accepted by Victory, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently
pending or (to Target's knowledge) threatened against Target or any of
its properties or assets that, if adversely determined, would
materially and adversely affect Target's financial condition or the
conduct of its business; Target knows of no facts that might form the
basis for the institution of any such litigation, proceeding, or
investigation and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that
materially or adversely affects its business or its ability to
consummate the transactions contemplated hereby;
4.1.9. The execution, delivery, and performance of this
Agreement has been duly authorized as of the date hereof by all
necessary action on the part of Target's board of trustees, which has
made the determinations required by Rule 17a-8(a) under the 1940 Act;
and, subject to approval by Target's shareholders and receipt of any
necessary exemptive relief or no-action assurances requested from the
Securities and Exchange Commission ("SEC") or its staff with respect to
Sections 17(a) and 17(d) of the 1940 Act, this Agreement will
constitute a valid and legally binding obligation of Target,
enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights
and by general principles of equity;
4.1.10. At the Effective Time, the performance of this
Agreement shall have been duly authorized by all necessary action by
Target's shareholders;
4.1.11. No governmental consents, approvals, authorizations,
or filings are required under the 1933 Act, the Securities Exchange Act
of 1934, as amended ("1934 Act"), or the 1940 Act for the execution or
performance of this Agreement by Target, except for (a) the filing with
the SEC of a registration statement by Victory on Form N-14 relating to
the Acquiring Fund Shares issuable hereunder, and any supplement or
amendment thereto ("Registration Statement"), including therein a
prospectus/proxy statement ("Proxy Statement"), (b) receipt of the
exemptive relief referenced in subparagraph 4.1.9, and (c) such
consents, approvals, authorizations, and filings as have been made or
received or as may be required subsequent to the Effective Time;
5
<PAGE>
4.1.12. On the effective date of the Registration Statement,
at the time of the shareholders' meeting referred to in paragraph 5.2,
and at the Effective Time, the Proxy Statement will (a) comply in all
material respects with the applicable provisions of the 1933 Act, the
1934 Act, and the 1940 Act and the rules and regulations thereunder and
(b) not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the shall not apply to
statements in or omissions from the Proxy Statement made in reliance on
and in conformity with information furnished by Victory for use
therein;
4.1.13. The Liabilities were incurred by Target in the
ordinary course of its business and are associated with the Assets;
4.1.14. Target is a "fund" as defined in section 851(g)(2) of
the Code; it qualified for treatment as a regulated investment company
under Subchapter M of the Code ("RIC") for each past taxable year since
it commenced operations and will continue to meet all the requirements
for such qualification for its current taxable year (and the Assets
will be invested at all times through the Effective Time in a manner
that ensures compliance with the foregoing); it has no earnings and
profits accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it; and it has made all distributions for
each such past taxable year that are necessary to avoid the imposition
of federal excise tax or has paid or provided for the payments of any
excise tax imposed for any such year;
4.1.15. There is no plan or intention by Shareholders who own
5% or more of Target Shares, and to the best of the knowledge of the
management of Target, there is no plan or intention on the part of the
remaining Shareholders to redeem or otherwise sell to Acquiring Fund or
Victory any Acquiring Fund Shares received in the Reorganization.
Target's management does not anticipate dispositions of Acquiring Fund
Shares at the time or soon after the Reorganization to exceed the usual
rate and frequency of redemptions of Target Shares in the ordinary
course of its operation as a series of an open-end investment company.
Consequently, Target's management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of
or at the time of the Reorganization will be de miminis;
4.1.16. Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case
within the meaning of section 368(a)(3)(A) of the Code;
4.1.17. Not more than 25% of the value of Target's total
assets (excluding cash, cash items, and U.S. government securities) is
invested in the stock and securities of any one issuer and not more
than 50% of the value of such assets is invested in the stock and
securities of five or fewer issuers;
4.1.18. Target will, pursuant to this Agreement, distribute,
in liquidation of Target, the Acquiring Fund Shares it receives in the
Reorganization as soon as reasonably practicable after the
Reorganization. Each Shareholder will receive solely Acquiring
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<PAGE>
Fund Shares in exchange for its Target Shares. Target will receive
solely Acquiring Fund Shares and the assumption by the Acquiring Fund
of the Liabilities in exchange for the Assets it transfers to
Acquiring Fund. None of the compensation received by any Shareholder
that is an employee or a direct or indirect provider of investment
advisory or administrative services to Target ("Shareholder/Service
Provider") (if any) will be separate consideration for, or allocable
to, any of its Target Shares; none of the Acquiring Fund Shares
received by any Shareholder/Service Provider (if any) will be separate
consideration for, or allocable to, any employment agreement or any
investment advisory services provided to Target; and the compensation
paid to any Shareholder/Service Provider (if any) will be for services
actually rendered and will be commensurate with the amounts paid to
third parties bargaining at arm's length for similar services;
4.1.19. As of the Effective Time, Target will not have
outstanding any warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire Target Shares;
and
4.1.20. Target will be terminated as soon as reasonably
practicable after the Reorganization.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Victory is a business trust that is duly organized,
validly existing, and in good standing under the laws of the State of
Delaware; and a copy of its Certificate of Trust is on file with the
Secretary of the State of Delaware;
4.2.2 Victory is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated
series of Victory;
4.2.4. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in
exchange for the Assets in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to
Target hereunder will, at the Effective Time, have been duly authorized
and, when issued and delivered as provided herein, will be duly and
validly issued and outstanding shares of Acquiring Fund, fully paid and
non-assessable by Victory (except as disclosed in Victory's
then-current prospectus and statement of additional information).
Except as contemplated by this Agreement, Acquiring Fund does not have
outstanding any options, warrants, or other rights to subscribe for or
purchase any of its shares, nor is there outstanding any security
convertible into any of its shares;
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4.2.6. Acquiring Fund's current prospectus and statement of
additional information conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the
execution and delivery of this Agreement and consummation of the
transactions contemplated hereby will not conflict with or violate,
Delaware law or any provision of Victory's Certificate of Trust or
Trust Instrument or By-Laws or of any provision of any agreement,
instrument, lease, or other undertaking to which Acquiring Fund is a
party or by which it is bound or result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Acquiring Fund is a party or by which it
is bound, except as previously disclosed in writing to and accepted by
Target;
4.2.8. Except as otherwise disclosed in writing to and
accepted by Target, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently
pending or (to Acquiring Fund's knowledge) threatened against Victory
with respect to Acquiring Fund or any of its properties or assets that,
if adversely determined, would materially and adversely affect
Acquiring Fund's financial condition or the conduct of its business;
Acquiring Fund knows of no facts that might form the basis for the
institution of any such litigation, proceeding, or investigation and is
not a party to or subject to the provisions of any order, decree, or
judgment of any court or governmental body that materially or adversely
affects its business or its ability to consummate the transactions
contemplated hereby;
4.2.9. The execution, delivery, and performance of this
Agreement has been duly authorized as of the date hereof by all
necessary action on the part of Victory's board of trustees, which has
made the determinations required by Rule 17a-8(a) under the 1940 Act;
and, subject to receipt of any necessary exemptive relief or no-action
assurances requested from the SEC or its staff with respect to Sections
17(a) and 17(d) of the 1940 Act, this Agreement will constitute a valid
and legally binding obligation of Acquiring Fund, enforceable in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights
and by general principles of equity;
4.2.10. No governmental consents, approvals, authorizations,
or filings are required under the 1933 Act, the 1934 Act, or the 1940
Act for the execution or performance of this Agreement by Victory,
except for (a) the filing with the SEC of the Registration Statement
and a post-effective amendment to Trust's registration statement on
Form N-1A, (b) receipt of the exemptive relief referenced in
subparagraph 4.2.9, and (c) such consents, approvals, authorizations,
and filings as have been made or received or as may be required
subsequent to the Effective Time;
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4.2.11. On the effective date of the Registration Statement,
at the time of the shareholders' meeting referred to in paragraph 5.2,
and at the Effective Time, the Proxy Statement will (a) comply in all
material respects with the applicable provisions of the 1933 Act, the
1934 Act, and the 1940 Act and the rules and regulations thereunder and
(b) not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
such statements were made, not misleading; provided that the foregoing
shall not apply to statements in or omissions from the Proxy Statement
made in reliance on and in conformity with information furnished by
Target for use therein;
4.2.12. Acquiring Fund is a "fund" as defined in Section
851(g)(2) of the Code; it qualified for treatment as a RIC for each
past taxable year since it commenced operations and will continue to
meet all the requirements for such qualification for its current
taxable year; Acquiring Fund intends to continue to meet all such
requirements for the next taxable year; and it has no earnings and
profits accumulated in any taxable year in which the provisions of
Subchapter M of the Code did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue
additional Acquiring Fund Shares following the Reorganization except
for shares issued in the ordinary course of its business as a series of
an open-end investment company; nor does Acquiring Fund have any plan
or intention to redeem or otherwise reacquire any Acquiring Fund Shares
issued to the Shareholders pursuant to the Reorganization, other than
in the ordinary course of its business as an open-end investment
company or to the extent necessary to comply with its legal obligation
under Section 22(e) of the 1940 Act.
4.2.14. Following the Reorganization Acquiring Fund (a) will
actively continue Target's "historic business" in substantially the
same manner that Target conducted that business immediately before the
Reorganization, (b) has no plan or intention to sell or otherwise
dispose of any of the Assets, except for dispositions made in the
ordinary course of its business and dispositions necessary to maintain
its status as a RIC, although in the ordinary course of its business
Acquiring Fund will continuously review its investment portfolio (as
Target did before the Reorganization) to determine whether to retain or
dispose of particular stocks or securities, including those included in
the Assets, and (c) expects to retain substantially all the Assets in
the same form as it receives them in the Reorganization, unless and
until subsequent investment circumstances suggest the desirability of
change or it becomes necessary to make dispositions thereof to maintain
such status;
4.2.15. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another business trust or corporation or
"fund" thereof (within the meaning of section 851(g)(2) of the Code)
following the Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more
than 25% of the value of Acquiring Fund's total assets (excluding cash,
cash items, and U.S. government securities) will be invested in the
stock and securities of any one issuer and (b) not more
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<PAGE>
than 50% of the value of such assets will be invested in the stock and
securities of five or fewer issuers;
4.2.17. Acquiring Fund does not own, directly or indirectly,
nor at the Effective Time will it own, directly or indirectly, nor has
it owned, directly or indirectly, at any time during the past five
years, any shares of Target; and
4.2.18. Acquiring Fund's management does not anticipate that
there will be extraordinary redemptions of Acquiring Fund Shares
immediately following the Reorganization.
4.3. Each Fund represents and warrants as follows:
4.3.1. The aggregate fair market value of the Acquiring Fund
Shares received by each Shareholder, when so received, will be
approximately equal to the aggregate fair market value of the Target
Shares exchanged therefor;
4.3.2. Immediately following consummation of the
Reorganization, Acquiring Fund will hold substantially the same assets
and be subject to substantially the same liabilities that Target held
or was subject to immediately prior thereto (in addition to the assets
and liabilities Acquiring Fund then holds or is subject to), plus any
liabilities and expenses of the parties incurred in connection with the
Reorganization;
4.3.3. The fair market value of the Assets will equal or
exceed the Liabilities;
4.3.4. There is no intercompany indebtedness between the
Funds that was issued or acquired, or will be settled, at a discount;
4.3.5. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the
fair market value of the net assets, and at least 70% of the fair
market value of the gross assets, held by Target immediately before the
Reorganization. For purposes of this representation, amounts paid by
Target to dissenters, amounts used by Target to pay its Reorganization
expenses, amounts paid by Target to Shareholders who receive cash or
other property, and all redemptions (except for redemptions occurring
in the ordinary course of Target's business as an open-end investment
company) and distributions (except for distributions made to conform to
its policy of distributing all or substantially all of its income and
gains to avoid the obligation to pay federal income tax and/or the
excise tax under Section 4982 of the Code) made by Target immediately
preceding the Reorganization will be included as assets thereof held
immediately before the Reorganization;
4.3.6. Any amounts payable to Shareholders who seek redemption
of their Target shares, and all other amounts payable to Shareholders,
including amounts due as a result of the declaration of a dividend or
other distribution, will be paid by Target and not by Acquiring Fund;
and
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<PAGE>
4.3.7. The Shareholders will pay their expenses, if any,
incurred in connection with the Reorganization. The Acquiring Fund will
pay or assume only those expenses of the Target that are solely and
directly related to the Reorganization in accordance with the
guidelines established in Rev. Rul.
73-54, 1073-1 C.B. 187.
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that (a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and (b) each Fund will
retain exclusive control of the composition of its portfolio until the Closing;
provided that Target shall not dispose of more than an insignificant portion of
its historic business assets during such period without Acquiring Fund's prior
consent.
5.2. Target covenants to call a special meeting of shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated hereby.
5.3. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target covenants that it will assist Victory in obtaining such
information as Victory reasonably requests concerning the beneficial ownership
of Target Shares.
5.5. Target covenants that its books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Victory at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement
in compliance with applicable federal securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target, title to and possession of the Acquiring Fund
Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the 1940 Act, and
such state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
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5.9. Subject to this Agreement, each Fund covenants to take or cause to
be taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance
by the other Fund of all the obligations to be performed hereunder at or before
the Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by each Investment Company's board of trustees
and shall have been approved by Target's shareholders in accordance with
applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Fund to permit consummation, in all material respects, of
the transactions contemplated hereby shall have been obtained, except where
failure to obtain same would not involve a risk of a material adverse effect on
the assets or properties of either Fund, provided that either Fund may for
itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall
be pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Target shall have received an opinion of Kramer Levin Naftalis &
Frankel LLP, counsel to Victory, substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of Victory,
a business trust duly organized and validly existing under the laws of
the State of Delaware with power under its Trust Instrument to own all
of its properties and assets and, to the knowledge of such counsel, to
carry on its business as presently conducted;
12
<PAGE>
6.4.2. This Agreement (a) has been duly authorized, executed,
and delivered by Victory on behalf of Acquiring Fund and (b) assuming
due authorization, execution, and delivery of this Agreement by Target,
is a valid and legally binding obligation of Victory with respect to
Acquiring Fund, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed
to the Shareholders under this Agreement, assuming their due delivery
as contemplated by this Agreement, will be duly authorized and validly
issued and outstanding and fully paid and non-assessable (except as
disclosed in Victory's then-current prospectus and statement of
additional information);
6.4.4. The execution and delivery of this Agreement did not,
and the consummation of the transactions contemplated hereby will not,
materially violate Victory's Trust Instrument or By-Laws or any
provision of any agreement (known to such counsel, without any
independent inquiry or investigation) to which Victory (with respect to
Acquiring Fund) is a party or by which it is bound or (to the knowledge
of such counsel, without any independent inquiry or investigation)
result in the acceleration of any obligation, or the imposition of any
penalty, under any agreement, judgment, or decree to which Victory
(with respect to Acquiring Fund) is a party or by which it (with
respect to Acquiring Fund) is bound, except as set forth in such
opinion or as previously disclosed in writing to and accepted by
Target;
6.4.5. To the knowledge of such counsel (without any
independent inquiry or investigation), no consent, approval,
authorization, or order of any court or governmental authority is
required for the consummation by Victory on behalf of Acquiring Fund of
the transactions contemplated herein, except such as have been obtained
under the 1933 Act, the 1934 Act, and the 1940 Act and such as may be
required under state securities laws;
6.4.6. Victory is registered with the SEC as an investment
company, and to the knowledge of such counsel no order has been issued
or proceeding instituted to suspend such registration; and
6.4.7. To the knowledge of such counsel (without any
independent inquiry or investigation), (a) no litigation,
administrative proceeding, or investigation of or before any court or
governmental body is pending or threatened as to Victory (with respect
to Acquiring Fund) or any of its properties or assets attributable or
allocable to Acquiring Fund and (b) Victory (with respect to Acquiring
Fund) is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially
and adversely affects Acquiring Fund's business, except as set forth in
such opinion or as otherwise disclosed in writing to and accepted by
Target.
In rendering such opinion, such counsel may (i) rely, as to matters governed by
the laws of the State of Delaware, on an opinion of competent Delaware counsel,
(ii) make assumptions
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<PAGE>
regarding the authenticity, genuineness, and/or conformity of documents and
copies thereof without independent verification thereof, (iii) limit such
opinion to applicable federal and state law, (iv) define the word "knowledge"
and related terms to mean the knowledge of attorneys then with such firm who
have devoted substantive attention to matters directly related to this Agreement
and the Reorganization; and (v) rely on certificates of officers or trustees of
Victory, in each case reasonably acceptable to Target.
6.5. Victory shall have received an opinion of Kirkpatrick & Lockhart
LLP, counsel to Target, substantially to the effect that:
6.5.1. Target is a business trust duly organized and validly
existing under the laws of the State of Ohio with power under its
Declaration of Trust to own all of its properties and assets and, to
the knowledge of such counsel, to carry on its business as presently
conducted;
6.5.2. This Agreement (a) has been duly authorized, executed,
and delivered by Target and (b) assuming due authorization, execution,
and delivery of this Agreement by Victory on behalf of Acquiring Fund,
is a valid and legally binding obligation of Target, enforceable in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights
and by general principles of equity;
6.5.3. The execution and delivery of this Agreement did not,
and the consummation of the transactions contemplated hereby will not,
materially violate Target's Declaration of Trust or By-Laws or any
provision of any agreement (known to such counsel, without any
independent inquiry or investigation) to which Target is a party or by
which it is bound or (to the knowledge of such counsel, without any
independent inquiry or investigation) result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Target is a party or by which it is bound,
except as set forth in such opinion or as previously disclosed in
writing to and accepted by Victory;
6.5.4 To the knowledge of such counsel (without any
independent inquiry or investigation), no consent, approval,
authorization, or order of any court or governmental authority is
required for the consummation by Target of the transactions
contemplated herein, except such as have been obtained under the 1933
Act, the 1934 Act, and the 1940 Act and such as may be required under
state securities laws;
6.5.5. Target is registered with the SEC as an investment
company, and to the knowledge of such counsel no order has been issued
or proceeding instituted to suspend such registration; and
6.5.6. To the knowledge of such counsel (without any
independent inquiry or investigation), (a) no litigation,
administrative proceeding, or investigation of or before any court or
governmental body is pending or threatened as to Target or any of its
properties or assets attributable or allocable to Target and (b) Target
is not a party to or
14
<PAGE>
subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially and adversely affects
Target's business, except as set forth in such opinion or as otherwise
disclosed in writing to and accepted by Victory.
In rendering such opinion, such counsel may (i) rely, as to matters governed by
the laws of the State of Ohio, on an opinion of competent Ohio counsel, (ii)
make assumptions regarding the authenticity, genuineness, and/or conformity of
documents and copies thereof without independent verification thereof, (iii)
limit such opinion to applicable federal and state law, (iv) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly related to this
Agreement and the Reorganization, and (v) rely on certificates of officers or
trustees of Target; in each case reasonably acceptable to Victory.
6.6. Each Investment Company shall have received an opinion of Kramer
Levin Naftalis & Frankel LLP addressed to and in form and substance satisfactory
to it, as to the federal income tax consequences of the Reorganization ("Tax
Opinion"). In rendering the Tax Opinion, such counsel may rely as to factual
matters, exclusively and without independent verification, on the
representations made in this Agreement (and/or in separate letters addressed to
such counsel) and each Fund's separate covenants. The Tax Opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein and conditioned on consummation of the Reorganization in accordance with
this Agreement, for federal income tax purposes:
6.6.1. The Reorganization will constitute a reorganization
within the meaning of section 368(a)(1) of the Code, and each Fund will
be "a party to a reorganization" within the meaning of section 368(b)
of the Code;
6.6.2. No gain or loss will be recognized by Target on the
transfer to Acquiring Fund of the Assets in exchange solely for
Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities or on the subsequent distribution of those shares to the
Shareholders in liquidation of Target;
6.6.3. No gain or loss will be recognized by Acquiring Fund on
its receipt of the Assets in exchange solely for Acquiring Fund Shares
and its assumption of the Liabilities;
6.6.4. Acquiring Fund's adjusted tax basis in the Assets will
be equal to the basis thereof in Target's hands immediately before the
Reorganization, and Acquiring Fund's holding period for the Assets will
include Target's holding period therefor;
6.6.5. A Shareholder will recognize no gain or loss on the
exchange of its Target Shares solely for Acquiring Fund Shares pursuant
to the Reorganization; and
6.6.6. A Shareholder's aggregate tax basis in the Acquiring
Fund Shares received by it in the Reorganization will equal its
aggregate tax basis in its Target Shares surrendered in exchange
therefor, and its holding period for those Acquiring Fund Shares
15
<PAGE>
will include its holding period for those Target Shares, provided such
Target Shares are held as capital assets by the Shareholder at the
Effective Time.
At any time before the Closing, (a) Acquiring Fund may waive any of the
foregoing conditions if, in the judgment of Victory's board of trustees, such
waiver will not have a material adverse effect on its shareholders' interests,
and (b) Target may waive any of the foregoing conditions if, in the judgment of
Target's board of trustees, such waiver will not have a material adverse effect
on the Shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company represents and warrants to the other that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
7.2. Each Fund will be responsible for its own expenses incurred in
connection with the Reorganization.
8. ENTIRE AGREEMENT; SURVIVAL
Neither party has made any representation, warranty, or covenant not
set forth herein, and this Agreement constitutes the entire agreement between
the parties. The representations, warranties, and covenants contained herein or
in any document delivered pursuant hereto or in connection herewith shall
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the
Effective Time, whether before or after approval by Target's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material
breach of any representation, warranty, or covenant contained herein to be
performed at or prior to the Effective Time, (b) if a condition to its
obligations has not been met and it reasonably appears that such condition will
not or cannot be met, or (c) if the Closing has not occurred on or before April
30, 1999; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1.(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or the trustees or officers of
either Investment Company, to the other Fund.
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10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target's shareholders, in such manner as may
be mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of Delaware; provided that, in the case of
any conflict between such laws and the federal securities laws, the latter shall
govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3. The parties acknowledge that each Investment Company is a
business trust. Notice is hereby given that this instrument is executed on
behalf of each Investment Company's trustees solely in their capacity as
trustees, and not individually, and that each Investment Company's obligations
under this instrument are not binding on or enforceable against any of its
trustees, officers, or shareholders, but are only binding on and enforceable
against the respective Funds' assets and property. Each Fund agrees that, in
asserting any rights or claims under this Agreement, it shall look only to the
other Fund's assets and property in settlement of such rights or claims and not
to such trustees or shareholders.
11.4. Victory agrees to indemnify and hold harmless each trustee of
Target at the time of the execution of this Agreement, whether or not such
person is or becomes a trustee of Victory subsequent to the Reorganization,
against expenses, including reasonable attorneys' fees, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by such trustee in
connection with any claim that is asserted against such trustee arising out of
such person's service as a trustee of Target, provided that such indemnification
shall be limited to the full extent of the indemnification that is available to
the trustees of Victory pursuant to the provisions of Victory's Trust Instrument
and applicable law.
11.5 For the period beginning at the time of the Reorganization and
ending not less than three years thereafter, Victory shall provide for a
liability policy covering the actions of each trustee of Target at the time of
the execution of this Agreement for the period they served as such, which may be
accomplished by causing such persons to be added as insured under the liability
policy of Victory.
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IN WITNESS WHEREOF, each party has caused this Agreement to be executed
by its duly authorized officer.
ATTEST: GRADISON TRUST
-----------------------
- ----------------------
- ---------------------- By:
Secretary -------------------
Vice President
ATTEST: THE VICTORY PORTFOLIOS
on behalf of its series,
- ---------------------- ---------------------- FUND
By:
- ---------------------- ----------------------
Secretary Vice President
18
<PAGE>
PART 7 - FINANCIAL INFORMATION ABOUT THE VICTORY PORTFOLIOS
The Annual Report of The Victory Portfolios for the period ended
October 31, 1998 is included with the Combined Proxy Statement and
Prospectus for shareholders of Gradison Ohio Tax-Free Income Fund,
Gradison Growth & Income Fund and Gradison International Fund.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 27, 1999
Acquisition of the Assets of
GRADISON GROWTH TRUST
Gradison Established Value Fund
Gradison Growth & Income Fund
Gradison Opportunity Value Fund
Gradison International Fund
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
Gradison Ohio Tax-Free Income Fund
GRADISON-McDONALD CASH RESERVES TRUST
Gradison U.S. Government Reserves
GRADISON CUSTODIAN TRUST
Gradison Government Income Fund
by and in exchange for Class G shares of
THE VICTORY PORTFOLIOS
Established Value Fund
Diversified Stock Fund
Small Company Opportunity Fund
International Growth Fund
Ohio Municipal Bond Fund
Gradison Government Reserves Fund
Fund for Income
This Statement of Additional Information dated January 27, 1999, is not a
prospectus, but should be read in conjunction with the Combined Proxy Statement
and Prospectus dated January 27, 1999. This Statement of Additional Information
is incorporated by reference in its entirety into the Combined Proxy Statement
and Prospectus. Copies of the Combined Proxy Statement and Prospectus may be
obtained by writing The Victory Portfolios at P.O. Box 8527, Boston, MA
02266-8527 or by calling toll free 800-539-FUND (800-539-3863) or McDonald
Investments Inc. at 513-579-5700 or 800-869-5999.
<PAGE>
TABLE OF CONTENTS
1. Statement of Additional Information of Diversified Stock Fund, Fund for
Income, International Growth Fund, Ohio Municipal Bond Fund, and
Special Growth Fund (to be renamed Small Company Opportunity Fund),
portfolios of The Victory Portfolios, dated January 26, 1999.
2. Statement of Additional Information of Gradison Established Value Fund,
Gradison Growth & Income Fund, Gradison International Fund, and
Gradison Opportunity Value Fund, portfolios of Gradison Growth Trust,
dated August 1, 1998.
3. Statement of Additional Information of Gradison Ohio Tax-Free Income
Fund, a portfolio of Gradison-McDonald Municipal Custodian Trust, dated
November 1, 1998.
4. Statement of Additional Information of Gradison U.S. Government
Reserves, a portfolio of Gradison McDonald Cash Reserves Trust, dated
February 1, 1998.
5. Statement of Additional Information of Gradison Government Income Fund,
a portfolio of Gradison Custodian Trust dated May 1, 1998.
6. Financial Statements of Diversified Stock Fund, Fund for Income,
International Growth Fund, Ohio Municipal Bond Fund, and Special Growth
Fund (to be renamed Small Company Opportunity Fund), portfolios of The
Victory Portfolios, dated October 31, 1998.
7. Financial Statements of Gradison Established Value Fund, Gradison
Growth & Income Fund, Gradison International Fund and Gradison
Opportunity Value Fund, portfolios of Gradison Growth Trust, dated
March 31, 1998.
8. Unaudited Financial Statements of Gradison Established Value Fund,
Gradison Growth & Income Fund, Gradison Opportunity Value Fund and
Gradison International Fund, portfolios of Gradison Growth Trust dated
September 30, 1998.
9. Financial Statements of Gradison Ohio Tax-Free Income Fund, a portfolio
of Gradison-McDonald Municipal Custodian Trust dated June 30, 1998.
10. Financial Statements of Gradison U.S. Government Reserves, a portfolio
of Gradison McDonald Cash Reserves Trust dated September 30, 1998.
11. Financial Statements of Gradison Government Income Fund, a portfolio of
Gradison Custodian Trust dated December 31, 1997.
12. Unaudited Financial Statements of Gradison Government Income Fund, a
portfolio of Gradison Custodian Trust dated June 30, 1998.
2
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ADDITIONAL INFORMATION ABOUT THE REGISTRANT
The Statement of Additional Information dated January 25, 1999, of
Diversified Stock Fund, Fund for Income, International Growth Fund, Ohio
Municipal Bond Fund, and Special Growth Fund (to be renamed Small Company
Opportunity Fund), portfolios of The Victory Portfolios, is incorporated by
reference to Post-Effective Amendment No. 45 to The Victory Portfolio's
Registration Statement on Form N-1A (File No. 33-8982) which was filed with the
Securities and Exchange Commission (SEC) on January 25, 1999.
The Statements of Additional Information dated August 1, 1998, of
Gradison Established Value Fund, Gradison Growth & Income Fund, Gradison
Opportunity Value Fund and Gradison International Fund, portfolios of Gradison
Growth Trust, are incorporated by reference to Post-Effective Amendment No. 20
to Gradison Growth Trust's Registration Statement on Form N-1A (File No.
2-84169). A copy may be obtained by writing Gradison Growth Trust at 580 Walnut
Street, Cincinnati, OH 45202 or by calling (513) 579-5700 from Cincinnati or
toll free 800-869-5999.
The Statement of Additional Information dated November 1, 1998, of
Gradison Ohio Tax-Free Income Fund, a portfolio of Gradison-McDonald Municipal
Custodian Trust, is incorporated by reference to Post-Effective Amendment No. 11
to Gradison-McDonald Municipal Custodian Trust's Registration Statement on Form
N-1A (File No. 33-48613). A copy may be obtained by writing Gradison-McDonald
Municipal Custodian Trust at 580 Walnut Street, Cincinnati, OH 45202 or by
calling (513) 579-5700 from Cincinnati or toll free 800-869-5999.
The Statement of Additional Information dated February 1, 1998, of
Gradison U.S. Government Reserves, a portfolio of Gradison McDonald Cash
Reserves Trust, is incorporated by reference to Post-Effective Amendment No. 40
to Gradison McDonald Cash Reserves Trust's Registration Statement on Form N-1A
(File No. 2-55297). A copy may be obtained by writing Gradison McDonald Cash
Reserves Trust at 580 Walnut Street, Cincinnati, OH 45202 or by calling (513)
579-5700 from Cincinnati or toll free 800-869-5999.
The Statement of Additional Information dated May 1, 1998, of Gradison
Government Income Fund, a portfolio of Gradison Custodian Trust, is incorporated
by reference to Post-Effective Amendment No. 16 to Gradison Custodian Trust's
Registration Statement on Form N-1A (File No. 33-14949). A copy may be obtained
by writing Gradison Custodian Trust at (513) 580 Walnut Street, Cincinnati, OH
45202 or by calling 579-5700 from Cincinnati or toll free 800-869-5999.
3
<PAGE>
FINANCIAL STATEMENTS
The audited Financial Statements of Diversified Stock Fund, Fund for
Income, International Growth Fund, Ohio Municipal Bond Fund, and Special Growth
Fund (to be renamed Small Company Opportunity Fund), portfolios of The Victory
Portfolios, are incorporated by reference to the Annual Report of The Victory
Portfolios (File No. 811-4852) dated October 31, 1998.
The audited Financial Statements of Gradison Established Value Fund,
Gradison Growth & Income Fund, Gradison International Fund, and Gradison
Opportunity Value Fund, portfolios of Gradison Growth Trust, are incorporated by
reference to the Annual Report of Gradison Growth Trust (File No. 811-3760)
dated March 31, 1998.
The unaudited Financial Statements of Gradison Established Value Fund,
Gradison Growth & Income Fund, Gradison International Fund, and Gradison
Opportunity Value Fund, portfolios of Gradison Growth Trust, are incorporated by
reference to the Semi-Annual Report of Gradison Growth Trust (File No. 811-3760)
dated September 30, 1998.
The audited Financial Statements of Gradison Ohio Tax-Free Income Fund,
a portfolio of Gradison-McDonald Municipal Custodian Trust, are incorporated by
reference to the Annual Report of Gradison-McDonald Municipal Custodian Trust
(File No. 811-6705) dated June 30, 1998.
The audited Financial Statements of Gradison U.S. Government Reserves,
a portfolio of Gradison McDonald Cash Reserves Trust, are incorporated by
reference to the Annual Report of Gradison McDonald Cash Reserves Trust (File
No. 811-2618) dated September 30, 1998.
The audited Financial Statements of Gradison Government Income Fund, a
portfolio of Gradison Custodian Trust, are incorporated by reference to the
Annual Report of Gradison Custodian Trust (File No. 811-5198) dated December 31,
1997.
The unaudited Financial Statements of Gradison Government Income Fund,
a portfolio of Gradison Custodian Trust are incorporated by reference to the
Semi-Annual Report of Gradison Custodian Trust (File No. 811-5198) dated June
30, 1998.
Pro forma financial statements as of October 31, 1998, which give
effect to the Reorganization of the Gradison Funds into the Victory Funds,
follow.
4
<PAGE>
THE VICTORY PORTFOLIOS
Victory Funds/Gradison Funds
Statements of Assets and Liabilities
October 31, 1998
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Victory Gradison
Fund For Government Combined
Income Income Fund Adjustments Totals
---------------- ----------------- --------------- ------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $28,528 & $156,363) $ 29,229 $ 159,069 $ - $ 188,298
Cash - 2 - 2
Interest receivable 190 1,695 - 1,885
Receivable for capital shares issued 1 - - 1
Receivable from brokers for investments sold 6,077 - - 6,077
Prepaid expenses and other assets 17 - - 17
---------------- ----------------- --------------- ------------------
Total Assets 35,514 160,766 - 196,280
---------------- ----------------- --------------- ------------------
LIABILITIES:
Dividends payable - 101 - 101
Payable to brokers for investments purchased 6,707 - - 6,707
Payable for capital shares redeemed 35 - - 35
Accrued expenses and other payables:
Investment advisory fees 4 - - 4
Custodian fees 6 - - 6
Transfer agent fees 13 - - 13
Shareholder service fees - Class A 5 - - 5
Other 1 47 - 48
---------------- ----------------- --------------- ------------------
Total Liabilities 6,771 148 - 6,919
---------------- ----------------- --------------- ------------------
NET ASSETS:
Capital 29,514 163,708 - 193,222
Undistributed (distributions in excess) net
investment income 28 (61) - (33)
Net unrealized appreciation/depreciation
from investments 701 2,706 - 3,407
Accumulated undistributed net realized - 0
losses from investment transactions (1,500) (5,735) (7,235)
---------------- ----------------- --------------- ------------------
Net Assets $ 28,743 $ 160,618 $ - $ 189,361
================ ================= =============== ==================
Net Assets
Class A $ 28,743 $ - $ - $ 28,743
Class G - 160,618 - 160,618
---------------- ----------------- --------------- ------------------
Total $ 28,743 $ 160,618 $ - $ 189,361
================ ================= =============== ==================
Outstanding units of beneficial interest
(shares)
Class A 2,923 - (767) 2,156
Class G - 12,051 - 12,051
---------------- ----------------- --------------- ------------------
Total 2,923 12,051 (767) 14,207
================ ================= =============== ==================
Net asset value
Redemption price per share - Class A $ 9.83 $ - $ 3.50 $ 13.33
================ ================= =============== ==================
Redemption price per share - Class G $ - $ 13.33 $ - $ 13.33
================ ================= =============== ==================
Maximum sales charge - Class A 2.00% - - 2.00%
================ ================= =============== ==================
Maximum offering price per share
(100%/(100%-maximum sales charge) of
net asset value adjusted to
nearest cent) - Class A $ 10.03 $ - $ 3.50 $ 13.60
================ ================= =============== ==================
</TABLE>
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Fund For Income
Schedule of Portfolio Investments
October 31, 1998
Unaudited
(Amounts in thousands, except shares)
<TABLE>
<CAPTION>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Fund for Government Fund for Government
Income Income Fund Income Income Fund
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset Backed Securities (5.4%)
American Housing Trust, Series VIII, Class K, 9.00%, 1/25/21, $1,007 $1,007 $1,136 $1,136
CMO
Federal National Mortgage Assoc., Series 1988-4, Class Z, 9.25%, 929 929 982 982
3/25/18, CMO
Federal National Mortgage Assoc., Series 1998-46, Class PJ, 481 481 485 485
6.25%, 12/18/22, CMO
General Electric Capital Mortgage Services, Inc., 7.00%, 1,000 1,000 1,015 1,015
3/25/08, CMO
Green Tree Financial Corp., 8.95%, 3/15/20, CMO 500 500 551 551
Green Tree Home Improvement Loan Trust, Series 1997-E, Class 655 655 680 680
HEA6, 6.62%, 1/15/29
Housing Securities, Inc., 7.25%, 4/25/08, CMO 1,517 1,517 1,583 1,583
Prudential Home Mortgage Securities, 7.00%, 1/25/08, CMO 1,022 1,022 1,050 1,050
Resolution Trust Corp., 8.20%, 11/25/21, CMO 744 744 742 742
Salomon Brothers Mortgage Securities VII, Series 1996-LB2, Class 654 654 697 697
A7, 7.65%, 10/25/26, CMO
Salomon Brothers Mortgage Securities VII, Series 1998-AQ1, Class 305 305 306 306
A3, 6.56%, 6/25/28
The Money Store Home Equity Trust, Series 1998A, Class AF3, 750 750 753 753
6.13%, 9/15/16
The Money Store Home Equity Trust, Series 1995-B, Class A5, 315 315 332 332
---
7.23%, 12/15/20
Total Asset Backed Securities (Cost $9,986) 10,312 10,312
------
Commercial Paper (0.9%)
Associates Corp., N.A., 5.70%, 11/2/98 830 830 830 830
Ford Motor Credit Corp., 5.51%, 11/2/98 900 900 900 900
---
Total Commercial Paper (Cost $1,730) 1,730 1,730
-----
Investment Companies (1.4%)
First Union Capital Mkts $2,710 2,710 $2,710 2,710
-----
Total Investment Companies (Cost $2,710) 2,710 2,710
-----
Securities Purchased When Issued (1.3%)
Federal Home Loan Mortgage Corp. (0.6%)
6.00%, 15 Year TBA 91 91 91 91
6.50%, 30 Year Gold TBA 257 257 259 259
7.00%, 30 Year Gold TBA 664 664 677 677
7.50%, 30 Year TBA 139 139 142 142
---
1,169
Federal National Mortgage Assoc. (0.4%)
6.00%, 15 Year TBA 552 552 554 554
8.00%, 30 Year TBA 259 259 267 267
---
821
Government National Mortgage Assoc. (0.3%)
6.50%, 30 Year TBA 538 538 544 544
---
Total Securities Purchased When Issued (Cost $2,540) 2534 2,534
-----
U.S. Government Agencies (0.4%)
Federal Home Loan Bank (0.4%)
5.68%, 12/3/07 675 675 726 726
---
Total U.S. Government Agencies (Cost $675) 726 726
---
<PAGE>
U.S. Government Mortgage Backed (66.2%)
Federal Home Loan Mortgage Corp. (1.2%)
6.50%, 5/1/23 410 410 414 414
8.50%, 5/1/17 - 7/1/21 429 429 450 450
9.50%, 8/1/19 - 12/1/22 1,136 1,136 1,200 1,200
10.00%, 2/1/17 - 9/1/19 103 103 111 111
12.00%, 10/1/10 - 7/1/14 9 9 9 9
--
2,184 2,184
-----
Federal National Mortgage Assoc. (1.6%)
6.00%, 7/1/13 - 9/1/28 334 334 333 333
6.50%, 7/1/13 - 9/1/28 1,351 1,351 1,364 1,364
7.00%, 5/1/12 - 7/1/28 306 306 312 312
7.50%, 9/1/23 - 9/1/28 362 362 369 369
8.50%, 5/1/12 - 11/1/17 545 545 568 568
9.50%, 1/1/19 15 15 16 16
10.00%, 5/1/13 - 2/1/18 62 62 66 66
12.00%, 8/1/13 11 11 12 12
13.00%, 12/1/12 33 33 38 38
--
3,078 3,078
-----
Government National Mortgage Assoc. (63.4%)
6.50%, 2/20/11 - 5/15/28 18,697 18,697 18,912 18,912
6.55%, 11/15/13 566 566 576 576
6.63%, 1/15/27 3,000 3,000 3,043 3,043
6.75%, 10/20/07 3,000 3,000 3,082 3,082
7.00%, 7/16/13 - 9/15/28 1,711 26,980 28,691 1,752 27,788 29,540
7.50%, 8/20/20 - 3/15/28 1,037 21,699 22,736 1,067 22,324 23,391
7.99%, 8/16/99 438 438 440 440
8.00%, 8/15/06 - 10/15/27 1,857 12,485 14,342 1,923 12,945 14,868
8.50%, 6/20/16 - 3/15/28 10,040 10,040 10,566 10,566
8.75%, 4/15/22 2,567 2,567 2,735 2,735
9.00%, 10/15/09 - 12/20/23 842 6,001 6,843 896 6,401 7,297
9.50%, 10/15/02 - 1/15/21 702 1,978 2,680 751 2,127 2,878
10.00%, 6/15/17 - 8/15/25 1,400 914 2,314 1,520 998 2,518
10.25%, 3/15/19 - 6/15/19 58 58 63 63
10.50%, 2/15/16 13 13 15 15
11.00%, 9/20/14 61 61 67 67
--
7,681 108,365 116,046 8,054 111,937 119,991
-------
Total U.S. Government Mortgage Backed (Cost $124,389) 12,787 108,365 121,152 13,316 111,935 125,251
-------
U.S. Treasury Obligations (23.8%)
U.S. Treasury Bonds (23.5%)
6.38%, 1/15/00 2,500 2,500 2,560 2,560
7.88%, 11/15/04 5,500 5,500 6,458 6,458
7.50%, 2/15/05 10,000 10,000 11,613 11,613
7.63%, 2/15/07 11,000 11,000 11,976 11,976
8.75%, 11/15/08 10,000 10,000 11,815 11,815
------
39,000 39,000 44,422 44,422
------
U.S. Treasury Notes (0.0%)
5.13%, 8/31/00 23 23 23 23
--
U.S. Treasury Strips (0.3%)
0.00%, 8/15/20 2,000 2,000 588 588
---
Total U.S. Treasury Obligations (Cost $42,861) 611 44,422 45,033
------
Total Investments (Cost $184,891) - 99.4% 29,229 159,069 188,298
Other assets in excess of liabilities - 0.6% (486) 1,548 1,063
-----
TOTAL NET ASSETS - 100.0% $28,743 $160,618 $189,361
----------
</TABLE>
CMO - Collateralized Mortgage Obligation
At the time of the reorganization the Fund for Income is expected to own only
U.S. Government securities backed by the full faith and credit of the U.S.
Government, consistent with the existing investment policies of the Gradison
Government Income Fund.
=========
<PAGE>
THE VICTORY PORTFOLIOS
Victory Funds/Gradison Funds
Statements of Assets and Liabilities
October 31, 1998
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Victory Gradison
Ohio Municipal Ohio Tax Free Combined
Bond Fund Income Fund Adjustments Totals
---------------- ----------------- --------------- ------------------
ASSETS:
<S> <C> <C> <C> <C>
Investments, at value (Cost $73,736 & $107,788) $ 79,027 $ 113,557 $ - $ 192,584
Cash - 130 - 130
Interest and dividends receivable 1,400 1,949 - 3,349
Receivable for capital shares issued 7 - - 7
Receivable from brokers for investments sold 2,345 990 - 3,335
Prepaid expenses and other assets 3 - - 3
---------------- ----------------- --------------- ------------------
Total Assets 82,782 116,626 - 199,408
---------------- ----------------- --------------- ------------------
LIABILITIES:
Dividends payable - 58 - 58
Payable to brokers for investments purchased - 2,045 - 2,045
Accrued expenses and other payables:
Investment advisory fees 27 - - 27
Administration fees 1 - - 1
Custodian fees 3 - - 3
Transfer agent fees 4 - - 4
Shareholder service fees - Class A 17 - - 17
Other 26 33 - 59
---------------- ----------------- --------------- ------------------
Total Liabilities 78 2,136 - 2,214
---------------- ----------------- --------------- ------------------
NET ASSETS:
Capital 76,104 108,606 - 184,710
Undistributed net investment income 75 25 - 100
Net unrealized appreciation/depreciation from
investments 5,291 5,769 - 11,060
Accumulated undistributed net realized gains
(losses) from investment transactions 1,234 90 - 1,324
---------------- ----------------- --------------- ------------------
Net Assets $ 82,704 $ 114,490 $ - $ 197,194
================ ================= =============== ==================
Net Assets
Class A $ 82,704 $ - $ - $ 82,704
Class G - 114,490 - 114,490
---------------- ----------------- --------------- ------------------
Total $ 82,704 $ 114,490 $ - $ 197,194
================ ================= =============== ==================
Outstanding units of beneficial interest
(shares)
Class A 6,872 - - 6,872
Class G - 8,201 1,308 9,509
---------------- ----------------- --------------- ------------------
Total 6,872 8,201 1,308 16,381
================ ================= =============== ==================
Net asset value
Redemption price per share - Class A $ 12.04 $ - $ - $ 12.04
================ ================= =============== ==================
Redemption price per share - Class G $ - $ 13.96 $ (1.92) $ 12.04
================ ================= =============== ==================
Maximum sales charge - Class A 5.75% - - 5.75%
================ ================= =============== ==================
Maximum offering price per share
(100%/(100%-maximum sales charge) of
net asset value adjusted to nearest
cent) - Class A $ 12.77 $ - $ - $ 12.77
================ ================= =============== ==================
</TABLE>
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Ohio Municipal Bond Fund
Schedule of Portfolio Investments
October 31, 1998
Unaudited
(Amounts in thousands, except shares)
<TABLE>
<CAPTION>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Ohio Ohio Ohio Ohio
Municipal Tax Municipal Tax
Bond Free Bond Free
Fund Fund Fund Fund
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds (95.6%)
Alternative Minimum Tax Paper (6.1%)
Cincinnati, 6.30%, 12/1/15, Callable
6/1/05 @ 101, $1,250 $1,250 $1,388 $1,388
Franklin County Mortgage, Briggs/Wedgewood, 1,000 1,000 1,028 1,028
5.35%, Series C, 11/20/12, Callable 11/20/07 @ 103
Franklin County Mortgage, Briggs/Wedgwood, 500 500 514 514
Series C, 5.55%, 11/20/17, Callable 11/20/07 @ 103
Gateway EDR, 6.50%, 9/15/14, Callable 9/15/03 @ 102 2,300 2,300 2,418 2,418
Ohio State Economic Development, ABS Industries Inc. 500 500 535 535
Project, 6.00%, 6/1/04
Ohio State Economic Development, Ohio Enterprise 815 815 890 890
Board Fund, 6.50%, 12/1/09, Callable 12/1/04 @ 102
Ohio State Economic Development, Ohio Enterprise 445 445 459 459
Board Fund, 5.60%, 6/1/02
Ohio State Water Development Authority, North Star 1,000 1,000 1,094 1,094
BHP Steel-Cargill, 6.30%, 9/1/20,
Callable 9/1/05 @ 102 Ohio State Water
Development Authority, North Star 3,415 3,415 3,730 3,730
------
BHP-Broken Hill, 6.45%, 9/1/20,
Callable 9/1/05 @ 102
12,056 12,056
------
General Obligations (32.8%)
County, City & Special District (5.7%)
Akron, 4.55%, 12/1/06 $200 200 $207 207
Akron, 4.55%, 12/1/07 250 250 257 257
Akron, 4.55%, 12/1/08 300 300 307 307
Avon, 6.50%, 12/1/15 335 335 396 396
Bath Township, 0.00%, 12/1/07, AMBAC 205 205 141 141
Bath Township, 0.00%, 12/1/08, AMBAC 205 205 134 134
Butler County, 5.60%, 12/1/09, Callable 12/1/06 @ 101, 355 355 391 391
AMBAC
Butler County, 5.65%, 12/1/10, Callable 12/1/06 @ 101, 155 155 171 171
AMBAC
Cuyahoga Falls, 5.25%, 12/1/17, Callable 12/1/07 @ 102, 500 500 517 517
FGIC
Deerfield Township, 5.13%, 12/1/23, 2,425 2,425 2,451 2,451
Callable 12/1/08 @ 101, AMBAC
Madison County, 7.00%, 12/1/19, Callable 12/1/04 @ 102, 600 600 699 699
AMBAC
Maple Heights, 0.00%, 12/1/07, FSA 500 500 343 343
Maple Heights, 0.00%, 12/1/08, FSA 505 505 328 328
Maple Heights, 0.00%, 12/1/10, FSA 310 310 182 182
Monroe Falls, Series A, 6.95%, 12/1/14, 1,000 1,000 1,154 1,154
Callable 12/1/04 @ 101, AMBAC
Newark, 0.00%, 12/1/16, FGIC 1,490 1,490 611 611
Summit County, Series A, 4.10%, 12/01/07, FGIC 125 125 125 125
Summit County, Series A, 6.90%, 8/1/12, 230 230 261 261
Callable 8/1/01 @ 102, AMBAC
Summit County, Series A, 6.90%, 8/1/12, 255 255 279 279
Callable 8/1/01 @ 102, AMBAC
Summit County, Series A, 6.90%, 8/1/12, 15 15 17 17
Callable 8/1/01 @ 102, AMBAC
Toledo, 5.63%, 12/1/11, Callable 12/1/06 @ 102, AMBAC 1,000 1,000 1,104 1,104
Toledo, 5.50%, 12/1/12, Callable 12/1/07 @ 102, FGIC 1,085 1,085 1,183 1,183
------
6,572 4,686 11,258
------
Education (15.8%)
Anthony Wayne Local School District, 5.75%, 12/1/18, 1,000 1,000 1,077 1,077
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Ohio Ohio Ohio Ohio
Municipal Tax Municipal Tax
Bond Free Bond Free
Fund Fund Fund Fund
-----------------------------------------------------------------------
Callable 12/1/05 @ 101, FGIC
Avon Local School District, 5.50%, 12/1/04, AMBAC 665 665 723 723
Avon Local School District, 5.55%, 12/1/05, AMBAC 250 250 274 274
Batavia Local School District, 7.00%, 12/1/14, MBIA 1,500 1,500 1,806 1,806
Big Walnut Local School District, 0.00%, 12/1/09,
AMBAC 250 250 154 154
Brecksville-Broadview Heights City School
District, 6.50%, 1,000 1,000 1,160 1,160
12/1/16, Callable 12/1/06 @ 102, FGIC
Canal Winchester Local School District, 4.60%, 12/1/08, 150 150 155 155
FGIC
Delaware City School District, 5.75%, 12/1/20, 1,000 1,000 1,074 1,074
Callable 12/1/05 @ 101, FGIC
Dublin City School District, 0.00%, 12/1/09, MBIA 1,250 1,250 772 772
Fairfield City School District, 7.45%, 12/1/14, FGIC 1,000 1,000 1,307 1,307
Forest Hills Local School District, 4.00%,
12/1/98, MBIA 165 165 165 165
Fort Loramie Local School District, 5.00%, 12/1/26, 1,000 1,000 994 994
Callable 12/1/08 @ 101, FGIC
Franklin City School District, 0.00%, 12/1/12, AMBAC 280 280 148 148
Franklin City School District, 0.00%, 12/1/13, AMBAC 280 280 140 140
Franklin City School District, 0.00%, 12/1/14, AMBAC 280 280 132 132
Graham Local School District, 0.00%, 12/01/11, MBIA 200 200 112 112
Graham Local School District, 0.00%, 12/01/12, MBIA 200 200 106 106
Hilliard School District, Series A, 5.00%, 12/1/20, 1,050 1,050 1,050 1,050
Callable 12/1/06 @ 101, FGIC
Indian Lake Local School District, 0.00%,
12/1/11, AMBAC 250 250 139 139
Indian Lake Local School District, 0.00%,
12/1/12, AMBAC 250 250 132 132
Indian Lake Local School District, 0.00%,
12/1/13, AMBAC 250 250 125 125
Indian Lake Local School District, 0.00%,
12/1/14, AMBAC 250 250 118 118
Indian Lake Local School District, 0.00%,
12/1/15, AMBAC 250 250 111 111
Indian Lake Local School District, 0.00%,
12/1/16, AMBAC 250 250 105 105
Indian Lake Local School District, 5.38%
12/1/23, Callable 1,050 1,050 1,085 1,085
12/1/06 @ 101, FGIC
Indian Valley Local School District, 7.00%, 12/1/14, 2,500 2,500 2,947 2,947
Callable 12/1/05 @ 102, AMBAC
Kent City School District, 5.75%, 12/1/21, 1,000 1,000 1,079 1,079
Callable 12/1/07 @ 101, FGIC
Kettering City School District, 5.25%, 12/1/22, 1,000 1,000 1,011 1,011
Callable 12/1/05 @ 101, FGIC
Lakeview Local School District, 6.95%, 12/1/19, 1,250 1,250 1,478 1,478
Callable 12/1/04 @ 102, AMBAC
Lakota Local School District, 0.00%, 12/01/08, FGIC 320 320 208 208
Liberty Benton Local School District, 0.00%, 12/1/15, 570 570 253 253
AMBAC
Liberty Benton Local School District, 0.00%, 12/1/16, 285 285 119 119
AMBAC
McComb Local School District, 4.70%, 12/1/06, MBIA 140 140 147 147
Mount Vernon City Schools, 7.50%, 12/1/14, 500 500 590 590
Callable 12/1/04 @ 101, FGIC
Oak Hills Local School District, Series A,
5.70%, 12/1/25, 600 600 643 643
Callable 12/1/07 @ 101
Olentangy Local School District, Series A,
6.25%, 12/1/14, 500 500 551 551
Callable 12/1/04 @ 102
Reynoldsburg City School District, 4.80%, 12/1/06, FGIC 235 235 248 248
Ridgemont Local School District, 0.00%, 12/1/10, AMBAC 185 185 109 109
Ridgemont Local School District, 0.00%, 12/1/11, AMBAC 185 185 103 103
Ridgemont Local School District, 0.00%, 12/1/12, AMBAC 185 185 98 98
Ridgemont Local School District, 0.00%, 12/1/13, AMBAC 185 185 92 92
Ridgemont Local School District, 0.00%, 12/1/14, AMBAC 185 185 87 87
Ripley-Union-Lewis, Local School District, 0.00%, 12/1/06, 145 145 104 104
FGIC
Ripley-Union-Lewis, Local School District, 0.00%, 12/1/07, 245 245 169 169
FGIC
Ripley-Union-Lewis, Local School District, 0.00%, 12/1/10, 245 245 144 144
FGIC
Ripley-Union-Lewis, Local School District, 0.00%, 12/1/11, 245 245 137 137
FGIC
Ripley-Union-Lewis, Local School District, 0.00%, 12/1/12, 240 240 127 127
FGIC
Ripley-Union-Lewis, Local School District, 0.00%, 12/1/13, 240 240 120 120
FGIC
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Ohio Ohio Ohio Ohio
Municipal Tax Municipal Tax
Bond Free Bond Free
Fund Fund Fund Fund
-----------------------------------------------------------------------
Ripley-Union-Lewis, Local School District, 0.00%, 12/1/14, 235 235 111 111
FGIC
Springfield City School District, 0.00%, 12/1/11, AMBAC 1,715 1,715 945 945
Sycamore Community School District, 0.00%, 12/1/07 360 360 245 245
Twinsburg Local School District, 5.90%, 12/1/21, Callable 2,000 2,000 2,181 2,181
12/1/06 @ 102, FGIC
Upper Arlington City School District, 5.13%, 12/1/19, 1,250 1,250 2,500 1,258 1,259 2,517
Callable 12/1/06 @ 101, MBIA
Wadsworth City School District, 0.00%, 12/1/07, FGIC 555 555 380 380
Wadsworth City School District, 0.00%, 12/1/08, FGIC 555 555 361 361
Wadsworth City School District, 5.00 %, 12/1/22, 500 500 498 498
------
Callable 12/1/08 @ 101, FGIC
20,818 10,148 30,966
------
Housing (0.5%)
Toledo Multifamily Revenue, 5.25%, 12/1/18, 1,035 1,035 1,054 1,054
------
Callable 12/1/08 @ 102, FGIC
Public Facilities
(Convention, Sport, Public Buildings) (7.2%)
Centerville, Capital Facilities, 5.63%, 12/1/26, 285 285 303 303
Callable 12/1/05 @ 101, MBIA
Crawford County, Correctional Facilities, 6.75%, 12/1/19, 1,385 1,385 1,594 1,594
Callable 12/1/05 @ 101, AMBAC
Hamilton County, 4.90%, 12/1/18, Callable 12/1/07 @ 101 1,995 1,995 2,094 2,094
Hamilton County, 5.50%, 12/1/17, Callable 12/1/07 @ 102 1,935 1,935 1,916 1,916
Ohio State, 5.35%, 8/1/12, Callable 8/1/07 @ 101 1,000 1,000 1,063 1,063
Ohio State, 4.90%, 8/1/17, Callable 8/1/08 @ 101 620 620 620 620
Parma, Series A, 5.00%, 12/1/24, Callable 12/1/08 @ 101 1,000 1,000 995 995
Puerto Rico Commonwealth, 5.38%, 7/1/21, 1,850 1,850 1,929 1,929
Callable 7/1/07 @ 101.5, MBIA
Washington County, Juvenile Detention Home, 5.00%, 1,045 1,045 1,047 1,047
12/1/18, Callable 12/1/08 @ 101, FSA
Westlake, 5.55%, 12/1/17, Callable 12/1/08 @ 101 1,500 1,500 1,588 1,588
Westlake, 5.50%, 12/1/20, Callable 12/1/08 @ 101 1,000 1,000 1,051 1,051
------
1,897 12,303 14,200
------
Transportation (0.5%)
Greater Cleveland Regional Transit Authority, 5.60%, 1,000 1,000 1,065 1,065
------
12/1/11, Callable 12/1/06 @ 101, FGIC
Utility (Sewers, Telephone, Electric) (3.1%)
Canton, Waterworks System, 5.75%, 12/1/10, 500 500 553 553
Callable 12/1/05 @ 102, AMBAC
Greene County Sewer System, 5.25%, 12/1/25 250 1,000 1,250 255 1,022 1,277
Huron County Landfill Issue II, 5.40%, 12/1/07, MBIA 285 285 314 314
Huron County, Landfill Issue II, 5.60%, 12/1/09, 320 320 358 358
Callable 12/1/07 @ 102, MBIA
Lucas County Metropolitan Sewer & Water District, 5.45%, 505 505 527 527
12/1/17, Callable 12/1/07 @ 102
North Olmstead, 6.20%, 12/01/11, AMBAC 1,000 1,000 1,172 1,172
Toledo, Sewer Improvements, 6.10%, 12/1/14, 1,000 1,000 1,117 1,117
Callable 12/1/04 @ 102, AMBAC
Warren County, 6.55%, 12/1/14 725 725 867 867
------
3,124 3,061 6,185
------
33,465 31,264 64,728
------
Revenue Bonds (56.7%)
Education (11.0%)
Franklin County IDR, Columbus College of Art & Design, 1,310 1,310 1,354 1,354
6.00%, 9/1/13, Callable 9/1/00 @ 102, LOC Bank One
Kent State University, Series A, 5.00%, 5/1/18, 1,000 1,000 991 991
Callable 5/1/08 @101, AMBAC
Kent State University, Series A, 5.00%, 5/1/23, 1,000 1,000 996 996
Callable 5/1/08 @ 101, AMBAC
Miami University, 4.10%, 12/1/08, FGIC 500 500 498 498
Miami University, 4.20%, 12/1/09, FGIC 500 500 496 496
Ohio State Higher Educational Facilities,
Mt. Union College, 2,205 2,205 2,186 2,186
5.00%, 10/1/23, Callable 10/1/08 @ 101, MBIA
Ohio State Higher Educational Facilities, University of 1,000 1,000 1,061 1,061
Dayton, 5.20%, 12/1/10, Callable 12/1/07 @ 101, AMBAC
Ohio State Higher Educational Facilities,
Xavier University, 2,500 2,500 2,610 2,610
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Ohio Ohio Ohio Ohio
Municipal Tax Municipal Tax
Bond Free Bond Free
Fund Fund Fund Fund
-----------------------------------------------------------------------
5.38%, 5/15/22, Callable 5/15/07 @ 102, MBIA
Ohio State University, Agricultural Technological Institute 1,000 1,000 1,008 1,008
Student Project, 5.05%, 12/1/17, Callable 12/1/08 @ 101
State Education Loan, Series A-1, 5.85%, 12/1/19, 2,000 2,000 2,080 2,080
Callable 6/1/07 @ 102, AMBAC
State Higher Educational Facility Revenue, John Carroll 150 150 158 158
University Project, 5.05%, 4/1/04
State Higher Educational Facility Revenue,
Xavier University, 500 500 570 570
6.00%, 5/15/08, Callable 5/15/07 @ 102, MBIA
State Higher Educational Facilty Revenue, 1,000 1,000 1,039 1,039
University of Dayton,5.40%, 12/1/22,
Callable 12/1/07 @ 101, AMBAC
Student Loan Funding Corp., Series A, 5.50%, 12/1/01 3,300 3,300 3,416 3,416
University of Akron, 5.25%, 1/1/22,
Callable 1/1/07 @ 102, 1,000 1,000 1,016 1,016
AMBAC
University of Akron, General Receipts, 5.00%, 1/1/02, 440 440 457 457
AMBAC
University of Cincinnati, General Receipts, Series AD, 350 350 363 363
5.10%, 6/1/11, Callable 6/1/07 @ 101
University of Cincinnati, University Center
Project, 5.00%, 1,000 1,000 1,051 1,051
6/1/09, MBIA
University of Toledo, 4.10%, 6/1/04, FGIC 100 100 101 101
University of Toledo, 4.30%, 6/1/08, FGIC 100 100 101 101
University of Toledo, 4.25%, 6/1/07, FGIC 200 200 202 202
------
9,481 12,273 21,754
------
Hospitals, Nursing Homes & Health Care (18.9%)
Athens County Mental Health, 5.90%, 3/1/09, 545 545 574 574
Callable 3/1/03 @102, LOC National City Bank
Cuyahoga County Health Care Facilities, Benjamin Rose 500 500 533 533
Institute Project, Series A, 5.30%, 12/1/25,
Callable 12/1/02 @ 101, LOC Society
National Bank
Cuyahoga County Hospital, Fairview, 6.25%, 8/15/10, 500 500 540 540
Callable 2/15/03 @ 102
Cuyahoga County Hospital, General Hospital Project, 1,500 1,500 1,581 1,581
Series A, 5.50%, 8/15/14, Callable 8/15/04 @ 102, MBIA
Cuyahoga County Hospital, University Hospital Health, 1,300 1,300 1,369 1,369
Series A, 5.63%, 1/15/21, Callable 1/15/06 @ 102, MBIA
Cuyahoga County Hospital, W.O. Walker Center, 2,250 2,250 2,221 2,221
Series I, 5.00%, 1/1/23, Callable 7/1/08 @101, AMBAC
Franklin County Hospital, 7.00%, 8/1/16, 625 625 654 654
Callable 8/1/00 @ 102, FHA
Franklin County Hospital, Holy Cross Health System 1,000 1,000 980 980
Corp., 5.00%, 6/1/28, Callable 6/1/08 @ 101, MBIA
Gallia County Hospital, Holzer Medical Center Project, 600 600 584 584
4.00%, 10/1/2008
Garfield Heights, Marymont Hospital, 6.70%, 11/15/15, 1,000 1,000 1,095 1,095
Callable 11/15/02 @ 102
Hamilton County Hospital Facilities, Children's Hospital 2,000 2,000 1,898 1,898
Medical Center, Series G, 4.75%, 5/15/28,
Callable 11/15/08 @ 100, MBIA
Hamilton County Hospital Facilities, Children's Hospital 1,000 1,000 990 990
Medical Center, Series G, 5.00%, 5/15/23,
Callable 11/15/08 @ 101, MBIA
Hamilton County Hospital Facilities, Deaconess Hospital, 2,150 2,150 2,337 2,337
7.00%, 1/1/12, Callable 7/1/02 @ 102
Hamilton County, Health Care Facilities, 5.75%, 10/1/08 755 755 827 827
Hamilton County, Health Care Facilities, 5.13%, 10/1/18, 535 535 522 522
Callable 10/1/08 @ 101
Lake County Hospital Facilities, 4.13%, 8/15/08, AMBAC 930 930 915 915
Lake County Hospital, Improvement Facilities, 6.38%, 1,500 1,500 1,664 1,664
8/15/03, AMBAC
Lorain County Hospital, Catholic Healthcare Partners, 530 530 555 555
5.50%, 9/1/27, Callable 9/1/07 @ 102, MBIA
Lucas County Hospital, Promedica Healthcare, 5.75%, 2,000 2,000 2,183 2,183
11/15/14, Callable 11/15/06 @ 102, MBIA
Lucas County Hospital, The Toldeo Hospital, 5.00%, 500 500 498 498
11/15/22, Callable 11/15/03 @ 102, MBIA
Lucas County Hospital, The Toledo Hospital, 5.00%, 1,500 1,500 1,538 1,538
11/15/10, Callable 11/15/03 @ 102, MBIA
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Ohio Ohio Ohio Ohio
Municipal Tax Municipal Tax
Bond Free Bond Free
Fund Fund Fund Fund
-----------------------------------------------------------------------
Lucas-Northgate Housing Development Corp., 8.13%, 380 380 394 394
1/1/25, Callable 1/1/00 @ 102, MBIA
Mahoning County Hospital Facilities, YHA Inc. Project, 855 855 958 958
Series A, 7.00%, 10/15/14, Callable 10/15/00 @ 102,
MBIA
Ohio Capital Corporation For Housing Management, 1,000 1,000 1,051 1,051
Kent Gardens, 6.35%, 7/1/15, Callable 1/1/03 @ 101,
MBIA
Ohio Capital Corporation For Housing Management, 960 960 997 997
Series A, 7.70%, 1/1/25, Callable 1/1/00 @ 102, MBIA
Ohio Capital Corporation For Housing Management, 920 920 979 979
Springhill Homes, Series C, 6.50%, 7/1/24,
Callable 1/1/03 @ 103, MBIA
Parma Hospital Improvement, Parma Community 1,000 1,000 1,008 1,008
General Hospital, 5.25%, 11/1/13, Callable 11/1/08 @ 101
Portage County Hospital, Robinson Memorial, 6.50%, 635 635 711 711
11/15/03, MBIA
Portage County Hospital, Robinson Memorial, 6.50%, 675 675 767 767
11/15/04, MBIA
Portage County Hospital, Robinson Memorial, 6.50%, 715 715 823 823
11/15/05, MBIA
Springdale Hospital Facility, 5.88%, 11/01/12, 1,500 1,500 1,564 1,564
Callable 11/1/03 @ 102
Stark County Health Care Facility, Rose Land Inc. 1,000 1,000 1,010 1,010
Project, 5.45%, 7/20/33, Callable 7/20/08 @ 103
Washington County Hospital, 4.25%, 9/1/07, FSA 250 250 251 251
Washington County Hospital, 4.35%, 9/1/08, FSA 810 810 814 814
Westlake IDR, 6.40%, 8/1/09, Callable 8/1/99 @ 103 1,755 1,755 1,831 1,831
------
11,731 25,485 37,216
------
Housing (4.7%)
Cincinnati Elderly Housing Finance Corp., Walnut Towers, 2,020 2,020 2,197 2,197
Series A, 6.90%, 8/1/25, Callable 8/1/04 @ 102, FHA
Cuyahoga County Multifamily Revenue, 6.60%, 10/20/30, 2,000 2,000 2,186 2,186
Callable 10/20/05 @ 102, GNMA
Cuyahoga County Multifamily Revenue, Water Street 370 370 392 392
Assoc., 5.60%, 6/20/08, GNMA
Cuyahoga County Multifamily Revenue, Water Street 850 850 923 923
Assoc., 6.15%, 12/20/26, Callable 6/20/08 @ 105,
GNMA
Ohio Capital Corp., Housing Management Revenue, 225 225 240 240
Bucyrus Estate, 5.75%, 7/1/06,
Callable 7/1/05 @ 102, MBIA
Ohio Capital Corp., Mutifamily Housing Revenue, 5.50%, 1,235 1,235 1,244 1,244
1/1/24, Callable 1/1/03 @ 100, MBIA
Ohio Housing Finance Agency, 6.15%, 3/1/29, 1,495 1,495 1,599 1,599
Callable 9/1/07 @ 102, GNMA
Ohio Housing Finance Agency, 5.40%, 9/1/29, 500 500 504 504
-----
Callable 9/1/08 @ 102, GNMA
7,088 2,197 9,285
-----
Industrial Development (1.8%)
Broadview Heights IDR, 6.25%, 7/1/13, 1,075 1,075 1,117 1,117
Callable 7/1/99 @ 103, FHA
Cuyahoga County IDR, Southwest Association Project, 2,185 2,185 2,406 2,406
-----
6.50%, 6/1/16, Callable 12/1/04 @102, FHA
3,523 3,523
-----
Public Facilities
(Convention, Sport, Public Buildings) (9.0%)
Cleveland Urban Renewal, Rock & Roll Hall of Fame, 100 100 106 106
6.63%, 3/15/11, Callable 3/15/03 @ 102
Cleveland Urban Renewal, Rock & Roll Hall of Fame 1,300 1,300 1,383 1,383
Project, 6.75%, 3/15/18, Callable 3/15/03 @ 102
Cleveland, Motorized Equipment, 7.10%, 7/1/02 2,600 2,600 2,778 2,778
Hamilton County, 4.50%, 12/1/07, MBIA 200 200 206 206
Hamilton County Sales Tax, 4.75%, 12/1/17, 1,000 1,000 970 970
Callable 12/1/07 @101, MBIA
Hamilton County Sales Tax, 4.75%, 12/1/27, 2,000 1,000 3,000 1,915 950 2,865
Callable 12/1/07 @ 101, MBIA
Hamilton County Sales Tax, 5.00%, 12/1/27, 445 445 442 442
Callable 6/1/08 @ 101, MBIA
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Ohio Ohio Ohio Ohio
Municipal Tax Municipal Tax
Bond Free Bond Free
Fund Fund Fund Fund
-----------------------------------------------------------------------
Ohio Building Authority, 6.13%, 10/1/12, 1,000 1,000 1,095 1,095
Callable 10/1/03 @ 102
Ohio Building Authority, 4.75%, 10/1/17, 1,000 1,000 976 976
Callable 10/1/08 @ 101
Ohio Department of Administrative Services, 1,000 1,000 988 988
The Ohio Center Project, 5.00%, 7/15/23,
Callable 7/15/08 @ 101, AMBAC
Ohio State Department of Administrative Services, 1,055 1,055 1,037 1,037
The Ohio Center Project, 5.00%, 7/15/28,
Callable 7/15/08 @ 101, AMBAC
State Building Authority, Adult Correctional Facilities, 2,000 2,000 2,210 2,210
6.00%, 10/1/07, Callable 10/1/03 @ 102
State Building Authority, Sports Facilities
Building, 5.00%, 450 450 480 480
10/1/07, FSA
Toledo, Lucas County Convention Center Project, 5.50%, 500 500 547 547
10/1/10, Callable 10/1/06 @ 102, MBIA
Toledo-Lucas County Convention Center Project, 5.70%, 1,500 1,500 1,620 1,620
------
10/1/15, Callable 10/1/06 @ 102, MBIA
5,358 12,344 17,703
------
Public Improvements (0.9%)
Deerfield Township, 4.60%, 12/1/07, AMBAC 200 200 208 208
Deerfield Township, 5.00%, 12/1/18, 1,200 1,200 1,202 1,202
Callable 12/1/08 @ 101, AMBAC
Union County, 5.00%, 12/1/18, Callable 12/1/08 @ 101, 300 300 300 300
------
AMBAC
1,710 1,710
------
Transportation (1.2%)
Cleveland Airport System, Series C, 5.13%, 1/1/22, 1,250 1,250 1,262 1,262
Callable 1/1/08 @ 101, FSA
Columbus Airport Authority, Port Columbus, 1,000 1,000 1,013 1,013
------
Series A, 5.00%,1/1/14, Callable 1/1/08 @ 101 AMBAC
2,275 2,275
------
Utility (Sewers, Telephone, Electric) (9.2%)
Alliance Water Works, 5.00%, 11/15/20, 1,500 1,500 1,493 1,493
Callable 11/15/08 @ 101, MBIA
Barberton Sewer System Revenue, 4.50%, 12/1/06, FGIC 250 250 259 259
Cleveland Public Power System, 7.00%, 11/15/16, 750 750 879 879
Callable 11/15/04 @102, MBIA
Cleveland Public Power Systems, Series A, 7.00%, 1,985 1,985 2,344 2,344
11/15/24, Prerefunded 11/15/04 @ 102, MBIA
Cleveland Waterworks, 5.75%, 1/1/21, 940 940 1,054 1,054
Prerefunded 1/1/06 @ 102, MBIA
Cleveland Waterworks, 5.75%, 1/1/21, 10 10 11 11
Callable 1/1/06 @ 102, MBIA
Cuyahoga County Utility System, 1,050 1,050 1,059 1,059
Medical Center Company Project, 5.13%, 2/15/28,
Callable 2/15/08 @102, AMBAC
Cuyahoga County Utility System, Medical Center 1,500 1,500 1,644 1,644
Company Project, Series B, 5.85%, 8/15/10,
Callable 8/15/05 @ 102, MBIA
Green County Sewer System, 5.13%, 12/1/20, 750 750 758 758
Callable 12/1/08 @ 102, MBIA
Huber Heights Water Systems, 5.55%, 12/1/10, 815 815 890 890
Callable 12/1/05 @ 102, MBIA
Huber Heights Water Systems, 0.00%, 12/1/22, MBIA 275 275 82 82
Huber Heights Water Systems, 0.00%, 12/1/24, MBIA 1,095 1,095 294 294
Huber Heights Water Systems, 0.00%, 12/1/25, MBIA 1,070 1,070 273 273
Ohio State Water Development Authority,
5.00%, 12/1/15, 1,000 1,000 1,008 1,008
Callable 6/1/08 @ 101, FSA
Ohio State Water Development Authority,
6.40%, 8/15/27, 2,250 2,250 2,432 2,432
Callable 8/15/02 @ 102
Puerto Rico Electric Power Authority, Series AA, 1,000 1,000 1,064 1,064
5.38%, 7/1/14, Calable 7/1/07 @ 101.5, MBIA
Southwest Regional Water, 6.00%, 12/1/20, 500 500 553 553
Callable 12/1/05 @101, MBIA
Warren Waterworks, 5.00%, 11/1/22, 1,000 1,000 1,003 1,003
Callable 11/1/07 @ 102, FGIC
Wilmington Water, 5.25%, 6/15/29, 1,000 1,000 1,016 1,016
Callable 6/15/08 @ 101, AMBAC
6,776 11,340 18,116
--------
42,144 69,437 111,581
--------
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Ohio Ohio Ohio Ohio
Municipal Tax Municipal Tax
Bond Free Bond Free
Fund Fund Fund Fund
-----------------------------------------------------------------------
Total Municipal Bonds (Cost $177,306) 75,609 112,757 188,366
--------
Investment Companies (2.1%)
Federated Ohio Municipal Cash Trust Fund 1,426 1,426 1,426 1,426
Fidelity Ohio Tax Free Money Market 1,992 1,992 1,992 1,992
Ohio Municipal Cash Money Market 800 800 800 800
--------
Total Investment Companies (Cost $4,218) 4,218 3,418 800 4,218
--------
Total Investments (Cost $181,524) - 97.6% 79,027 113,557 192,584
Other assets in excess of liabilities - 2.4% 3,677 933 4,610
--------
TOTAL NET ASSETS - 100.0% $82,704 $114,490 $197,194
========
- ------------
AMBAC - Insured by American Municipal Bond Assurance Corp.
FGIC - Insured by Financial Guaranty Insurance Corp.
FNMA - Federal National Mortgage Assoc.
FSA - Insured by Financial Security Assurance
GNMA - Insured by Government National Mortgage Assoc.
MBIA - Insured by Municipal Bond Insurance Assoc.
<PAGE>
THE VICTORY PORTFOLIOS
Victory Funds/Gradison Funds
Statements of Assets and Liabilities
October 31, 1998
(Amounts in thousands, except per share amounts)
Victory Gradison
Diversified Growth &
Stock Income Combined
Fund Fund Adjustments Totals
---------------- ----------------- --------------- ------------------
ASSETS:
Investments, at value (Cost $911,046 &
$52,067) $ 1,037,448 $ 64,360 $ - $ 1,101,808
Repurchase agreements at amortized cost 125,000 - - 125,000
Cash 2 1 - 3
Interest and dividends receivable 734 91 - 825
Receivable for capital shares issued 213 - - 213
Receivable from brokers for investments sold 17,438 - - 17,438
Prepaid expenses and other assets 14 6 (2) 18
---------------- ----------------- --------------- ------------------
Total Assets 1,180,849 64,458 (2) 1,245,305
---------------- ----------------- --------------- ------------------
LIABILITIES:
Payable for capital shares redeemed 92 - - 92
Payable to brokers for investments purchased 22,196 - - 22,196
Payable for return of collateral received 173,555 - - 173,555
Accrued expenses and other payables:
Investment advisory fees 437 - - 437
Administration fees 13 - - 13
Custodian fees 20 - - 20
Accounting fees 1 - - 1
Transfer agent fees 160 - - 160
Shareholder service fees - Class A 167 - - 167
Shareholder service and 12b-1 fees
- Class B 39 - - 39
Other 49 14 - 63
---------------- ----------------- --------------- ------------------
Total Liabilities 196,729 14 - 196,743
---------------- ----------------- --------------- ------------------
NET ASSETS:
Capital 659,150 51,721 (2) 710,869
Undistributed net investment income 86 44 - 130
Net unrealized appreciation/depreciation from
investments 126,402 12,293 - 138,695
Accumulated undistributed net realized gains
from investment transactions 198,482 386 - 198,868
---------------- ----------------- --------------- ------------------
Net Assets $ 984,120 $ 64,444 $ (2) $ 1,048,562
================ ================= =============== ==================
Net Assets
Class A $ 933,158 $ - $ - $ 933,158
Class B 50,962 - - 50,962
Class G - 64,444 (2) 64,442
---------------- ----------------- --------------- ------------------
Total $ 984,120 $ 64,444 $ (2) $ 1,048,562
================ ================= =============== ==================
Outstanding units of beneficial interest
(shares)
Class A 49,507 - - 49,507
Class B 2,740 - - 2,740
Class G - 2,338 1,081 3,419
---------------- ----------------- --------------- ------------------
Total 52,247 2,338 1,081 55,666
================ ================= =============== ==================
Net asset value
Redemption price per share-Class A $ 18.85 $ - $ - $ 18.85
================ ================= =============== ==================
Offering and redemption price per
share-Class B * $ 18.60 $ - $ - $ 18.60
================ ================= =============== ==================
Offering and redemption price per
share-Class G $ - $ 27.57 $ (8.72) $ 18.85
================ ================= =============== ==================
Maximum sales charge - Class A 5.75% - - 5.75%
================ ================= =============== ==================
Maximum offering price per share
(100%/(100%-maximum sales
charge) of net asset value adjusted to
nearest cent)-Class A $ 20.00 $ - $ - $ 20.00
================ ================= =============== ==================
</TABLE>
* Redemption price per Class B Share varies based on length of time held.
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Diversified Stock Fund
Schedule of Portfolio Investments
October 31, 1998
Unaudited
<TABLE>
<CAPTION>
(Amounts in thousands, except shares) Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Diversified Growth & Diversified Growth &
Stock Income Stock Income
Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Commercial Paper (4.7%)
Associates Corp., N.A., 5.70%, 11/2/98 $49,295 $49,295 $49,295 $49,295
-------
Total Commercial Paper (Cost $49,295) 49,295 49,295
------
Common Stocks (95.4%)
Adhesives (1.0%)
Avery Dennison Corp. 230,000 20,000 250,000 9,531 829 10,360
------
Aerospace/Defense (2.5%)
AlliedSignal, Inc. 372,200 372,200 14,493 14,493
Boeing Co. 300,000 300,000 11,250 11,250
------
25,743 25,743
------
Airlines (0.1%)
Comair Holdings, Inc. 20,000 20,000 658 658
---
Aluminum (1.6%)
Aluminum Co. of America 212,000 212,000 16,801 16,801
Automotive Parts (0.1%)
TRW, Inc. 20,000 20,000 1,139 1,139
-----
17,940
Banks (7.5%)
BankAmerica Corp. 225,000 225,000 12,923 12,923
First Union Corp. 190,000 190,000 11,020 11,020
Huntington Bancshares, Inc. 33,000 33,000 947 947
J.P. Morgan & Co., Inc. 15,000 15,000 1,414 1,414
Mellon Bank Corp. 219,000 219,000 13,167 13,167
National City Corp. 10,000 10,000 643 643
Norwest Corp. (a) 60,000 60,000 2,231 2,231
Norwest Corp. (a) 415,200 415,200 15,440 15,440
PNC Bank Corp. 445,000 445,000 22,250 22,250
------
74,800 5,235 80,035
------
Beverages (2.9%)
Anheuser-Busch Co., Inc. 225,000 225,000 13,373 13,373
Coca-Cola Co. 150,000 150,000 10,144 10,144
PepsiCo, Inc. 15,000 15,000 506 506
PepsiCo, Inc. 200,000 200,000 6,750 6,750
-----
30,267 506 30,773
------
Chemicals-General (1.4%)
A. Schulman, Inc. 20,000 20,000 398 398
E.I. Du Pont de Nemours Co. 20,000 20,000 1,150 1,150
Nalco Chemical Co. 208,600 208,600 6,454 6,454
RPM, Inc. 402,187 402,187 6,761 6,761
-----
13,215 1,548 14,763
------
Commercial Services (0.1%)
Automatic Data Processing, Inc. 10,000 10,000 778 778
---
Computers & Peripherals (7.3%)
Compaq Computer Corp. 550,000 550,000 17,393 17,393
Diebold, Inc. 30,000 30,000 936 936
Electronic Data Systems Corp. 420,000 420,000 17,088 17,088
<PAGE>
Gateway 2000, Inc. (a) 225,000 225,000 12,558 12,558
Hewlett-Packard Co. 50,000 50,000 3,009 3,009
Hewlett-Packard Co. 155,000 155,000 9,329 9,329
International Business Machines Corp. 30,200 30,200 4,483 4,483
Seagate Technology, Inc. (a) 500,000 500,000 13,188 13,188
------
74,039 3,945 77,984
------
Conglomerates (2.5%)
Canadian Pacific, Ltd. 513,600 513,600 11,621 11,621
Corning, Inc. 159,261 159,261 5,783 5,783
Minnesota Mining & Manufacturing Co. 10,000 10,000 800 800
Textron, Inc. 105,000 105,000 7,809 7,809
-----
25,213 800 26,013
------
Consumer Products (1.1%)
Newell Co. 20,000 20,000 880 880
Newell Co. 225,000 225,000 9,900 9,900
Procter & Gamble Co. 10,000 10,000 889 889
---
9,900 1,769 11,669
------
Containers-Metal, Glass,
Paper, Plastic (0.5%)
Sonoco Products Co. 173,800 173,800 4,932 4,932
-----
Cosmetics & Related (1.3%)
Avon Products, Inc. 340,000 340,000 13,494 13,494
International Flavor & Fragance, Inc. 20,000 20,000 749 749
---
13,494 749 14,243
------
Electronic & Electrical-General(3.5%)
AMP, Inc. 26,168 26,168 1,075 1,075
AMP, Inc. 187,010 187,010 7,679 7,679
General Electric Co. 15,000 15,000 1,313 1,313
General Electric Co. 50,000 50,000 4,375 4,375
Motorola, Inc. 15,000 15,000 780 780
Motorola, Inc. 150,000 150,000 7,799 7,799
Thomas & Betts Corp. 170,000 170,000 7,597 7,597
Vishay Intertechnology, Inc. (a) 374,015 374,015 5,657 5,657
-----
33,107 3,168 36,275
------
Financial Services (1.0%)
Citigroup, Inc. 210,000 210,000 9,883 9,883
Exel Ltd. 10,000 10,000 764 764
---
9,883 764 10,647
------
Food Processing & Packaging (3.2%)
Archer-Daniels-Midland Co. 31,500 31,500 526 526
Bestfoods 20,000 20,000 1,090 1,090
H.J. Heinz Co. 15,000 15,000 872 872
Kellogg Co. 30,000 30,000 990 990
Kellogg Co. 200,000 200,000 6,600 6,600
Quaker Oats Co. 225,000 225,000 13,289 13,289
Ralston Purina Group 317,580 317,580 10,599 10,599
------
30,488 3,478 33,966
------
Forest Products-Lumber & Paper (2.2%)
Bowater, Inc. 383,400 383,400 15,647 15,647
International Paper Co. 158,400 158,400 7,356 7,356
23,003 23,003
------
Health Care (1.7%)
Columbia HCA Healthcare Corp. 700,000 700,000 14,700 14,700
Tenet Healthcare Corp. (a) 125,000 125,000 3,492 3,492
-----
18,192 18,192
------
Hotels & Motels (0.5%)
Mirage Resorts, Inc. (a) 340,000 340,000 5,759 5,759
-----
Household Goods-Appliances,
Furnishings & Electronics (0.1%)
Lancaster Colony Corp. 25,000 25,000 747 747
---
Industrial Goods & Services (0.1%)
Hubbell, Inc. 20,000 20,000 798 798
---
<PAGE>
Insurance (0.3%)
Allstate Corp. 30,000 30,000 1,292 1,292
Cincinnati Financial Corp. 30,000 30,000 1,119 1,119
St. Paul Cos., Inc. 30,000 30,000 994 994
---
3,405 3,405
-----
Insurance-Multi-Line (4.4%)
American General Corp. 30,000 30,000 2,055 2,055
American International Group, Inc. 282,037 282,037 24,044 24,044
General Reinsurance Corp. 30,500 30,500 6,700 6,700
Lincoln National Corp. 116,500 116,500 8,839 8,839
Partner Reinsurance Ltd. 100,500 100,500 3,995 3,995
-----
43,578 2,055 45,633
------
Insurance-Property,
Casualty, Health (0.8%)
Everest Reinsurance Holdings, Inc. 228,500 228,500 7,869 7,869
-----
Investment Company (0.7%)
Tele-communications TCI
Ventures Group, Class A (b) 374,710 374,710 6,979 6,979
-----
Machine Tools (1.1%)
Kennametal, Inc. 512,000 512,000 10,624 10,624
Lincoln Electric Holdings 20,000 20,000 425 425
---
10,624 425 11,049
------
Machinery-Diversfied (1.2%)
Thermo Electron (a) 643,300 643,300 12,826 12,826
------
Manufacturing -Capital Goods (0.1%)
Parker-Hannifin Corp. 20,000 20,000 715 715
---
Manufacturing-Miscellaneous (0.1%)
Pall Corp. 25,000 25,000 631 631
---
Media (1.4%)
News Corp. ADR 536,900 536,900 14,664 14,664
------
Medical Supplies (0.9%)
Biomet, Inc. 294,967 294,967 10,010 10,010
------
Medical-Biotechnology (0.5%)
Amgen, Inc. (a) 65,000 65,000 5,107 5,107
-----
Metals (0.9%)
Reynolds Metal Co. 158,600 158,600 9,506 9,506
-----
Office Equipment & Supplies
(Non-Computer Related) (0.4%)
Pitney Bowes, Inc. 50,000 50,000 2,753 2,753
Reynolds & Reynolds Co., Class A 60,000 60,000 1,080 1,080
-----
3,833 3,833
-----
Oil & Gas Exploration,
Production & Services (5.4%)
Anadarko Petroleum Corp. 80,000 80,000 2,710 2,710
Conoco, Inc., Class A (a) 427,100 427,100 10,624 10,624
Enron Corp. 460,700 460,700 24,302 24,302
Helmerich & Payne, Inc. 20,000 20,000 476 476
Mobil Corp. 30,000 30,000 2,271 2,271
Noble Affiliates, Inc. 69,200 69,200 2,266 2,266
Texaco, Inc. 131,000 131,000 7,770 7,770
USX - Marathon Group 200,000 200,000 6,538 6,538
-----
54,210 2,747 56,957
------
Oil-Integrated Companies (3.2%)
Atlantic Richfield Co. 135,800 135,800 9,353 9,353
Chevron Corp. 15,000 15,000 1,223 1,223
Exxon Corp. 27,600 27,600 1,967 1,967
Phillips Petroleum Co. 100,000 100,000 4,325 4,325
Unocal Corp. 480,000 480,000 16,289 16,289
------
29,967 3,190 33,157
------
<PAGE>
Oilfield Services &
Equipment (3.0%)
Baker Hughes, Inc. 560,000 560,000 12,355 12,355
Halliburton Co. 200,600 200,600 7,209 7,209
Schlumberger, Ltd. 220,000 220,000 11,550 11,550
------
31,114 31,114
------
Packaging (1.2%)
Crown Cork & Seal Co., Inc. 400,000 400,000 12,750 12,750
------
Pharmaceuticals (7.0%)
American Home Products Corp. 50,000 50,000 2,438 2,438
American Home Products Corp. 651,000 651,000 31,736 31,736
Bristol-Myers Squibb Co. 20,000 20,000 2,210 2,210
Merck & Co., Inc. 15,000 15,000 2,029 2,029
Merck & Co., Inc. 40,000 40,000 5,410 5,410
Pfizer, Inc. 180,000 180,000 19,316 19,316
SmithKline Beecham PLC ADR 180,000 180,000 11,475 11,475
------
67,937 6,677 74,614
------
Radio & Television (2.9%)
Chancellor Media Corp. (a) 185,000 185,000 7,099 7,099
Tele-Communications, Inc.,
Class A (a) 545,645 545,645 22,986 22,986
------
30,085 30,085
------
Railroads (0.4%)
Union Pacific Corp. 96,778 96,778 4,609 4,609
-----
Real Estate Investment
Trusts (0.5%)
Office (0.3%)
Cousins Properties, Inc. 100,000 100,000 2,863 2,863
-----
Warehouse (0.2%)
ProLogis Trust 108,333 108,333 2,363 2,363
-----
Restaurants (0.0%)
McDonald's Corp. 7,000 7,000 468 468
---
Retail (1.9%)
AutoZone, Inc. (a) 415,000 415,000 10,920 10,920
May Department Stores Co. 10,000 10,000 610 610
OfficeMax, Inc. (a) 847,000 847,000 7,729 7,729
Walgreen Co. 15,000 15,000 730 730
---
18,649 1,340 19,989
------
Rubber & Rubber Products (0.1%)
Cooper Tire & Rubber Co. 40,000 40,000 665 665
---
Semiconductors (3.0%)
Applied Materials, Inc. (a) 200,600 200,600 6,958 6,958
Intel Corp. 50,000 20,000 70,000 4,459 1,783 6,242
Texas Instruments, Inc. 290,000 290,000 18,543 18,543
------
29,960 1,783 31,743
------
Software & Computer Services (3.9%)
Computer Associates International, Inc. 250,000 250,000 9,844 9,844
First Data Corp. 400,000 400,000 10,600 10,600
Networks Associates, Inc. (a) 220,000 220,000 9,350 9,350
Oracle Systems Corp. (a) 360,000 360,000 10,642 10,642
------
40,436 40,436
------
Steel (0.0%)
Worthington Industries, Inc. 35,000 35,000 470 470
---
Tobacco & Tobacco Products (3.2%)
Philip Morris Cos., Inc. 510,000 510,000 26,074 26,074
UST, Inc. 232,000 232,000 7,888 7,888
-----
33,962 33,962
------
Utilities-Electric (2.1%)
<PAGE>
CINergy Corp. 346,700 346,700 11,962 11,962
Duke Energy Corp. 15,000 15,000 970 970
Southern Co. 30,000 30,000 846 846
Southern Co. 304,300 304,300 8,577 8,577
-----
20,539 1,816 22,355
------
Utilities-Telecommunications (2.4%)
Ameritech Corp. 50,000 50,000 2,697 2,697
Ameritech Corp. 57,200 57,200 3,085 3,085
GTE Corp. 178,500 178,500 10,476 10,476
MCI Worldcom Inc. (a) 127,804 127,804 7,061 7,061
SBC Communications, Inc. 30,000 30,000 1,389 1,389
-----
20,622 4,086 24,708
------
Total Common Stocks (Cost $862,118) ####### 939,594 61,219 1,000,813
Investment Companies (0.3%)
First Union Capital Mkts 3,145,000 3,145,000 3,145 3,145
-----
Total Investment Companies (Cost $3,145) 3,145
-----
Securities Purchased With Cash
Collateral (17.0%)
Short Term Securities (4.6%)
General American Funding
Agreement, 5.89%, 11/6/98 35,000 35,000 35,000 35,000
AIM Short Term Prime
Obligations Money Market Fund 1,284 1,284 1,284 1,284
AIM Liquid Assets Money Market Fund 12,271 12,271 12,271 12,271
Repurchase Agreements (11.9%)
Lehman Brothers, Inc., 5.41%, 11/2/98 20,000 20,000 20,000 20,000
Goldman, 5.32%, 11/2/98 20,000 20,000 20,000 20,000
Bache Corp., 5.27%, 11/2/98 40,000 40,000 40,000 40,000
Salomon Corp., 5.30%, 11/2/98 20,000 20,000 20,000 20,000
Morgan Stanley Corp., 5.31%, 11/2/98 25,000 25,000 25,000 25,000
------
Total Securities Purchased With
Cash Collateral (Cost $173,555) 173,555
-------
Total Investments (Cost $1,088,113) - 116.5% 1,162,448 64,360 1,226,808
Other assets in excess of liabilities - (16.5%) (178,328) 82 (178,246)
---------
TOTAL NET ASSETS - 100.0% $984,120 $64,442 $1,048,562
============
(a) Non-income producing securities.
ADR - American Depository Receipts
<PAGE>
THE VICTORY PORTFOLIOS
Victory Funds/Gradison Funds
Statements of Assets and Liabilities
October 31, 1998
(Amounts in thousands, except per share amounts) Victory Gradison
Special Opportunity
Growth Value Combined
Fund Fund Adjustments Totals
---------------- ----------------- --------------- ------------------
ASSETS:
Investments, at value (Cost $92,054 & $120,749) $ 80,739 $ 146,358 $ - $ 227,097
Interest and dividends receivable - 76 - 76
Receivable for capital shares issued 14 - - 14
Receivable from brokers for investments sold 993 454 - 1,447
Prepaid expenses and other assets 2 8 - 10
---------------- ----------------- --------------- ------------------
Total Assets 81,748 146,896 - 228,644
---------------- ----------------- --------------- ------------------
LIABILITIES:
Payable for capital shares redeemed 2 - - 2
Payable to brokers for investments purchased 64 359 - 423
Accrued expenses and other payables:
Investment advisory fees 55 - - 55
Administration fees 1 - - 1
Custodian fees 7 - - 7
Transfer agent fees 8 - - 8
Shareholder service fees - Class A 9 - - 9
Other 3 148 - 151
---------------- ----------------- --------------- ------------------
Total Liabilities 149 507 - 656
---------------- ----------------- --------------- ------------------
NET ASSETS:
Capital 102,960 120,080 - 223,040
Undistributed (distributions in excess of ) net
investment income (1) 364 - 363
Net unrealized appreciation/depreciation from
investments (11,315) 25,609 - 14,294
Accumulated undistributed net realized gains
(losses)
from investment transactions (10,045) 336 - (9,709)
---------------- ----------------- --------------- ------------------
Net Assets $ 81,599 $ 146,389 $ - $ 227,988
================ ================= =============== ==================
Net Assets
Class A $ 81,599 $ - $ - $ 81,599
Class G - 146,389 - 146,389
---------------- ----------------- --------------- ------------------
Total $ 81,599 $ 146,389 $ - $ 227,988
================ ================= =============== ==================
Outstanding units of beneficial interest
(shares)
Class A 8,537 - (4,797) 3,740
Class G - 6,709 - 6,709
---------------- ----------------- --------------- ------------------
Total 8,537 6,709 (4,797) 10,449
================ ================= =============== ==================
Net asset value
Redemption price per share-Class A $ 9.56 $ - $ 12.26 $ 21.82
================ ================= =============== ==================
Offering and redemption price per
share-Class G $ - $ 21.82 $ - $ 21.82
================ ================= =============== ==================
Maximum sales charge - Class A 5.75% - - 5.75%
================ ================= =============== ==================
Maximum offering price per share
(100%/(100%-maximum sales
charge) of net asset value adjusted to
nearest cent) $ 10.14 $ - $ 13.01 $ 23.15
================ ================= =============== ==================
</TABLE>
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Special Growth Fund
Schedule of Portfolio Investments
October 31, 1998
Unaudited
(Amounts in thousands, except shares)
<TABLE>
<CAPTION>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Special Oportunity Special Oportunity
Growth Value Growth Value
Fund Fund Fund Fund
----------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Paper (7.0%)
Associates Corp. N.A., 5.70%, 11/2/98 $1,431 $1,431 $1,431 $1,431
Banc One, 5.03%, 12/2/98 $2,000 2,000 $1,992 1,992
Dupont, 5.24%, 11/24/98 2,000 2,000 1,994 1,994
Goldman Sachs Group, 5.36%, 11/18/98 2,000 2,000 1,995 1,995
Indianapolis Power and Lighting, 5.48%, 11/3/98 2,500 2,500 2,499 2,499
Interstate Energy, 5.28%, 11/10/98 2,000 2,000 1,998 1,998
LG&E Energy Corp., 5.20%, 11/4/98 2,000 2,000 1,999 1,999
Lubrizol Corp, 5.17%, 11/13/98 2,000 2,000 1,997 1,997
-----
Total Commercial Paper (Cost $15,905) 1,431 14,474 15,905
------
Common Stocks (88.7%)
Airlines (1.7%)
Comair Holdings, Inc. 75,000 75,000 2,465 2,465
SkyWest, Inc. 55,000 55,000 1,403 1,403
-----
1,403 2,465 3,868
-----
Apparel (0.7%)
Gerber Children's Wear, Inc. (a) 80,000 80,000 680 680
Gildan Activewear, Inc. - Class A (a) 150,000 150,000 994 994
---
1,674 1,674
-----
Apparel-Footwear (0.8%)
Bebe Stores, Inc. (a) 66,500 66,500 1,064 1,064
Gadzooks, Inc. (a) 100,000 100,000 819 819
---
1,883 1,883
-----
Automotive Parts (2.7%)
Borg-Warner Auto, Inc. 25,000 25,000 1,172 1,172
Gleason Corp. 30,000 30,000 606 606
Intermet Corp 70,000 70,000 1,089 1,089
Motocar Parts & Accessories, Inc. (a) 43,000 43,000 516 516
Superior Industries International 30,000 30,000 786 786
Wynn's International, Inc. 100,000 100,000 1,881 1,881
-----
6,050 6,050
-----
Banks (8.5%)
Andover Bancorp 53,000 53,000 1,650 1,650
Firstar Corp. 30,000 30,000 1,703 1,703
GBC Bancorp 74,000 74,000 1,943 1,943
HUBCO, Inc. 49,172 49,172 1,309 1,309
Mercantile Bankshares Corp. 46,125 46,125 1,499 1,499
MT & T Bank Corp. 4,000 4,000 1,993 1,993
National City Bankcorp (a) 44,000 44,000 1,166 1,166
Old Kent Financial Corp. 42,000 42,000 1,764 1,764
TCF Financial Corp. 50,000 50,000 1,178 1,178
TR Financial Corp. 66,000 66,000 2,115 2,115
Union Planters Corp. 20,000 20,000 929 929
Zions Bancorporation 40,000 40,000 2,122 2,122
------
19,371 19,371
Beverages (0.3%)
Hansen Natural Corp. (a) 150,000 150,000 792 792
------
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Special Oportunity Special Oportunity
Growth Value Growth Value
Fund Fund Fund Fund
----------------------------------------- --------------------------------------
Bio-Technology (0.7%)
Incyte Pharmaceuticals, Inc. (a) 50,000 50,000 1,525 1,525
-----
Building Materials (2.3%)
Cascade Corp. 32,000 32,000 432 432
Fibermark, Inc. (a) 25,000 25,000 356 356
Hughes Supply Co. 65,000 65,000 1,727 1,727
NCI Building Systems (a) 79,000 79,000 1,708 1,708
Texas Industries, Inc. 34,000 34,000 1,005 1,005
-----
5,228 5,228
-----
Business & Public Services (3.0%)
ABM Industries, Inc. 75,000 75,000 2,100 2,100
Advanced Marketing Services 36,000 36,000 612 612
Inacom Corp. (a) 38,000 38,000 736 736
Leasing Solutions, Inc. (a) 65,000 65,000 662 662
Merrill Corp. 70,000 70,000 1,155 1,155
Norstan, Inc. (a) 100,000 100,000 1,650 1,650
-----
6,915 6,915
-----
Chemicals-General (1.4%)
Cambrex Corp. 60,000 60,000 1,533 1,533
Ferro Corp. 45,000 45,000 1,148 1,148
Stephan Co. 44,000 44,000 550 550
-----
3,231 3,231
-----
Commercial Services (1.0%)
Convergys Corp. (a) 50,000 50,000 697 697
NCO Group (a) 26,000 26,000 819 819
Pharmaceutical Product Development, Inc. (a) 30,000 30,000 810 810
---
2,326 2,326
-----
Computers & Peripherals (4.4%)
Affiliated Computer Services, Inc. (a) 60,000 60,000 2,220 2,220
Applied Graphics Technology (a) 11,400 11,400 136 136
Computer Network Technology Corp. (a) 140,000 140,000 796 796
Digital River, Inc. (a) 60,000 60,000 660 660
Documentum, Inc. (a) 25,000 25,000 850 850
Entrust Technologies, Inc. (a) 60,000 60,000 998 998
Intervoice, Inc. (a) 50,000 50,000 1,424 1,424
Kronos, Inc. (a) 25,000 25,000 900 900
MTS Systems Corp. 55,000 55,000 667 667
National Computer Systems, Inc. 35,000 35,000 980 980
Printronix, Inc. (a) 30,000 30,000 375 375
------
6,608 3,398 10,006
------
Consulting (0.4%)
Tetra Tech, Inc. (a) 43,750 43,750 889 889
Consumer Products (1.3%)
Coachman Industries, Inc. 75,000 75,000 1,734 1,734
Michael Foods, Inc. 55,000 55,000 1,320 1,320
-----
3,054 3,054
-----
Electronic & Electrical-General (1.1%)
SIPEX Corp. (a) 50,000 50,000 1,388 1,388
TAVA Technologies, Inc. (a) 175,000 175,000 1,039 1,039
-----
2,427 2,427
-----
Electronic Components/Instruments (1.1%)
Encore Wire Corp. (a) 64,000 64,000 712 712
Energy Conversion Devices (a) 55,000 55,000 416 416
Jabil Circuit, Inc. (a) 30,000 30,000 1,389 1,389
-----
2,517 2,517
-----
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Special Oportunity Special Oportunity
Growth Value Growth Value
Fund Fund Fund Fund
----------------------------------------- --------------------------------------
Electronics (2.2%)
CTS Corp. 40,500 40,500 1,200 1,200
EDO Corp. 54,000 54,000 405 405
Electro Scientific Industries, Inc. (a) 25,000 25,000 625 625
Esterline Technologies Corp. (a) 75,000 75,000 1,500 1,500
Frequency Electronics 60,000 60,000 413 413
Technitrol, Inc. 33,000 33,000 899 899
-----
5,042 5,042
-----
Energy (1.1%)
Input/Output Inc. (a) 55,000 55,000 488 488
SEACOR SMIT, Inc. (a) 20,000 20,000 956 956
World Fuel Services Corp. 70,000 70,000 980 980
-----
2,424 2,424
-----
Engineering (0.1%)
URS Corp. (a) 9,000 9,000 152 152
Financial Services (4.1%)
AmeriCredit Corp (a) 51,000 51,000 682 682
ARM Financial Services 80,000 80,000 1,535 1,535
D & N Financial Corp. 30,000 30,000 570 570
ITLA Capital Corp. (a) 85,000 85,000 1,286 1,286
Knight/Trimark Group, Inc. (a) 100,000 100,000 813 813
Raymond James Financial, Inc. 100,000 100,000 2,293 2,293
TeleBanc Financial Corp. (a) 75,000 75,000 1,368 1,368
Vermont Financial Services Corp. 35,000 35,000 779 779
-----
2,181 7,146 9,326
-----
Food Products (0.4%)
Horizon Organic Holding Corp. (a) 80,000 80,000 1,010 1,010
Gaming (0.5%)
Harveys Casinos Resorts 24,000 24,000 611 611
Rio Hotel and Casino, Inc. (a) 39,000 39,000 546 546
---
1,157 1,157
-----
Health Care (4.2%)
ADAC Laboratiories (a) 50,000 50,000 1,482 1,482
Capital Senior Living Corp. (a) 80,000 80,000 940 940
Genesis Health Ventures, Inc. (a) 42,000 42,000 567 567
Integrated Health Services, Inc. 35,000 35,000 567 567
Mariner Health Group, Inc. (a) 68,000 68,000 395 395
Osteotech, Inc. (a) 50,000 50,000 1,259 1,259
Prime Medical Services (a) 102,000 102,000 765 765
Renal Care Group, Inc. (a) 35,000 35,000 1,019 1,019
Universal Health Services, Inc. (a) 50,000 50,000 2,566 2,566
-----
4,700 4,859 9,560
-----
Homebuilders (2.0%)
D.R. Horton, Inc. 50,000 50,000 794 794
Lennar Corp. 43,000 43,000 871 871
LNR Property Corp. 43,000 43,000 763 763
MDC Holdings, Inc. 49,000 49,000 861 861
Toll Brothers, Inc. (a) 50,000 50,000 1,159 1,159
-----
4,448 4,448
-----
Industrial Goods & Services (3.8%)
Applied Power, Inc. 50,000 50,000 1,378 1,378
Docummum, Inc. (a) 30,000 30,000 480 480
Farr Co. (a) 52,500 52,500 473 473
Gardner Denver, Inc. (a) 34,000 34,000 489 489
Gehl Co. (a) 44,000 44,000 608 608
Met-Pro Corp. 50,000 50,000 616 616
Thomas Industries, Inc. 32,000 32,000 580 580
Transtechnology Corp. 71,000 71,000 1,494 1,494
Unifirst Corp. 50,000 50,000 1,391 1,391
United Dominion Industrial Inc. 62,000 62,000 1,267 1,267
-----
8,776 8,776
-----
Insurance (3.4%)
Donegal Group, Inc. 32,000 32,000 448 448
Fremont General Corp. 45,000 45,000 2,222 2,222
HCC Insurance Holdings, Inc. 52,000 52,000 933 933
Orion Capital Corp. 40,000 40,000 1,368 1,368
Protective Life Corp. 58,000 58,000 2,149 2,149
3
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Special Oportunity Special Oportunity
Growth Value Growth Value
Fund Fund Fund Fund
----------------------------------------- --------------------------------------
Selective Insurance Group, Inc. 22,000 22,000 402 402
Unico American Corp. 16,000 16,000 204 204
---
7,725 7,726
-----
Landscaping (0.4%)
LandCARE USA, Inc. (a) 100,000 100,000 800 800
---
Leisure-Recreation, Gaming (2.2%)
AMC Entertainment, Inc. (a) 86,300 86,300 1,251 1,251
Anchor Gaming (a) 20,000 25,000 45,000 1,018 1,272 2,290
Family Golf Centers, Inc. (a) 70,000 70,000 1,474 1,474
-----
3,743 1,272 5,015
-----
Manufacturing -Capital Goods (0.5%)
Thor Industries, Inc. 50,000 50,000 1,113 1,113
-----
Medical Equipment & Supplies (2.5%)
Cooper Cos., Inc. (a) 85,000 85,000 2,018 2,018
EMPI, Inc. (a) 35,000 35,000 652 652
Thermedics, Inc. (a) 31,000 31,000 333 333
Vertex Comm Corp. (a) 71,000 71,000 1,136 1,136
West Cos., Inc. 30,000 30,000 891 891
Wolverine Tube, Inc. (a) 36,000 36,000 763 763
---
5,793 5,793
-----
Medical Services (0.2%)
HEALTHSOUTH Corp. (a) 40,000 40,000 485 485
---
Medical-Biotechnology (0.8%)
Martek Biosciences Corp. (a) 140,000 140,000 1,085 1,085
Matritech, Inc. (a) 300,000 300,000 731 731
---
1,816 1,816
-----
Medical-Information Systems (0.5%)
Dendrite International, Inc. (a) 50,000 50,000 1,031 1,031
-----
Metals-Fabrication (1.8%)
Atchison Casting Corp. (a) 29,000 29,000 277 277
Chase Industries, Inc. (a) 37,500 37,500 497 497
Mueller Industries, Inc. (a) 85,000 85,000 1,913 1,913
Quanex Corp. 37,000 37,000 624 624
Reliance Steel & Aluminum 26,000 26,000 804 804
---
4,115 4,115
-----
Metals-Nonferrous (0.0%)
International Precious Metals Corp. (a) 450,000 450,000 23 23
--
Natural Resources (1.3%)
Florida Rock Industries 24,000 24,000 596 596
Lone Star Industries, Inc. 10,000 10,000 704 704
Southdown, Inc. 32,000 32,000 1,742 1,742
-----
3,042 3,042
-----
Oil & Gas Exploration, Production & Services (3.0
Atwood Oceanics, Inc. (a) 53,000 53,000 1,491 1,491
Atwood Oceanics, Inc. (a) 29,700 29,700 835 835
BJ Services Co. (a) 60,000 60,000 1,226 1,226
Eagle Geophysical, Inc. (a) 91,000 91,000 620 620
Evergreen Resources, Inc. (a) 40,000 40,000 905 905
Newfield Exploration Co. (a) 35,000 35,000 851 851
Stone Energy Corp. (a) 30,000 30,000 964 964
---
5,401 1,491 6,892
-----
Oil & Gas Transmission (0.4%)
Barr Laboratories, Inc. (a) 25,000 25,000 855 855
---
Oilfield Services & Equipment (0.9%)
Superior Energy Services, Inc. (a) 175,000 175,000 705 705
Varco International, Inc. (a) 75,000 75,000 811 811
Venture Seismic Ltd. (a) 200,000 200,000 575 575
---
2,091 2,091
-----
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Special Oportunity Special Oportunity
Growth Value Growth Value
Fund Fund Fund Fund
----------------------------------------- --------------------------------------
Pharmaceuticals (2.7%)
Agouron Pharmaceuticals, Inc. (a) 40,000 40,000 1,550 1,550
Alpharma, Inc., Class A 50,000 50,000 1,384 1,384
Balance Bar Co. (a) 100,000 100,000 975 975
DUSA Pharmaceuticals, Inc. (a) 140,000 140,000 718 718
Immune Response Corp. (a) 125,000 125,000 1,531 1,531
-----
6,158 6,158
-----
Printing (1.0%)
Mail-Well, Inc. (a) 175,000 175,000 2,286 2,286
-----
Real Estate (0.3%)
Realty Information Group, Inc. (a) 80,000 80,000 670 670
---
Retail (2.5%)
BJ's Wholesale Club, Inc. (a) 43,000 43,000 1,545 1,545
Delia's, Inc. (a) 150,000 150,000 1,256 1,256
Duane Reade, Inc. (a) 30,000 30,000 1,159 1,159
O'Charleys, Inc. (a) 60,000 60,000 690 690
White Cap Industries, Inc. (a) 100,000 100,000 1,050 1,050
-----
3,465 2,235 5,700
-----
Retail-Specialty Stores (0.8%)
Garden Ridge Corp. (a) 100,000 100,000 813 813
Tweeter Home Entertainment (a) 80,000 80,000 1,120 1,120
-----
1,933 1,933
-----
Security Services (0.8%)
Kroll - O' Gara Company (a) 70,000 70,000 1,724 1,724
-----
Semiconductors (2.9%)
Dallas Semiconductor Corp. 50,000 50,000 1,850 1,849
Kulicke & Soffa Industries, Inc. (a) 40,000 40,000 650 650
Savoir Technology Group (a) 165,000 165,000 1,537 1,537
Semtech Corp. (a) 55,000 55,000 1,309 1,309
Transwitch Corp. (a) 50,000 50,000 1,219 1,219
-----
2,528 4,037 6,564
-----
Software & Computer Services (4.4%)
Bindview Developement Corp. (a) 55,000 55,000 990 990
Broadvision, Inc. (a) 50,000 50,000 750 750
General Magic, Inc. (a) 175,000 175,000 1,006 1,006
Inso Corp. (a) 60,000 60,000 1,148 1,148
Inspire Insurance Solutions (a) 70,000 70,000 1,749 1,749
InterVU, Inc. (a) 90,000 90,000 731 731
Keane, Inc. (a) 45,000 45,000 1,497 1,497
Progress Software Corp. (a) 40,000 40,000 1,043 1,043
Visio Corp. (a) 40,000 40,000 1,065 1,065
-----
8,482 1,497 9,979
-----
Staffing (0.4%)
On Assignment, Inc. (a) 25,000 25,000 850 850
---
Telecommunications (4.4%)
Advanced Fibre Communications, Inc. (a) 80,000 80,000 775 775
Amdocs Ltd. (a) 70,000 70,000 910 910
Cellstar Corp. (a) 175,000 175,000 1,203 1,203
Comdial Corp. (a) 100,000 100,000 788 788
Communication Systems, Inc. 30,000 30,000 360 360
Geotel Communications Corp. (a) 50,000 50,000 1,300 1,300
International FiberCom, Inc. (a) 170,000 170,000 1,296 1,296
IXC Communications, Inc. (a) 40,000 40,000 1,550 1,550
Tekelec (a) 60,000 60,000 1,076 1,076
Terayon Communication Systems, Inc. (a) 70,000 70,000 840 840
---
7,747 2,350 10,098
------
Transportation (0.4%)
Forward Air Corp. (a) 55,000 55,000 846 846
---
<PAGE>
Shares or Principal Amount Market Value
VICTORY GRADISON COMBINED VICTORY GRADISON COMBINED
Special Oportunity Special Oportunity
Growth Value Growth Value
Fund Fund Fund Fund
----------------------------------------- --------------------------------------
Transportation Leasing &Trucking (0.4%)
USFreightways Corp. 40,000 40,000 1,000 1,000
-----
Total Common Stocks (Cost $188,018) 79,253 123,003 202,256
Repurchase Agreements (3.9%)
First Union Capital Markets, 5.39%, 11/2/98 8,880 8,880 8,880 8,880
-----
Total Repurchase Agreements (Cost $8,880) 8,880 8,880 8,880 8,880
-----
Rights & Warrants (0.0%)
Engineering, Industrial Construction (0.0%)
Morrison Knudsen Corp., Expire 3/11/03 158 158 1 1
-
Industrial Goods & Services (0.0%)
Energy Conversion Devices, Expire 7/31/01 55 55 55 55
--
Total Rights & Warrants (Cost $0) 56 56 56 56
--
Total Investments (Cost $212,803) - 100.0% 80,739 146,358 227,097
-------
Other assets in excess of liabilities - 0.0% 860 31 891
TOTAL NET ASSETS - 100.0% $81,599 $146,389 $227,988
========
- ------------
(a) Non-income producing securities.
At the time of the reorganization the combined fund will be renamed to Victory
Small Company Opportunity Fund and is expected to own securities consistent with
the existing investment policies of the Gradison Opportunity Value Fund.
<PAGE>
THE VICTORY PORTFOLIOS
Victory Funds/Gradison Funds
Statements of Assets and Liabilities
October 31, 1998
(Amounts in thousands, except per share amounts)
Victory
International Gradison
Growth International Combined
Fund Fund Adjustments Totals
---------------- ----------------- --------------- ------------------
ASSETS:
Investments, at value (Cost $123,700 & $27,728) $ 135,905 $ 29,660 $ - $ 165,565
Cash - 1,354 - 1,354
Foreign currency (cost $1, $620) 1 553 - 554
Interest and dividends receivable 221 39 - 260
Receivable for capital shares issued 12 - - 12
Receivable from brokers for investments sold 832 448 - 1,280
Receivable for futures variation margin - 6 - 6
Reclaim receivble 236 - - 236
Prepaid expenses and other assets 1 9 (8) 11
---------------- ----------------- --------------- ------------------
Total Assets 137,217 32,069 (8) 169,278
---------------- ----------------- --------------- ------------------
LIABILITIES:
Forward foreign currency exchange contracts sold - 26 - 26
Payable for futures variation margin - 18 - 18
Payable for capital shares redeemed 23 - - 23
Payable to brokers for investments purchased 2,157 - - 2,157
Payable for forward currency contracts purchased 15 - - 15
Accrued expenses and other payables: 0
Investment advisory fees 109 - - 109
Administration fees 2 - - 2
Custodian fees 25 - - 25
Transfer agent fees 13 - - 13
Shareholder service fees - Class A 25 - - 25
Other 5 56 - 61
---------------- ----------------- --------------- ------------------
Total Liabilities 2,374 100 - 2,474
---------------- ----------------- --------------- ------------------
NET ASSETS:
Capital 118,339 29,768 (8) 148,099
Undistributed (distributions in excess of ) net
investment income (134) 117 - (17)
Net unrealized appreciation/depreciation from
investments 9,325 1,933 - 11,258
Net unrealized appreciation/depreciation from
translation of assets and
liabilities in foreign currencies 2,878 (9) - 2,869
Accumulated undistributed net realized gains
from investment transactions 4,435 160 - 4,595
---------------- ----------------- --------------- ------------------
Net Assets $ 134,843 $ 31,969 $ (8) $ 166,804
================ ================= =============== ==================
Net Assets
Class A $ 134,491 $ - $ - $ 134,491
Class B 352 - - 352
Class G - 31,969 (8) 31,961
---------------- ----------------- --------------- ------------------
Total $ 134,843 $ 31,969 $ (8) $ 166,804
================ ================= =============== ==================
Outstanding units of beneficial interest
(shares)
Class A 10,196 - - 10,196
Class B 27 - - 27
Class G - 1,857 566 2,423
---------------- ----------------- --------------- ------------------
Total 10,223 1,857 566 12,646
================ ================= =============== ==================
Net asset value
Redemption price per share-Class A $ 13.19 $ - $ - $ 13.19
================ ================= =============== ==================
Offering and redemption price per
share-Class B * $ 12.82 $ - $ - $ 12.82
================ ================= =============== ==================
Offering and redemption price per
share-Class G $ - $ 17.22 $ (4.03) $ 13.19
================ ================= =============== ==================
Maximum sales charge - Class A 5.75% - - 5.75%
================ ================= =============== ==================
Maximum offering price per share
(100%/(100%-maximum sales
charge) of net asset value adjusted to
nearest cent)-Class A $ 13.99 $ - $ - $ 13.99
================ ================= =============== ==================
</TABLE>
* Redemption price per Class B Share varies based on length of time held.
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
International Growth Fund
Schedule of Investments
October 31, 1998
Unaudited
(Amounts in thousands, except shares)
<TABLE>
<CAPTION>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Paper (3.4%)
United States (3.4%)
Financial Services (3.4%)
Associates Corp., N.A., 5.70%, 11/2/98 $ 5,673 $ 5,673 $ 5,673 $ 5,673
---------
Total Commercial Paper (Cost $5,673) 5,673
---------
Common Stocks (94.9%)
Argentina (0.8%)
Banks (0.4%)
Banco de Galicia y Buenas Aires S.A. de C.V. 9,497 9,497 $ 41 41
Banco Frances S.A. (a) 7,196 7,196 50 50
Banco Rio de la Plata SA, ADR 60,000 60,000 540 539
---------
630
---------
Food Processing & Packaging (0.0%)
Molinos Rio de la Plata S.A. 9,040 9,040 21 21
---------
Oil & Gas Exploration,
Production & Services (0.2%)
Astra Cia Argentina De Petroleo S.A. 39,350 39,350 47 47
Perez Companc S.A. 9,750 9,750 95 96
YPF Sociedad Anonima 7,000 7,000 202 202
---------
345
---------
Oil-Integrated Companies (0.1%)
Gas Natural Ban S.A. 1,600 1,600 138 138
---------
Real Estate (0.0%)
IRSA Inversiones y Representaciones S.A. 541 541 14 14
---------
Steel (0.0%)
Siderca S.A. 38,364 38,364 54 54
---------
Telecommunications (0.1%)
Telefonica Argentina S.A. 5,512 5,512 182 182
---------
Total Argentina 1,384
---------
Australia (1.9%)
Banks (0.3%)
National Australia Bank Ltd. 32,500 32,500 429 429
---------
Leisure-Recreation, Gaming (0.3%)
Aristocrat Leisure Ltd. 225,000 225,000 707 707
---------
Multimedia (0.3%)
News Corp. Ltd. 62,900 62,900 428 428
---------
Oil & Gas Exploration,
Production & Services (0.1%)
Woodside Petroleum Ltd. 17,278 17,278 91 91
---------
Publishing (0.3%)
Publishing & Broadcasting Ltd. 150,000 150,000 593 593
---------
Retail (0.3%)
Woolworths Ltd. 144,000 144,000 504 504
---------
Utilities-Telecommunications (0.3%)
Telstra Corp., ADR 8,000 8,000 448 448
---------
Total Austrailia 3,200
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Brazil (0.8%)
Banks (0.1%)
Banco Bradesco S.A. 6,639,000 6,639,000 38 38
Banco Itau S.A. 102,000 102,000 49 49
---------
87
---------
Brewery (0.0%)
Companhia Cervejaria Brahma 41,000 41,000 19 19
---------
Mining (0.0%)
Companhia Vale do Rio Doce, Class A 2,600 2,600 39 39
---------
Oil-Integrated Companies (0.0%)
Petroleo Brasileiro S.A. 192,000 192,000 24 24
---------
Paper and Forest Products (0.0%)
Aracruz Celulose S.A. 9,000 9,000 8 8
---------
Steel (0.0%)
Companhia Siderurgica Nacional S.A. 1,452,000 1,452,000 21 21
Usinas Siderurgicas de Minas Gerais S.A. 4,000 4,000 13 13
---------
34
---------
Tobacco & Tobacco Products (0.0%)
Souza Cruz S.A. 2,100 2,100 14 14
---------
Utilities-Electric (0.1%)
Centrais Eletricas Brasileiras S.A. 4,582,000 4,582,000 105 105
Companhia Energetica Minas Gerais 812,000 812,000 16 16
Companhia Paulista de Forca e Luz 101,246 101,246 9 9
---------
130
---------
Utilities-Telecommunications (0.6%)
Telecomunicacoes Brasileiras S.A. (a) 383,000 383,000 16 17
Telecomunicacoes Brasileiras-Telebras SA, ADR (a) 10,900 1,800 12,700 828 138 965
---------
982
---------
Total Brazil 1,337
---------
Britain (13.6%)
Aerospace/Defense (1.1%)
British Aerospace PLC 253,580 253,580 1,888 1,888
---------
Banks (1.1%)
Abbey National PLC 6,640 6,640 129 129
Lloyds TSB Group PLC 15,459 15,459 191 191
Lloyds TSB Group PLC 127,500 127,500 1,578 1,578
---------
1,898
---------
Brewery (0.1%)
Scottish & Newcastle PLC 9,360 9,360 114 114
---------
Computers & Peripherals (0.4%)
Misys PLC 105,600 105,600 737 737
---------
Conglomerates (0.0%)
IMI PLC 10,200 10,200 50 50
---------
Consumer Products (0.1%)
Unilever PLC 15,200 15,200 153 153
---------
Financial Services (0.0%)
HSBC Holdings PLC 2,480 2,480 58 58
---------
Food Distributors, Supermarkets & Wholesalers(0.1%)
Tesco PLC 32,300 32,300 91 91
---------
Food Processing & Packaging (0.0%)
Cadbury Schweppes PLC 4,900 4,900 75 75
---------
Insurance (0.8%)
CGU PLC 5,900 5,900 94 94
Prudential Corp. PLC 84,000 9,400 93,400 1,101 122 1,223
---------
1,317
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Leisure-Recreation, Gaming (0.5%)
Ladbroke Group PLC 250,000 250,000 914 914
---------
Manufacturing - Miscellaneous (0.0%)
TI Group PLC 7,800 7,800 47 47
---------
Oil & Gas Exploration,
Production & Services (0.9%)
British Petroleum Co. PLC 7,630 7,630 112 112
British Petroleum Co. PLC 88,000 88,000 1,299 1,299
LASMO PLC 12,900 12,900 37 37
---------
1,448
---------
Oil-Integrated Companies (0.0%)
Shell Transport &Trading Co. 8,050 8,050 49 49
---------
Pharmaceuticals (3.4%)
Glaxo Wellcome PLC 4,200 4,200 131 131
Glaxo Wellcome PLC 89,300 89,300 2,771 2,771
SmithKline Beecham PLC 13,600 13,600 170 170
SmithKline Beecham PLC 186,671 186,671 2,302 2,302
Zeneca Group PLC 4,690 4,690 179 180
---------
5,554
---------
Retail (0.6%)
Kingfisher PLC 112,000 112,000 977 978
Wolseley PLC 11,580 11,580 76 76
---------
1,054
---------
Retail-Specialty Stores (0.1%)
Boots Co. PLC 7,450 7,450 112 112
---------
Telecommunications (1.6%)
Vodafone Group PLC 182,000 182,000 2,431 2,431
---------
Transportation (1.0%)
National Express Group PLC 100,000 100,000 1,700 1,700
---------
Utilities-Electric (0.1%)
National Power PLC 8,200 8,200 71 71
Scottish Power PLC 11,429 11,429 113 113
---------
184
---------
Utilities-Telecommunications (1.7%)
British Telecommunications PLC 9,800 9,800 127 127
British Telecommunications PLC 198,200 2,301 198,200 2,592 2,592
---------
2,719
---------
Total Britain 22,593
---------
Canada (1.9%)
Diversified (0.3%)
Bombadier, Inc., Class B 48,000 48,000 566 566
---------
Mining (0.1%)
Franco-Nevada Mining Corp. Ltd. 12,000 12,000 231 231
---------
Oil-Integrated Companies (0.8%)
Suncor Energy, Inc. 37,000 37,000 1,172 1,172
---------
Publishing (0.2%)
Thomson Corp. 14,000 14,000 344 344
---------
Telecommunications (0.5%)
Northern Telecom Ltd. 19,000 19,000 813 813
---------
Total Canada 3,126
---------
Chile (0.3%)
Banks (0.0%)
Banco Santander Chile 6,500 6,500 60 60
---------
Brewery (0.0%)
Compania Cervecerias Unidas S.A. 1,750 1,750 32 32
---------
Building Materials (0.0%)
Maderas y Sinteticos S.A. 3,400 3,400 19 19
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Chemicals-General (0.0%)
Sociedad Quimica y Minera de Chile S.A. 1,300 1,300 43 43
---------
Metals-Nonferrous (0.0%)
Madeco S.A. ADR 1,600 1,600 12 12
---------
Telecommunications (0.1%)
Cia. de Telecomunicaciones de Chile S.A. 7,442 7,442 163 163
---------
Utilities-Electric (0.2%)
Empresa Nacional de Electricidad S.A. 6,600 6,600 66 66
Enersis S.A. 5,150 5,150 107 107
Gener S.A. 3,524 3,524 57 57
---------
230
---------
Total Chile 559
---------
Finland (2.4%)
Banks (0.1%)
Okobank 5,200 5,200 102 102
---------
Brewery (0.0%)
Oyj Hartwall Abp 3,750 3,750 46 46
---------
Building Materials (0.0%)
YIT-Yhtyma OY 3,200 3,200 27 27
---------
Leisure-Recreation, Gaming (0.0%)
Viking Line Oyj 550 550 28 28
---------
Machinery & Engineering (0.0%)
The Rauma Group 55 55 1 1
---------
Paper and Forest Products (0.1%)
Metsa-Serla Oyj, B Shares 9,740 9,740 74 74
UPM-Kymmene Oyj 4,880 4,880 116 116
---------
190
---------
Publishing (0.1%)
Werner Soderstrom Osakeyhtio 3,150 3,150 206 206
---------
Steel (0.0%)
Rautaruuki OY 7,100 7,100 42 42
---------
Telecommunications (2.1%)
Nokia Oyj, Class A 12,730 12,730 1,159 1,158
Nokia Oyj, Class A 24,856 24,856 2,262 2,263
---------
3,421
---------
Total Finland 4,063
---------
France (12.3%)
Automobiles (1.5%)
PSA Peugeot Citroen 1,550 1,550 259 259
PSA Peugeot Citroen 7,293 7,293 1,217 1,217
Valeo S.A. 1,160 1,160 100 100
Valeo S.A. 10,850 359 10,850 939 939
---------
2,515
---------
Banks (0.2%)
Banque Nationale de Paris 4,430 4,430 281 281
---------
Beverages (0.1%)
LVMH 1,270 1,270 235 235
---------
Building Materials (0.2%)
Groupe GTM 2,100 2,100 228 228
Lafarge S.A. 1,020 1,020 104 104
---------
332
---------
Computers & Peripherals (1.0%)
Cap Gemini SA 10,697 10,697 1,607 1,607
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Cosmetics & Related (1.1%)
L'OREAL 310 310 177 177
L'OREAL 2,950 2,950 1,686 1,686
---------
1,863
---------
Diversified (2.5%)
Compagnie de Saint Gobain 800 800 118 118
Compagnie de Saint Gobain 8,950 8,950 1,324 1,324
Vivendi 1,170 1,170 268 267
Vivendi 10,590 10,590 2,417 2,418
---------
4,127
---------
Electronic & Electrical-General (0.6%)
Legrand SA 3,680 3,680 938 938
Schneider S.A. 2 2 0 0
---------
938
---------
Food Distributors, Supermarkets
& Wholesalers (0.2%)
Carrefour S.A. 470 470 312 312
---------
Food Processing & Packaging (1.0%)
Groupe Danone 880 880 233 233
Groupe Danone 5,400 5,400 1,428 1,427
---------
1,660
---------
Food-Retail (0.1%)
Promodes 330 330 208 208
---------
Oil & Gas Exploration,
Production & Services (0.2%)
Elf Aquitaine S.A. 3,352 3,352 387 388
---------
Oil-Integrated Companies (0.9%)
Total S.A., Class B 1,880 1,880 217 217
Total S.A., Class B 11,850 11,850 1,367 1,367
---------
1,584
---------
Retail-Department Stores (1.1%)
Pinault-Printemps-Redoute S.A. 9,935 1,450 11,385 1,663 243 1,905
---------
Retail-Specialty Stores (0.8%)
Castorama Dubois 7,300 7,300 1,302 1,302
---------
Telecommunications (0.6%)
Alcatel 1,308 1,308 146 146
Alcatel 8,000 8,000 891 891
---------
1,037
---------
Utilities-Telecommunications (0.2%)
France Telecom S.A. (a) 4,340 4,340 303 303
---------
Total France 20,597
---------
Germany (7.0%)
Automobiles (1.6%)
Daimler-Benz AG (a) 1,950 1,950 151 151
Daimler-Benz AG (a) 22,158 22,158 1,726 1,727
Volkswagen AG 10,800 10,800 507 507
Volkswagen AG 3,380 3,380 254 254
---------
2,639
---------
Banks (1.1%)
Commerzbank AG 2,400 2,400 72 72
Deutsche Bank AG 2,400 2,400 149 149
Dresdner Bank AG 1,400 1,400 55 55
HypoVereinsbank 2,900 2,900 231 230
HypoVereinsbank 18 18 1,389 1,389
---------
1,895
---------
Chemicals-General (0.1%)
BASF AG 2,700 2,700 114 114
---------
Cosmetics & Related (0.8%)
Douglas Holding AG 22,500 22,500 1,290 1,290
Douglas Holding AG-New (a) 1,450 1,450 81 81
---------
1,371
---------
Insurance (1.2%)
Allianz AG, Registered 745 745 255 256
Allianz AG, Registered 4,450 4,450 1,526 1,525
Munchener Rueckversicherungs-
Gesellschaft AG 360 360 165 165
---------
1,946
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Machinery & Engineering (0.2%)
Mannesman AG 3,620 3,620 356 356
---------
Manufacturing - Miscellaneous (0.2%)
Siemens AG 2,120 2,120 127 127
Viag AG 370 370 252 252
---------
379
---------
Oil-Integrated Companies (0.1%)
RWE AG 3,000 3,000 163 163
---------
Pharmaceuticals (0.2%)
Bayer AG 6,315 6,315 257 257
---------
Retail-Department Stores (0.1%)
Metro AG 2,400 2,400 148 148
---------
Software & Computer Services (1.1%)
SAP AG 750 750 365 365
SAP AG 3,600 3,600 1,511 1,511
---------
1,876
---------
Utilities-Electric (0.3%)
Veba AG 2,332 2,332 130 130
Veba AG 6,280 3,244 6,280 351 351
---------
481
---------
Total Germany 1,625
---------
Greece (1.2%)
Banks (0.1%)
Alpha Credit Bank 1,440 1,440 115 115
Ergobank S.A. 800 800 71 71
---------
186
---------
Beverages (0.1%)
Hellenic Bottling Co. S.A. 3,500 3,500 85 85
---------
Building Materials (0.0%)
Titan Cement Co. S.A. 1,000 1,000 62 62
---------
Commercial Banking (0.7%)
National Bank of Greece 864 864 123 123
National Bank of Greece 7,700 7,700 1,094 1,094
---------
1,217
---------
Telecommunications (0.2%)
STET Hellas Telecommunications SA (a) 11,500 11,500 302 302
---------
Utilities-Telecommunications (0.1%)
Hellenic Telecommunication
Organization S.A. 10,000 10,000 227 227
---------
Total Greece 2,079
---------
Hong Kong (1.8%)
Banks (0.4%)
Hang Seng Bank 22,200 22,200 192 192
HSBC Holdings PLC 18,400 18,400 422 422
---------
614
---------
Conglomerates (0.2%)
Citic Pacific Ltd. 105,000 105,000 258 258
---------
Construction (0.1%)
New World Infrastructure Ltd. (a) 170,000 170,000 243 243
---------
Diversified (0.1%)
Hutchison Whampoa Ltd. 23,000 23,000 165 165
---------
Financial Services (0.1%)
Guoco Group Ltd. (a) 85,000 85,000 89 89
---------
Newspapers (0.1%)
South China Morning Post (Holdings) Ltd. 386,000 386,000 207 207
---------
Real Estate (0.6%)
Cheung Kong (Holdings) Ltd. 48,000 48,000 328 328
Henderson Land Development Co. Ltd. 40,000 40,000 197 197
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Sun Hung Kai Properties Ltd. 61,000 61,000 424 424
Wharf Holdings Ltd. 78,000 78,000 124 124
---------
1,073
---------
Utilities-Electric (0.2%)
Beijing Datang Power Generation Co. Ltd. 915,000 915,000 284 284
Hong Kong Electric Holdings Ltd. 27,000 27,000 99 99
---------
383
---------
Total Hong Kong 3,032
---------
Hungary (1.0%)
Banks (0.1%)
OTP Bank 3,580 3,580 127 127
---------
Food-Meat Products (0.0%)
Pick Szeged 650 650 27 27
---------
Hotels & Motels (0.0%)
Danubius Hotel and Spa 1,500 1,500 24 24
---------
Manufacturing - Miscellaneous (0.0%)
Graboplast 550 550 4 4
---------
Oil-Integrated Companies (0.1%)
MOL Magyar Olaj-es Gazipari 10,200 10,200 228 228
---------
Pharmaceuticals (0.0%)
Gedeon Richter 2,100 2,100 69 69
---------
Utilities-Telecommunications (0.8%)
Matav Rt. 75,600 75,600 392 392
Matav Rt. 140,000 140,000 725 725
---------
1,117
---------
Total Hungary 1,596
---------
Ireland (2.8%)
Banks (1.3%)
Allied Irish Banks PLC 22,500 22,500 324 325
Allied Irish Banks PLC 116,000 116,000 1,661 1,661
---------
1,986
---------
Building Materials (0.1%)
CRH PLC 14,100 14,100 207 207
---------
Construction (1.4%)
CRH PLC 153,000 153,000 2,232 2,231
---------
Containers (0.0%)
Jefferson Smurfit Group PLC 36,400 36,400 60 60
---------
Food Processing & Packaging (0.0%)
Kerry Group PLC 6,000 6,000 76 76
---------
Insurance (0.0%)
Irish Life PLC 7,900 7,900 70 70
---------
Total Ireland 4,630
---------
Israel (0.4%)
Banks (0.1%)
Bank Hapoalim 40,000 40,000 72 72
Bank Leumi-Le Israel 33,000 33,000 42 42
---------
114
---------
Chemicals-Specialty (0.0%)
Israel Chemicals Ltd. (a) 47,000 47,000 41 41
---------
Food Distributors,
Supermarkets & Wholesalers (0.0%)
Supersol Ltd. 23,900 23,900 62 62
---------
Food Manufacturing (0.0%)
Elite Industries Ltd. (b) 1,740 1,740 46 46
---------
Pharmaceuticals (0.1%)
Agis Industries Ltd. 3,800 3,800 18 18
Teva Pharmaceutical Industries Ltd. 2,530 2,530 100 100
---------
118
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Retail (0.0%)
Blue Square Chain Investments and
Properties Ltd. (a) 3,800 3,800 48 48
---------
Software & Computer Services (0.0%)
Formula Systems Ltd. (a) 2,000 2,000 43 43
---------
Telecommunications (0.2%)
Bezeq Israeli Telecommunication
Corporation Ltd. 21,600 21,600 62 62
ECI Telecommunications Ltd. 2,800 2,800 92 92
Koor Industries Ltd. 880 880 70 70
---------
224
---------
Total Isreal 696
---------
Italy (5.4%)
Apparel (0.1%)
Benetton Group SpA 91,400 91,400 153 153
---------
Automobiles (0.1%)
Fiat SpA 43,600 43,600 125 125
---------
Banks (1.3%)
Banca Comerciale Italiana 24,400 24,400 151 151
Banca di Roma (a) 510,000 510,000 890 890
Istituto Bancario San Paolo
di Torino SpA (a) 81,000 81,000 1,192 1,192
---------
2,233
---------
Construction (0.1%)
Danieli & Co. 12,500 12,500 85 85
---------
Energy (0.1%)
Edison SpA 24,000 24,000 211 211
---------
Financial & Insurance (0.1%)
Alleanz Assicurazioni 14,850 14,850 183 183
---------
Financial Services (0.4%)
Istituto Mobiliare Italiano SpA 10,300 10,300 158 158
Istituto Mobiliare Italiano SpA 35,500 35,500 546 546
---------
704
---------
Insurance (0.2%)
Assicurazioni Generali 8,120 8,120 290 290
Istituto Nazionale delle Assicurazioni 38,000 38,000 105 105
---------
395
---------
Oil-Integrated Companies (0.3%)
ENI SpA 78,500 78,500 468 467
---------
Telecommunications (0.2%)
Telecom Italia 37,110 37,110 268 268
---------
Utilities-Telecommunications (2.5%)
Telecom Italia Mobile SpA 51,000 51,000 296 296
Telecom Italia Mobile SpA 352,000 352,000 2,045 2,045
Telecom Italia SpA 367,139 367,139 1,851 1,852
---------
4,193
---------
Total Italy 9,017
---------
Japan (13.5%)
Apparel-Footware (0.1%)
Aoyamma Trading Co. Ltd. 6,600 6,600 163 163
---------
Automobiles (0.1%)
Toyota Motor Corp. 4,000 4,000 96 96
---------
Brewery (0.1%)
Kirin Brewery Co. Ltd. 17,000 17,000 185 185
---------
Chemicals-General (0.1%)
Sekisui Chemical Co., Ltd. 28,000 28,000 153 153
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Computers & Peripherals (0.3%)
Canon, Inc. 4,000 4,000 76 76
Canon, Inc. 10,000 10,000 189 189
Nidec Corp. 3,000 3,000 273 273
---------
538
---------
Construction (0.2%)
Sekisui House Ltd. 35,000 35,000 349 349
---------
Cosmetics & Related (1.4%)
Kao Corp. 60,000 60,000 1,215 1,214
Shiseido Co. Ltd. 90,000 90,000 986 986
---------
2,200
---------
Electronic & Electrical-General (1.2%)
Fanuc Ltd. 6,200 6,200 187 186
Hitachi Ltd. 28,000 28,000 143 142
Makita Corp. 59,000 59,000 623 624
Matsushita Electric Industrial Co. Ltd. 6,000 6,000 88 88
Minebea Co. Ltd. 30,000 30,000 282 282
Murata Manufacturing Co. Ltd. 4,000 4,000 135 135
NEC Corporation 8,000 8,000 59 59
Sharp Corp. 70,000 70,000 529 529
---------
2,045
---------
Entertainment (0.4%)
Nintendo Co. Ltd. 7,000 7,000 592 592
---------
Financial Services (0.6%)
Takefuji Corp. 20,000 20,000 1,066 1,066
---------
Food Manufacturing (0.3%)
Q.P. Corp. 60,000 60,000 458 458
---------
Health & Personal Care (0.3%)
Hoya Corp. 10,000 10,000 428 428
---------
Insurance (0.7%)
Tokio Marine & Fire Insurance Co. 10,000 10,000 114 114
Tokio Marine & Fire Insurance Co. 100,000 100,000 1,137 1,137
---------
1,251
---------
Manufacturing - Miscellaneous (0.3%)
Mitsubishi Heavy Industries Ltd. 19,000 19,000 73 73
Mitsubishi Heavy Industries Ltd. 100,000 100,000 386 387
---------
460
---------
Medical Equipment (1.3%)
Terumo Corp. 100,000 100,000 2,103 2,103
---------
Paint, Varnishes & Enamels (0.1%)
Kansai Paint 100,000 100,000 227 227
---------
Pharmaceuticals (0.9%)
Fujisawa Pharmaceutical Co. Ltd. 19,000 19,000 224 224
Sankyo Co., Ltd. 30,000 30,000 678 678
Takeda Chemical Industries 20,000 20,000 650 650
---------
1,552
---------
Photography (0.1%)
Fuji Photo Film 6,000 6,000 220 220
---------
Printing (0.3%)
Toppan Printing Co. Ltd. 55,000 55,000 564 564
---------
Retail (1.0%)
Ito-Yokado Co. Ltd. 1,000 1,000 58 58
Ito-Yokado Co. Ltd. 20,000 20,000 1,167 1,168
Seven-Eleven Japan Co., Ltd. 5,000 5,000 380 380
---------
1,606
---------
Retail-Department Stores (1.2%)
Isetan Co. Ltd. 40,000 40,000 363 363
Marui Co. Ltd. 90,000 90,000 1,568 1,568
---------
1,931
---------
Rubber-Tires (0.0%)
Bridgestone Corp. 3,000 3,000 66 66
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Security Services (0.3%)
Secom Co., Ltd. 6,000 6,000 445 445
---------
Shipping (0.0%)
Mitsui O.S.K. Lines 57,000 57,000 83 83
---------
Telecommunications-Equipment (1.0%)
NTT Mobile Communications Network, Inc. 44 44 1,590 1,590
---------
Utilities-Electric (0.3%)
Tokyo Electric Power 14,700 4,200 18,900 372 106 478
---------
Utilities-Telecommunications (0.9%)
Nippon Telegraph & Telephone 42 42 164 164
Nippon Telegraph & Telephone 100 100 782 783
NTT Data Corp. 120 120 508 508
---------
1,455
---------
Total Japan 22,304
---------
Malaysia (0.1%)
Automobiles (0.1%)
Oriental Holdings Berhad 275,000 275,000 201 201
---------
Total Malaysia 201
---------
Mexico (0.6%)
Beverages (0.0%)
Fomento Economico Mexicano S.A. de C.V. 560 560 15 15
---------
Biotechnology (0.0%)
Empresas La Moderna S.A. de C.V. 4,700 4,700 28 28
---------
Brewery (0.0%)
Grupo Modelo S.A. de C.V., Series C 19,400 19,400 40 41
---------
Broadcasting/Cable (0.0%)
Grupo Televisa S.A., GDR 780 780 22 22
TV Azteca S.A. de C.V. 500 500 4 4
---------
26
---------
Building Materials (0.4%)
Cemex SA de CV 95,000 95,000 436 435
Cemex, S.A. de C.V. 6,643 6,643 16 16
---------
451
---------
Conglomerates (0.0%)
Alfa S.A., Class A 5,250 5,250 14 14
Desc S.A. de C.V., Series B 9,250 9,250 8 8
Desc S.A. de C.V., Series C 530 530 0 0
Grupo Carso S.A. de C.V., Series A1 5,050 5,050 18 18
---------
40
---------
Financial Services (0.2%)
Grupo Financiero Banamex Accival,
S.A. de C.V. 11,554 11,554 10 10
Grupo Financiero Banamex Accival,
SA de CV, Class B 290,000 290,000 292 292
---------
302
---------
Food Processing & Packaging (0.0%)
Grupo Industrial Bimbo S.A.de C.V.,
Series A 7,172 7,172 12 12
---------
Mining (0.0%)
Grupo Mexico S.A. 8,150 8,150 21 21
Industrias Penoles S.A. 3,900 3,900 12 12
---------
33
---------
Paper and Forest Products (0.0%)
Kimberly Clark de Mexico S.A. de C.V. 5,950 5,950 17 17
---------
Retail (0.0%)
Cifra S.A. De C.V. 21,802 21,802 30 30
Controlodora Comercial Mexicana
S.A. de C.V. 8,500 8,500 5 5
---------
35
---------
Total Mexico 1,000
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Netherlands (5.0%)
Banks (1.6%)
ABN Amro Holding N.V. 3,064 3,064 57 57
ING Groep N.V. 3,200 3,200 155 155
ING Groep N.V. 49,600 49,600 2,401 2,401
---------
2,613
---------
Conglomerates (0.0%)
Akzo Nobel N.V. 1,130 1,130 44 44
---------
Consumer Products (0.1%)
Unilever N.V. 2,440 2,440 181 181
---------
Electronic & Electrical-General (0.0%)
Phillips Electronics N.V. 1,185 1,185 63 63
---------
Food & Dairy Products (0.6%)
Koninklijke Numico N.V. 23,600 23,600 929 929
---------
Insurance (0.6%)
Aegon N.V. 10,624 10,624 922 923
Fortis Amev N.V. 1,500 1,500 97 97
---------
1,020
---------
Oil-Integrated Companies (2.0%)
Royal Dutch Petroleum Co. 8,280 8,280 401 400
Royal Dutch Petroleum Co. 39,900 39,900 1,926 1,927
Royal Dutch Petroleum Co. ADR 17,500 17,500 862 862
---------
3,189
---------
Publishing (0.1%)
Elsevier N.V. 4,000 4,000 56 56
VNU N.V. 4,480 4,480 155 155
---------
211
---------
Telecommunications (0.0%)
KPN N.V. 1,800 1,800 70 70
---------
Transportation (0.0%)
TNT Post Group N.V. 1,800 1,800 48 48
---------
Total Netherlands 8,368
---------
New Zealand (0.3%)
Fisheries (0.0%)
Sanford Ltd. 53,200 53,200 82 82
---------
Household Goods-Appliances,
Furnishings & Electronics (0.3%)
Fisher & Paykel Industries Ltd. 146,000 146,000 433 433
---------
Total New Zealand 515
---------
Norway (0.4%)
Banks (0.4%)
Den Norske Bank ASA 170,000 170,000 597 597
---------
Total Norway 597
---------
Peru (0.1%)
Banks (0.0%)
Banco Wiese 3,500 3,500 6 6
---------
Brewery (0.0%)
Cerveceria Backus & Johnston S.A. 50,127 50,127 18 18
---------
Building Materials (0.0%)
Cementos Lima S.A. 5,250 5,250 6 6
---------
Financial Services (0.0%)
Credicorp Ltd. 3,400 3,400 23 23
---------
Mining (0.0%)
Compania de Minas Buenaventura
S.A., Class A 900 900 5 5
Compania de Minas Buenaventura
S.A., ClassB 1,781 1,781 11 11
---------
16
---------
Telecommunications (0.1%)
Telefonica del Peru S.A.A. 67,300 67,300 88 88
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Utilities-Electric (0.0%)
Luz del Sur S.A.A. 15,500 15,500 11 11
---------
Total Peru 168
---------
Poland (0.7%)
Banks (0.2%)
Bank Przemyslowo-Handlowy S.A. 350 350 23 23
Bank Rozwoju Eksportu S.A. 5,020 5,020 104 104
Bank Slaski S.A. w Katowicach 1,700 1,700 85 85
BIG Bank Gdanski S.A. 73,900 73,900 76 76
Wielkopolski Bank Kredytowy S.A. 15,517 15,517 100 100
---------
388
---------
Electronic & Electrical-General(0.3%)
Electrim Spolka Akcyjna S.A. 13,000 21,300 34,300 155 252 407
---------
Food Processing & Packaging (0.0%)
Agros Holdings S.A. 900 900 4 4
---------
Paint, Varnishes & Enamels (0.0%)
Polifarb Cieszyn-Wroclaw S.A. 23,900 23,900 32 32
---------
Retail (0.0%)
Amica Wronki (b) 5,300 5,300 25 25
---------
Rubber-Tires (0.0%)
Debica S.A. 2,400 2,400 40 40
Stomil Olsztyn S.A. 2,800 2,800 14 14
---------
54
---------
Software & Computer Services (0.2%)
Softbank SA GDR 12,000 12,000 272 272
---------
Total Poland 1,182
---------
Portugal (1.8%)
Banks (0.2%)
Banco Commercial Portugues, Registered 4,072 4,072 128 128
Banco Espirito Santo e Comercial
de Lisboa, S.A. 4,121 4,121 122 122
BPI-SGPS, S.A. 3,600 3,600 110 110
---------
360
---------
Building Materials (0.1%)
Cimpor-Cimentos de Portugal, SGPS, S.A. 3,460 3,460 120 120
---------
Engineering (0.0%)
Brisa-Auto Estradas de Portugal S.A. 1,200 1,200 58 58
---------
Food Distributors, Supermarkets
& Wholesalers (0.0%)
Jeronimo Martins, SGPS S.A. 1,895 1,895 82 82
---------
Insurance (0.1%)
Companhia do Seguros Mundial
Confianca S.A. (a) 4,000 4,000 108 108
---------
Publishing (0.0%)
Investec-Consultoria Internacianal S.A. 1,650 1,650 65 65
---------
Retail (0.1%)
Sonae Investimentos-Sociedade Gestora
de Participacoes Soc 2,040 2,040 87 87
---------
S.A.
Utilities-Electric (0.5%)
Electricidade de Portugal S.A. 9,800 9,800 247 247
Electricidade de Portugal S.A. 24,000 24,000 604 603
---------
850
---------
Utilities-Telecommunications (0.8%)
Portugal Telecom S.A., Registered Shares 6,430 6,430 305 305
Portugal Telecom S.A., Registered Shares 19,100 1,432 19,100 906 906
---------
1,211
---------
Total Portugal 2,941
---------
Singapore (0.4%)
Real Estate (0.1%)
City Developments Ltd. 57,000 57,000 207 207
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Shipbuilding (0.3%)
Keppel Corp. 210,000 210,000 420 420
---------
Total Singapore 627
---------
South Africa (0.5%)
Software & Computer Services (0.5%)
DataTec Ltd. 60,250 60,250 913 913
---------
Total South Africa 913
---------
South Korea (0.3%)
Electronic & Electrical-General (0.1%)
Samsung Electronics GDR 8,550 8,550 179 179
---------
Utilities-Electric (0.2%)
Korea Electric Power Corp. ADR 26,700 26,700 340 340
---------
Total South Korea 519
---------
Spain (5.8%)
Banks (1.9%)
Banco Bilbao Vizcaya S.A. 15,900 15,900 213 214
Banco Central Hispanoamericano 7,161 7,161 79 79
Banco Santander S.A. 4,488 4,488 82 82
Corporacion Bancaria de Espana S.A. 8,000 8,000 174 174
Corporacion Bancaria de Espana S.A. 122,400 122,400 2,658 2,658
---------
3,207
---------
Commercial Services (0.1%)
Autopistas Concesionaria Espanola S.A. 7,140 7,140 117 117
---------
Construction (1.3%)
Dragados & Construcciones SA 75,000 75,000 2,230 2,230
---------
Oil & Gas Exploration,
Production & Services (0.1%)
Repsol S.S. 1,700 1,700 85 85
---------
Utilities-Electric (1.0%)
Endesa S.A. 7,900 7,900 199 199
Endesa S.A. 48,400 48,400 1,218 1,217
Gas y Electricidad S.A. 1,100 1,100 93 93
Iberdrola S.A. 10,600 10,600 171 171
---------
1,680
---------
Utilities-Telecommunications (1.4%)
Telefonica de Espana 7,963 7,963 359 359
Telefonica de Espana 45,818 45,818 2,065 2,065
---------
2,424
---------
Total Spain 9,743
---------
Sweden (0.9%)
Telecommunications (0.9%)
Telefonaktiebolaget LM Ericsson, Class B 68,475 68,475 1,542 1,542
----------
Total Sweeden 1,542
---------
Switzerland (9.0%)
Banks (1.5%)
Credit Suisse Group, Registered Shares 944 944 145 145
Credit Suisse Group, Registered Shares 6,600 6,600 1,015 1,015
UBS AG, Registered Shares 4,030 750 4,780 1,106 206 1,312
---------
2,472
---------
Building Materials (0.1%)
Holderbank Financiere Glaris AG 99 99 110 110
---------
Chemicals-Specialty (0.1%)
Ciba Specialty Chemicals 238 238 24 24
Clariant AG 250 250 130 130
---------
154
---------
Engineering (0.1%)
ABB AG 72 72 86 86
---------
Food Processing & Packaging (1.4%)
Nestle S.A., Registered Shares 138 138 294 294
Nestle S.A., Registered Shares 940 940 1,999 1,999
---------
2,293
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
Insurance (1.3%)
Zurich Allied AG 3,650 3,650 2,218 2,218
---------
Jewelery (0.0%)
TAG Heuer International S.A. 650 650 42 42
---------
Pharmaceuticals (4.4%)
Novartis AG, Registered Shares 253 253 457 456
Novartis AG, Registered Shares 1,955 1,955 3,524 3,524
Roche Holding AG 29 29 338 338
Roche Holding AG 270 795 270 3,150 3,150
---------
7,468
---------
Travel Services (0.1%)
Kuoni Reisen AG 30 30 107 107
---------
---------
Total Switzerland 4,950
---------
Thailand (0.3%)
Banks (0.3%)
Krung Thai Bank Pub Co Ltd 1,250,000 1,250,000 459 459
---------
Total Thailand 459
---------
Turkey (0.6%)
Appliances (0.1%)
Arcelik A.S. 3,540,000 3,540,000 81 81
---------
Automobiles (0.0%)
Ford Otomotiv Sanayii A.S. 73,000 73,000 16 16
---------
Banks (0.4%)
Akbank T.A.S. 2,383,006 2,383,006 35 35
Turkiye Garanti Bankasi A.S. 3,557,000 3,557,000 62 62
Turkiye Is Bankasi 6,157,500 6,157,500 169 169
Yapi ve Kredi Bankasi A.S. 5,271,550 5,271,550 59 59
Yapi ve Kredi Bankasi AS GDR 16,450 16,450 188 187
---------
512
---------
Brewery (0.0%)
Ege Biracilik Ve Malt Sanayii S.A. 687,000 687,000 45 45
---------
Building Materials (0.0%)
Adana Cimento 1,360,305 1,360,305 26 26
---------
Fertilizers (0.0%)
Bagfas Bandirma Gubre Fabrikalari A.S. 570,000 570,000 24 24
---------
Housewares (0.0%)
Turk Sise ve Cam Fabrikalari A.S. 992,800 992,800 11 11
---------
Investment Company (0.0%)
Haci Omer Sabanci Holding A.S. 2,265,000 2,265,000 34 34
---------
Retail (0.1%)
Migros Turk T.A.S. 73,650 73,650 63 63
---------
Rubber-Tires (0.0%)
Brisa Bridgestone Sabanci
Lastik San.Ve Tic A.S. 1,562,000 1,562,000 33 33
---------
Steel (0.0%)
Eregli Demir Ve Celik Fabrikalari T.A.S. 851,000 851,000 48 48
---------
Telecommunications-Equipment (0.0%)
Netas Northern Electric Telekomunikasyon A.S. 618,800 618,800 14 14
---------
Wholesale/Distribution (0.0%)
Aygaz A.S. 323,000 323,000 25 25
---------
Total Turkey 932
---------
United Kingdom (0.6%)
Catering (0.6%)
Compass Group PLC 102,200 102,200 1,032 1,032
---------
Total United Kingdom 1,032
---------
<PAGE>
Victory Shares or Victory
Inter- Principal Inter- Market Value
national Gradison national Gradison
Growth International Growth International
Fund Fund Combined Fund Fund Combined
-------------------------------------------------------------------------------
United States (0.1%)
Telecommunications (0.1%)
Telefonos De Mexico 2,620 2,620 138 138
---------
Total United States
Venezuela (0.3%)
Banks (0.1%)
Banco Provincial S.A. 106,356 106,356 105 105
---------
Building Materials (0.0%)
Corporacion Venezolana de
Cementos S.A.C.A., Series I 123,346 123,346 36 36
Corporacion Venezolana de
Cementos S.A.C.A., Series II 16,446 16,446 4 4
---------
40
---------
Food Manufacturing (0.0%)
Mavesa S.A. 9,450 9,450 38 38
---------
Steel (0.0%)
Siderurgica Venezolana S.A.C.A. 424,491 424,491 31 31
---------
Telecommunications (0.1%)
Compania Anonima Nacional
Telefonos De Venezuela 12,550 12,550 195 195
---------
Utilities-Electric (0.1%)
C.A. La Electricid de Caracas 367,689 367,689 105 105
---------
Total Venezuela 514
---------
Total Common Stocks (Cost $144,062) 158,179
Convertible Bonds (1.0%)
Banks (0.5%)
Mitsubishi Bank International
Finance Bermuda, 3.00% 943 943 943 943
---------
Financial Services (0.5%)
Bell Atlantic Financial Services, 5.75%, 4/1/03, 750 750 769 769
Conver shares of Telecom New Zealand ---------
Total Convertible Bonds (Cost $1,693)
1,712
---------
Warrants (0.0%)
France (0.0%)
Vivendi 550 550 1 1
---------
Total Warrants (Cost $0) 1
---------
Total Investments (Cost $151,428) - 99.3% 135,905 29,660 165,565
Other assets in excess of liabilities - 0.7% (1,062) 2,301 1,239
----------- ---------- =========
TOTAL NET ASSETS - 100.0% $ 134,843 $ 31,961 $ 166,804
=========
</TABLE>
- ------------
(a) Non-income producing securities.
ADR - American Depository Receipts
GDR - Global Depository Receipts
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Notes to Pro Forma Financial Statements
(Unaudited)
1. Organization Prior to Proposed Reorganization
---------------------------------------------
The Victory Fund for Income, the Victory Ohio Municipal Bond Fund,
the Victory Diversified Stock Fund, the Victory International Growth Fund and
the Victory Special Growth Fund (the "Victory Funds") each are separate
investment portfolios offered by The Victory Portfolios.
The Gradison Government Income Fund is the sole series of Gradison
Custodian Trust. The Gradison Ohio Tax-Free Income Fund is the sole series of
Gradison-McDonald Municipal Custodian Trust. The Gradison Growth & Income Fund,
the Gradison International Fund and the Gradison Opportunity Value Fund each are
series of The Gradison Growth Trust. Those funds of the various Gradison Trusts
are referred to herein as the "Gradison Funds."
The Victory Portfolios, Gradison Custodian Trust, Gradison-McDonald
Municipal Custodian Trust and Gradison Growth Trust each are registered as
open-end management companies under the Investment Company Act of 1940, as
amended (the "1940 Act"). The investment objective of the Victory Fund for
Income is to seek a high level of current income consistent with preservation of
shareholders' capital. The investment objective of the Gradison Government
Income Fund is to provide high current income through investment in U.S.
Government obligations and obligations of agencies or instrumentalities of the
U.S. Government. The investment objective of the Victory Ohio Municipal Bond
Fund is to provide a high level of current interest income which is exempt from
both federal income tax and Ohio personal income tax. The investment objective
of the Gradison Ohio Tax-Free Income Fund is to provide as high a level of
after-tax current income exempt from federal regular income tax and Ohio state
personal income tax as is consistent with preservation of capital by investing
primarily in municipal securities. The investment objective of the Victory
Diversified Stock Fund is to provide long-term growth of capital. The investment
objective of the Gradison Growth & Income Fund is long-term growth of capital,
current income, and growth of income consistent with reasonable investment risk.
The investment objective of the Victory International Growth Fund is to provide
capital growth consistent with reasonable investment risk. The investment
objective of the Gradison International Fund is growth of capital. The
investment objective of the Victory Special Growth Fund is to provide capital
appreciation. The investment objective of the Gradison Opportunity Value Fund is
long-term capital growth by investing primarily in common stocks.
The Victory Funds and the Gradison Funds are referred to collectively
herein as the "Funds."
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Notes to Pro Forma Financial Statements - Continued
(Unaudited)
2. Basis of Combination:
--------------------
The unaudited Pro Forma combining Statements of Assets and
Liabilities, Statements of Operations, and Schedules of Portfolio Investments
reflect the accounts of the Victory Funds and Gradison Funds as if the proposed
reorganization occurred as of and for the year ended October 31, 1998. The
accompanying statements give effect to the proposed transfer described below and
have been derived from the books and records of the Funds utilized in
calculating daily net asset value at October 31, 1998.
The Agreement and Plan of Reorganization and Termination provides
that at the time the reorganization becomes effective (the "Effective Time of
the Reorganization"), all assets and liabilities will be transferred such that
at and after the Effective Time of Reorganization, the assets and liabilities of
each Gradison Fund will become the assets and liabilities of a Victory Fund. The
net assets of the Gradison Government Income Fund will be transferred to the
Victory Fund for Income, the net assets of the Gradison Ohio Tax-Free Income
Fund will be transferred to the Victory Ohio Municipal Bond Fund, the net assets
of the Gradison Growth & Income Fund will be transferred to the Victory
Diversified Stock Fund, the net assets of the Gradison International Fund will
be transferred to the Victory International Growth Fund and the net assets of
the Gradison Opportunity Value Fund will be transferred to the Victory Special
Growth Fund. The Victory Special Growth Fund, concurrent with the
reorganization, will be renamed, and is hereafter referred to as, the Victory
Small Company Opportunity Fund.
For accounting purposes, the historical basis of assets and
liabilities of the Victory Funds will survive this reorganization, except for
the Victory Fund for Income and the Victory Small Company Opportunity Fund, for
which the historical basis of assets and liabilities of the corresponding
Gradison Funds (the Gradison Government Income Fund and the Gradison Opportunity
Value Fund, respectively), shall form the basis of accounting survivorship.
Those Victory and Gradison Funds for which the basis of assets and liabilities
will survive the reorganization are hereafter referred to as the "Survivor
Funds," and all Survivor Funds will be separate investment portfolios of The
Victory Portfolios. The Victory Portfolios, at the Effective Time of the
Reorganization, will issue a new class of shares, Class G shares, for the net
assets of each Survivor Fund in connection with the reorganization.
In exchange for the transfer of assets and liabilities, The Victory
Portfolios will issue to the Gradison Funds full and fractional Class G shares
of the corresponding Survivor Funds, and the Gradison Funds will make a
liquidating distribution of such Class G shares to its shareholders. The number
of Class G shares of the Survivor Funds so issued will be equal in value to the
full and fractional shares of the Gradison Funds that are outstanding
immediately
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Notes to Pro Forma Financial Statements - Continued
(Unaudited)
prior to the Effective Time of the Reorganization. At and after the Effective
Time of the Reorganization, all debts, liabilities and obligations of the
Gradison Funds will attach to the Survivor Funds and may thereafter be enforced
against the Survivor Funds to the same extent as if they had been incurred by
it.
Under generally accepted accounting principles, the Survivor Funds'
basis, for purposes of determining net asset value, of the assets and
liabilities of the Gradison Funds will be the fair market value of such assets
and liabilities on the closing date of the transaction. The Victory Portfolios
will recognize no gain or loss for federal tax purposes on its issuance of Class
G shares in the reorganization.
The accompanying pro forma financial statements represent the
Survivor Funds, and reflect the combined results of operations of the Victory
Funds and the Gradison Funds. However, should such reorganization be effected,
the statements of operations of the Survivor Funds will not be restated for
pre-combination period results of the corresponding Victory or Gradison Funds.
The Pro Forma combining Statements of Assets and Liabilities, Statements of
Operations, and Schedules of Portfolio Investments should be read in conjunction
with the historical financial statements of the Funds.
Expenses:
--------
Key Asset Management Inc. ("KAM"), a subsidiary of KeyCorp, serves
as the investment adviser to The Victory Portfolios. Indocam International
Investment Services, S.A. serves as a sub-adviser for the Victory International
Growth Fund. KAM, and not The Victory Portfolios, pays sub-advisory fees as
applicable. Affiliates of KAM and other financial institutions serve as
Shareholder Servicing Agents for The Victory Portfolios. BISYS Fund Services
("BISYS") an indirect, wholly-owned subsidiary of The BISYS Group, Inc. serves
as the administrator and distributor for The Victory Portfolios. BISYS Fund
Services, Ohio, Inc., an affiliate of The BISYS Group, Inc., serves as Mutual
Fund Accountant.
Victory Funds
The Victory Funds currently issue one class of shares, except the
Victory Diversified Stock Fund and the Victory International Growth Fund, each
of which are authorized to issue two classes of shares: Class A shares and Class
B shares. In connection with the reorganization, each Victory Fund will be
authorized to issue an additional class of shares (Class G shares), as described
above. Each class of Victory shares has substantially identical rights and
privileges except with respect to sales charges, fees paid under shareholder
servicing or distribution plans, expenses allocable exclusively to each class of
shares, voting rights on matters affecting a single
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Notes to Pro Forma Financial Statements - Continued
(Unaudited)
class of shares, and the exchange privilege of each class of shares.
Class A shares are subject to an initial sales charge upon purchase
unless the shareholder is subject to an applicable waiver. Class B shares are
subject to a contingent deferred sales charge (CDSC), which varies based on the
length of time such shares are held. Class A and Class B shares, as applicable,
are subject to a shareholder servicing fee, pursuant to a shareholder servicing
plan, payable at an annual rate up to 0.25% of average daily net assets of those
classes of shares. Class B shares are subject to a distribution fee, pursuant to
the terms of a 12b-1 Plan, payable at the annual rate of 0.75% of the average
net assets of Class B shares. Class G shares of each Victory Fund, pursuant to
the terms of a 12b-1 Plan, will be subject to service fees and distribution
fees, as applicable, corresponding to those borne by the predecessor Gradison
Fund, as described below under the caption "Gradison Funds."
Under the terms of the investment advisory agreement, KAM is
entitled to receive fees computed at the annual rate of 0.50%, 0.60%, 0.65%,
1.10% and 1.00% of average net assets of the Victory Fund for Income, the
Victory Ohio Municipal Bond Fund, the Victory Diversified Stock Fund, the
Victory International Growth Fund and the Victory Small Company Opportunity
Fund, respectively. At the time the reorganization becomes effective, the
investment advisory fees for the Victory Small Company Opportunity Fund will
change, and KAM will be entitled to receive fees computed at the annual rate of
0.65% of average net assets up to $100 million, 0.55% of average net assets
between $100 million and $200 million and 0.45% of average net assets over $200
million. Such fees, net of voluntary fee waivers, as applicable, are accrued
daily and paid monthly. For the year ended October 31, 1998, total KAM
investment advisory fees incurred by the Funds, and advisory fees waived, were
as follows:
Total Fees Waiver
---------- ------
Victory Fund for Income $ 120,000 $ 104,000
Victory Ohio Municipal Bond Fund 476,000 174,000
Victory Diversified Stock Fund 6,062,000 1,023,000
Victory International Growth Fund 1,206,000 123,000
Victory Small Company Opportunity Fund 1,068,000 148,000
Under the terms of the administration agreement, BISYS' fees are
computed at the annual rate of 0.15% of each Funds' average daily net assets of
$300 million and less, 0.12% of each Funds' average daily net assets between
$300 million and $600 million and 0.10% of each Funds' average daily net assets
greater than $600 million. BISYS voluntarily waived a portion of these fees
during the year ended October 31, 1998. For the year ended October 31, 1998,
BISYS' fees, and amounts waived, were as follows:
Total Fees Waiver
---------- ------
Victory Fund for Income $ 36,000 $22,000
Victory Ohio Municipal Bond Fund 119,000 -
Victory Diversified Stock Fund 1,143,000 -
Victory International Growth Fund 164,000 -
Victory Small Company Opportunity Fund 160,000 -
Gradison Funds
The Gradison Funds issue one class of shares. The rights and
privileges of those shares are analogous to the Class G shares of the Surviving
Funds.
McDonald Investments Inc. ("McDonald") serves as investment adviser
for the Gradison Funds. Blairlogie Capital Management ("Blairlogie") serves as
sub-adviser for the Gradison International Fund. Blairlogie's fees are borne by
McDonald, and not the Gradison International Fund. Under the terms of the
investment advisory agreement, McDonald is entitled to receive fees computed at
the annual rate of 0.50% of average net assets of each of the Gradison
Government Income Fund and the Gradison Ohio Tax-Free Income Fund. McDonald
receives advisory fees computed at the annual rate of 0.65% of average net
assets up to $100 million, 0.55% of average net assets between $100 million and
$200 million and 0.45% of average net assets over $200 million of each of the
Gradison Growth & Income Fund and the Gradison Opportunity Value Fund. Advisory
fees paid to McDonald for the Gradison International Fund are computed based on
1.00% of average net assets up to $100 million, 0.90% of average net assets
between $100 million and $250 million, 0.80% of average net assets between $250
million and $500 million, and 0.75% of average net assets over $500 million. For
the year ended October 31, 1998, total investment advisory fees incurred by the
Gradison Funds, and amounts waived by McDonald, as applicable, were as follows:
Total Fees Waiver
---------- ------
Gradison Government Income Fund $784,000 -
Gradison Ohio Tax-Free Income Fund 474,000 -
Gradison Growth & Income Fund 369,000 -
Gradison International Fund 322,000 $76,000
Gradison Opportunity Value Fund 969,000 -
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Notes to Pro Forma Financial Statements - Continued
(Unaudited)
Under the terms of a Distribution Plan adopted under Rule 12b-1 of the 1940 Act,
the distributor receives a service fee at the annual rate of 0.25% of average
daily net assets of each Gradison Fund. The service fee is paid as compensation
to agents for providing personal services to shareholders of the Gradison Funds,
including responding to shareholder inquiries and providing information to
shareholders about their Gradison Fund accounts. The distributor uses the fee to
make payments to authorized dealers for providing these services to Gradison
Fund shareholders. The distributor also receives a distribution fee in an
additional amount of up to 0.25% of the average net assets of the Gradison
Growth & Income Fund, the Gradison International Fund and the Gradison
Opportunity Value Fund. The distribution fee is paid for general distribution
services and as compensation for selling shares of the Gradison Funds. These
fees are calculated on a daily basis and paid to the distributor monthly. The
distributor makes payments to financial intermediaries and securities dealers of
those amounts for personal services to shareholders and for assistance in
selling shares of the Gradison Funds. Effective October 23, 1998, BISYS serves
as distributor for the Gradison Funds. Prior to that date, McDonald served as
the distributor. For the year ended October 31, 1998, the Gradison Funds paid
distribution fees as follows:
Total Fees
----------
Gradison Government Income Fund $385,000
Gradison Ohio Tax-Free Income Fund 237,000
Gradison Growth & Income Fund 284,000
Gradison International Fund 161,000
Gradison Opportunity Value Fund 791,000
Pro Forma Adjustments and Pro Forma Combined Columns
- ----------------------------------------------------
The pro forma adjustments and pro forma combined columns of the
statements of operations reflect the adjustments necessary to show expenses at
the contractual rates, including the reduced advisory fee rate for the Victory
Small Company Opportunity Fund adopted at the time the reorganization becomes
effective, that would have been in effect if the Gradison Funds were included in
the Victory Funds for the year ended October 31, 1998. The investment advisory
fees and, for Class B and Class G shares, the 12b-1 and shareholder service
fees, as applicable, disclosed in the pro forma combined column are calculated
at the rates in effect for the Survivor Funds based upon the combined net assets
of the Victory Funds and the Gradison Funds. As part of the reorganization, KAM
has committed to waive its management fee, or reimburse expenses, as allowed by
law, to the extent necessary to maintain expenses of the Survivor Funds so that
total expenses for Class G Shares would not exceed specified limits until
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Notes to Pro Forma Financial Statements - Continued
(Unaudited)
April 1, 2001. Accordingly, the pro forma adjustments reflect the waiver or
reimbursement of these amounts by KAM at levels sufficient to meet these
commitments.
The pro forma adjustments and pro forma combined columns of the
statements of assets and liabilities reflect the adjustment necessary to show
the reclassification of the unamortized organization costs of the Funds that are
not the Survivor Funds against capital. The pro forma schedules of portfolio
investments give effect to the proposed transfer of such assets as if the
reorganization had occurred at October 31, 1998.
The pro forma combined accumulated undistributed net realized gains
(losses) from investment transactions in the accompanying statements of assets
and liabilities may include amounts identified as capital loss carryforwards as
of each Funds' most recent fiscal year end date prior to the Effective Date of
the Reorganization. The Gradison Government Income Fund had a capital loss
carryforward for Federal income tax purposes as of December 31, 1997 of
approximately $5,948,000. The Gradison International Fund had a capital loss
carryforward for Federal income tax purposes as of March 31, 1998 of
approximately $360,000. Utilization of these capital loss carryforwards
subsequent to the Effective Date of the Reorganization may be limited under the
provisions of the Internal Revenue Code.
3. Portfolio Valuation, Securities Transactions and Related Income:
---------------------------------------------------------------
Investments in common and preferred stocks, corporate bonds,
commercial paper, municipal and foreign government bonds, U.S. Government
securities and securities of U.S. Government agencies are valued at their market
values determined on the basis of the latest available bid prices in the
principal market (closing sales prices if the principal market is an exchange)
in which such securities are normally traded on or the basis of valuation
procedures approved by the Board of Trustees. Investments in investment
companies are valued at their respective net asset values as reported by such
companies. The differences between the cost and market values of investments are
reflected as either unrealized appreciation or depreciation.
Securities transactions are accounted for on the date the security
is purchased or sold (trade date). Interest income is recognized on the accrual
basis and includes, where applicable, the pro rata amortization of premium or
accretion of discount. Dividend income is recorded on the ex-dividend date, net
of foreign taxes withheld. Gains or losses realized from sales of securities are
determined by comparing the identified cost of the security lot sold with the
net sales proceeds.
<PAGE>
The Victory Portfolios
Victory Funds/Gradison Funds
Notes to Pro Forma Financial Statements
(Unaudited)
4. Capital Shares:
--------------
In connection with the reorganization, the Victory and Gradison
Funds that comprise the Survivor Funds, each a separate investment portfolio of
The Victory Portfolios, will each issue additional, separate Class G shares. The
one class of each of the Gradison Funds has rights and privileges analogous to
those of Class G shares of the Survivor Funds. Class G shares will not be
subject to a sales charge upon purchase or redemption.
The pro forma net asset values per share assume the impact of any
required corporate actions relating to shares of The Victory Portfolios that
would have occurred at October 31, 1998 in connection with the proposed
reorganization of the Victory Funds and the Gradison Funds into the Survivor
Funds as described above. The pro forma number of shares outstanding consists of
the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------- ----------------------- ----------------------------
Shares Outstanding at Reverse Stock Splits to
October 31, 1998 Facilitate the
(000) Reorganization
(000)
- ------------------------------------------------------- ----------------------- ----------------------------
<S> <C> <C>
Victory Fund for Income 2,923 (767)
- ------------------------------------------------------- ----------------------- ----------------------------
Victory Ohio Municipal Bond Fund 6,872
- ------------------------------------------------------- ----------------------- ----------------------------
Victory Diversified Stock Fund 52,247
- ------------------------------------------------------- ----------------------- ----------------------------
Victory International Growth Fund 10,223
- ------------------------------------------------------- ----------------------- ----------------------------
Victory Small Company Opportunity Fund 8,537 (4,797)
- ------------------------------------------------------- ----------------------- ----------------------------
- ------------------------------------------------------- ----------------------- ----------------------------
Additional Shares Issued Pro forma Shares at
in the Reorganization October 31, 1998
(000) (000)
- ------------------------------------------------------- --------------------------- -------------------------
Victory Fund for Income 12,051 14,207
- ------------------------------------------------------- --------------------------- -------------------------
Victory Ohio Municipal Bond Fund 9,509 16,381
- ------------------------------------------------------- --------------------------- -------------------------
Victory Diversified Stock Fund 3,419 55,666
- ------------------------------------------------------- --------------------------- -------------------------
Victory International Growth Fund 2,423 12,646
- ------------------------------------------------------- --------------------------- -------------------------
Victory Small Company Opportunity Fund 6,709 10,449
- ------------------------------------------------------- --------------------------- -------------------------
Immediately prior to the reorganization, the Victory Fund for Income
and the Victory Small Company Opportunity Fund will effect a reverse stock split
to adjust the net asset value per share such that the net asset value per share
of each respective Survivor Fund will equal that of the predecessor Gradison
Fund. The impact of these reverse stock splits are reflected above in the
"Reverse Stock Splits to Facilitate the Reorganization" column.
</TABLE>
