December 15, 1999
(LOGO)(R)
Victory Funds
PROSPECTUS
*
National Municipal Bond Fund
Class A and G Shares
New York Tax-Free Fund
Class A and G Shares
Ohio Municipal Bond Fund
Class A and G Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Call Victory at:
800-539-FUND (800-539-3863)
or visit the Victory Funds' website at: www.victoryfunds.com
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TABLE OF CONTENTS
*
RISK/RETURN SUMMARY FOR EACH OF THE FUNDS
An analysis which includes the investment objective, principal strategies,
principal risks, performance, and expenses of each Fund
INTRODUCTION 1
National Municipal Bond Fund, Class A and G Shares 2
New York Tax-Free Fund, Class A and G Shares 4
Ohio Municipal Bond Fund, Class A and G Shares 6
INVESTMENTS 8
RISK FACTORS 10
SHARE PRICE 11
DIVIDENDS, DISTRIBUTIONS, AND TAXES 12
INVESTING WITH VICTORY
* Choosing a Share Class 14
* How to Buy Shares 17
* How to Exchange Shares 20
* How to Sell Shares 21
ORGANIZATION AND MANAGEMENT OF THE FUNDS 23
ADDITIONAL INFORMATION 25
FINANCIAL HIGHLIGHTS
National Municipal Bond Fund 26
New York Tax-Free Fund 27
Ohio Municipal Bond Fund 28
The Victory Portfolios
KEY TO FUND INFORMATION
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its
investment objective.
RISK FACTORS
The risks you may assume as an investor in a Fund.
PERFORMANCE
A summary of the historical performance of a Fund in comparison to an
unmanaged index.
EXPENSES
The costs you will pay, directly or indirectly, as an investor in a Fund,
including sales charges and ongoing expenses.
Shares of the Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the
principal amount invested.
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Introduction
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for
future reference.
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Investment Strategy
Each of the Funds pursues its investment objective by investing primarily in
general obligation bonds and revenue bonds. However, each of the Funds has
unique investment strategies and its own risk/reward profile. Please review
the "Risk/Return Summary" for each Fund and the "Investments" section for an
overview.
Risk Factors
Certain Funds may share many of the same risk factors. For example, all of
the Funds are subject to interest rate inflation, reinvestment, and credit
risks. The Funds are not insured by the FDIC. In addition, there are other
potential risks, discussed in each "Risk/Return Summary" and in "Risk
Factors."
Who May Want to Invest in the Funds
*Investors in higher tax brackets seeking tax-exempt income
*Investors seeking income over the long term
*Investors with moderate risk tolerance
*Investors seeking higher potential returns than are provided by money market
funds
*Investors willing to accept price and dividend fluctuations
Share Classes
Each Fund offers Class A and Class G Shares. See "Choosing a Share Class."
The following pages provide you with an overview of each of the Funds. Please
look at the objective, policies, strategies, risks, and expenses to determine
which Fund will suit your risk tolerance and investment needs.
1
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NATIONAL MUNICIPAL BOND FUND Risk/Return Summary
Investment Objective
The National Municipal Bond Fund seeks to provide a high level of current
interest income exempt from federal income tax, as is consistent with the
preservation of capital.
Principal Investment Strategies
The National Municipal Bond Fund pursues its investment objective by
primarily investing in municipal bonds. The interest on these bonds is exempt
from federal income tax. Under normal circumstances, at least 80% of the
National Municipal Bond Fund's income distributions will be exempt from
federal income taxes, including the alternative minimum tax.
Under normal market conditions, the National Municipal Bond Fund
primarily invests in:
* Municipal securities, including mortgage-related securities, with fixed,
variable, or floating interest rates;
* Zero coupon, tax, revenue, and bond anticipation notes; and
* Tax-exempt commercial paper.
Important Characteristics of the National Municipal Bond Fund's
Investments:
* Quality: Municipal securities rated A or above at the time of purchase by
Standard & Poor's (S&P), Fitch IBCA International (Fitch IBCA), Moody's
Investors Service (Moody's), or another NRSRO*, or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the Statement
of Additional Information (SAI).
* Maturity: The dollar-weighted effective average maturity of the Fund
generally will range from 5 to 11 years. Under certain market conditions, the
Portfolio Manager may go outside these boundaries.
* An NRSRO is a nationally recognized statistical ratings organization, like
S&P, Fitch IBCA, or Moody's, that assigns credit ratings to securities based
on the borrower's ability to meet its obligation to make principal and
interest payments.
Municipal securities are issued to raise money for public purposes.
General obligation bonds are backed by the taxing power of a state or
municipality. This means the issuing authority can raise taxes to cover the
payments. Revenue bonds are backed by revenues from a specific tax, project,
or facility. Principal and interest payments on some municipal securities are
insured by private insurance companies. The National Municipal Bond Fund's
higher portfolio turnover may result in higher expenses and taxable capital
gain distributions.
There is no guarantee that the National Municipal Bond Fund will achieve
its objectives.
Principal Risks
You may lose money by investing in the National Municipal Bond Fund. The
National Municipal Bond Fund is subject to the following principal risks,
more fully described in "Risk Factors." The National Municipal Bond Fund's
net asset value, yield and/or total return may be adversely affected if any
of the following occurs:
* Economic or political events take place in a state which make the market
value of that state's obligations go down.
* The market value of securities acquired by the National Municipal Bond Fund
declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The National Municipal Bond Fund must reinvest interest or sale proceeds at
lower rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
The National Municipal Bond Fund primarily invests in municipal
securities from several states, rather than from a single state. The National
Municipal Bond Fund is a non-diversified fund. As a non-diversified fund, the
National Municipal Bond Fund may devote a larger portion of its assets to the
securities of a single issuer than if it were diversified. This could make
the National Municipal Bond Fund more susceptible to economic, political, or
credit risks. The National Municipal Bond Fund also is subject to the risks
associated with investing in municipal debt securities, including the risk
that certain investments could lose their tax-exempt status.
An investment in the National Municipal Bond Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
2
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NATIONAL MUNICIPAL BOND FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the National Municipal Bond Fund by showing changes in its
performance for various time periods.
The bar chart shows returns for Class A Shares of the National Municipal
Bond Fund. Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1995 17.67%
1996 4.45%
1997 8.76%
1998 6.30%1
1 The National Municipal Bond Fund's year-to-date return as of September 30,
1999 was -0.67%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 6.46% (quarter ending March 31, 1995) and the lowest return for a quarter
was -0.39% (quarter ending March 31, 1996).
The table shows how the average annual total returns for Class A Shares
of the National Municipal Bond Fund for one year and since inception compare
to those of two broad-based market indices. The figures shown in this table
assume reinvestment of dividends and distributions and reflect all applicable
sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Inception
December 31, 1998)1 One Year (2/3/94)
Class A 0.19% 5.03%
Lehman 7-Year
Municipal Bond Index2 6.22% 5.72%
Lehman 10-Year
Municipal Bond Index3 6.76% 6.19%
1 The National Municipal Bond Fund did not offer Class G Shares prior to
December 15, 1999.
2 The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index
comprised of investment grade municipal bonds with maturities of 6 to 8
years, weighted according to the total market value of each bond in the
Index.
3 The Lehman Brothers 10-Year Municipal Bond Index is a broad-based unmanaged
index that represents the general performance of investment-grade municipal
bonds with maturities of 8 to 12 years.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the National Municipal Bond Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The National Municipal Bond Fund pays
these expenses from its assets.)
Management Fees 0.55% 0.55%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable
to Class A Shares) 0.77% 1.01%
Total Fund Operating Expenses 1.32%3 1.81%3,4
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 There is no initial sales charge on purchases of $1 million or more for
Class A Shares. However, if you sell any such Class A Shares within one year,
you will be charged a contingent deferred sales charge (CDSC) of 1.00%. If
you sell any such Class A Shares within two years, you will be charged a CDSC
of 0.50%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed
by law, to the extent necessary to maintain the net operating expenses of
Class A and G Shares of the National Municipal Bond Fund at a maximum of
1.00% and 1.49%, respectively. The Adviser may terminate these
waivers/reimbursements at any time to the extent allowed by law.
4 Estimated Class G expenses are based on historical expenses of Class
A Shares for the fiscal year ended October 31, 1998.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the National Municipal Bond Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the
National Municipal Bond Fund for the time periods shown and then sell 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 National Municipal Bond
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $702 $969 $1,257 $2,074
Class G $184 $569 $ 980 $2,127
3
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NEW YORK TAX-FREE FUND Risk/Return Summary
Investment Objective
The New York Tax-Free Fund seeks to provide a high level of current income
exempt from federal, New York State, and New York City income taxes,
consistent with the preservation of shareholders' capital.
Principal Investment Strategies
The New York Tax-Free Fund pursues its investment objective by investing at
least 80% of its total assets in securities that have interest income that is
exempt from federal income tax, including the federal alternative minimum
tax. At least 65% of the portfolio will be invested in insured municipal
securities that pay interest exempt from New York State and New York City
income taxes.
Under normal market conditions, the New York Tax-Free Fund primarily
invests in:
* Municipal securities, including mortgage-related securities, with fixed,
variable, and floating interest rates;
* Zero coupon, tax, and revenue anticipation notes; and
* Tax-exempt commercial paper.
Important Characteristics of the New York Tax-Free Fund's Investments:
* Quality: Municipal securities rated A or above at the time of purchase by
S&P, Fitch IBCA, Moody's, or another NRSRO, or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the SAI.
* Maturity: The New York Tax-Free Fund will generally purchase securities
with original final maturities of 20 to 30 years at the time of purchase.
Under certain market conditions, the Portfolio Manager may go outside these
boundaries.
Insurance policies for the municipal securities held by the New York
Tax-Free Fund generally are obtained either by the issuer of the security or
by a third party from a private insurer. The insurance company guarantees
timely payments of principal and interest. This insurance reduces risk, but
these high quality bonds may yield less than uninsured bonds.
There is no guarantee that the New York Tax-Free Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in New York Tax-Free Fund. The New York
Tax-Free Fund is subject to the following principal risks, more fully
described in "Risk Factors." The New York Tax-Free Fund's net asset value,
yield and/or total return may be adversely affected if any of the following
occurs:
* Economic or political events take place in New York which make the market
value of New York's obligations go down.
* The market value of securities acquired by the New York Tax-Free Fund
declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The New York Tax-Free Fund must reinvest interest or sale proceeds at lower
rates.
* The rate of inflation increases.
* The New York Tax-Free Fund is a non-diversified fund. As a non-diversified
fund, the New York Tax-Free Fund may devote a larger portion of its assets to
the securities of a single issuer than if it were diversified.
* The New York Tax-Free Fund also is subject to the risks associated with
investing in municipal debt securities, including the risk that certain
investments could lose their tax-exempt status.
* The New York Tax-Free Fund is subject to additional risks because it
concentrates its investments in a single geographic area. This could make the
New York Tax-Free Fund more susceptible to economic, political, or credit
risks than a fund that invests in a more diversified geographic area. The SAI
explains the risks specific to investments in New York municipal securities.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the New York Tax-Free Fund is not a deposit of KeyBank
or any of its affiliates and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
4
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NEW YORK TAX-FREE FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the New York Tax-Free Fund by showing changes in its performance
for various time periods.
The bar chart shows returns for Class A Shares of the New York Tax-Free
Fund. Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1992 8.26%
1993 12.34%
1994 -4.58%
1995 13.30%
1996 3.50%
1997 6.04%
1998 5.33%1
1 The New York Tax-Free Fund's year-to-date return as of September 30, 1999
was -1.31%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 5.19% (quarter ending March 31, 1995) and the lowest return for a quarter
was -3.64% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares
of the New York Tax-Free Fund for one year, five years and since inception
compare to those of a broad-based market index. The figures shown in this
table assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (2/11/91)
Class A -0.76% 3.32% 5.92%
Lehman 10-Year
Municipal Bond Index2 6.76% 6.35% 8.02%
1 The New York Tax-Free Fund did not offer Class G Shares prior to December
15, 1999.
2 The Lehman Brothers 10-Year Municipal Bond Index is a broad-based unmanaged
index that represents the general performance of investment-grade municipal
bonds with maturities of 8 to 12 years.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the New York Tax-Free Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The New York Tax-Free Fund pays
these expenses from its assets.)
Management Fees 0.55% 0.55%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable
to Class A Shares) 0.99% 0.74%
Total Fund Operating Expenses 1.54%3 1.54%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 There is no initial sales charge on purchases of $1 million or more for
Class A Shares. However, if you sell any such Class A Shares within one year,
you will be charged a contingent deferred sales charge (CDSC) of 1.00%. If
you sell any such Class A Shares within two years, you will be charged a CDSC
of 0.50%.
3 Estimated Class G expenses are based on historical expenses of Class A
Shares for the fiscal year ended October 31, 1998. The Adviser may waive its
management fee and reimburse expenses, as allowed by law, so that the net
operating expenses of Class A Shares and Class G Shares of the New York
Tax-Free Fund will equal 0.95%. The Adviser may terminate these
waivers/reimbursements at any time to the extent allowed by law.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the New York Tax-Free Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the New York
Tax-Free Fund for the time periods shown and then sell 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 New York Tax-Free Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $723 $1,033 $1,366 $2,304
Class G $157 $ 486 $ 839 $1,834
5
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OHIO MUNICIPAL BOND FUND Risk/Return Summary
Investment Objective
The Ohio Municipal Bond Fund seeks to provide a high level of current
interest income which is exempt from both federal income tax and Ohio
personal income tax.
Principal Investment Strategies
The Ohio Municipal Bond Fund pursues its investment objective by investing at
least 80% of its total assets in investment grade obligations. The interest
on these obligations is exempt from federal income taxes, including the
federal alternative minimum tax. The Ohio Municipal Bond Fund expects to
invest at least 65% of its total assets in bonds that pay interest that is
also exempt from Ohio personal income tax.
Under normal market conditions, the Ohio Municipal Bond Fund primarily
invests in:
* Municipal securities, including mortgage-related securities, with fixed,
variable, or floating interest rates;
* Zero coupon, tax, revenue, and bond anticipation notes; and
* Tax-exempt commercial paper.
Important Characteristics of the Ohio Municipal Bond Fund's Investments:
* Quality: Municipal securities rated A or above at the time of purchase by
S&P, Fitch IBCA, Moody's, or another NRSRO, or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the SAI.
* Maturity: The dollar-weighted effective average maturity of the Ohio
Municipal Bond Fund generally will range from 5 to 15 years. Under certain
market conditions, the Portfolio Manager may go outside these boundaries.
Ohio's economic activity includes the service sector, durable goods
manufacturing, and agricultural industries. Manufacturing activity is
concentrated in cyclical industries; therefore, the Ohio economy may be more
cyclical than other states. The Ohio Municipal Bond Fund's high portfolio
turnover rate may result in higher expenses and taxable capital gain
distributions.
There is no guarantee that the Ohio Municipal Bond Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Ohio Municipal Bond Fund. The Ohio
Municipal Bond Fund is subject to the following principal risks, more fully
described in "Risk Factors." The Ohio Municipal Bond Fund's net asset value,
yield and/or total return may be adversely affected if any of the following
occurs:
* Economic or political events take place in Ohio which make the market value
of Ohio obligations go down.
* The market value of securities acquired by the Ohio Municipal Bond Fund
declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Ohio Municipal Bond Fund must reinvest interest or sale proceeds at
lower rates.
* The rate of inflation increases.
* The Ohio Municipal Bond Fund is a non-diversified fund. As a
non-diversified fund, the Ohio Municipal Bond Fund may devote a larger
portion of its assets to the securities of a single issuer than if it were
diversified.
* The Ohio Municipal Bond Fund also is subject to the risks associated with
investing in municipal debt securities, including the risk that certain
investments could lose their tax-exempt status.
* The Ohio Municipal Bond Fund is subject to additional risks because it
concentrates its investments in a single geographic area. This could make the
Ohio Municipal Bond Fund more susceptible to economic, political, or credit
risks than a fund that invests in a more diversified geographic area. The SAI
explains the risks specific to investments in Ohio municipal securities.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Ohio Municipal Bond Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
6
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OHIO MUNICIPAL BOND FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Ohio Municipal Bond Fund by showing changes in its
performance for various time periods.
The bar chart shows returns for Class A Shares of the Ohio Municipal
Bond Fund. Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1991 10.75%
1992 7.76%
1993 12.64%
1994 -4.46%
1995 17.72%
1996 4.32%
1997 7.87%
1998 6.56%1
1 The Ohio Municipal Bond Fund's year-to-date return as of September 30, 1999
was -1.96%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 6.68% (quarter ending March 31, 1995) and the lowest return for a quarter
was -5.07% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares
of the Ohio Municipal Bond Fund for one year, five years and since inception
compare to those of a broad-based market index. The figures shown in this
table assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (5/18/90)
Class A 0.42% 4.91% 7.03%
Lehman 10-Year
Municipal Bond Index2 6.76% 6.35% 8.43%
1 The Ohio Municipal Bond Fund did not offer Class G Shares prior to March
29, 1999.
2 The Lehman Brothers 10-Year Municipal Bond Index is a broad-based unmanaged
index that represents the general performance of investment-grade municipal
bonds with maturities of 8 to 12 years.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Ohio Municipal Bond Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Ohio Municipal Bond Fund pays
these expenses from its assets.)
Management Fees 0.60% 0.60%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable
to Class A Shares) 0.54% 0.27%
Total Fund Operating Expenses 1.14% 1.12%
Fee Waiver / Expense Reimbursement (0.00)% (0.21)%
Net Expenses 1.14%3 0.91%4
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 There is no initial sales charge on purchases of $1 million or more for
Class A Shares. However, if you sell any such Class A Shares within one year,
you will be charged a contingent deferred sales charge (CDSC) of 1.00%. If
you sell any such Class A Shares within two years, you will be charged a CDSC
of 0.50%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed
by law, so that the net operating expenses of Class A Shares of the Ohio
Municipal Bond Fund will equal 0.94%. The Adviser may terminate this
waiver/reimbursement at any time to the extent allowed by law.
4 The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain
the net operating expenses of Class G Shares of the Ohio Municipal Bond Fund
at a maximum of 0.91% until at least April 1, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Ohio Municipal Bond Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Ohio
Municipal Bond Fund for the time periods shown and then sell all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Ohio Municipal Bond Fund's
operating expenses remain the same. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $685 $916 $1,167 $1,881
Class G1 $ 93 $336 $ 598 $1,347
1 This Example assumes that Net Annual Fund Operating Expenses for Class G
Shares will equal 0.91% until April 1, 2001 and will equal 1.12% thereafter.
7
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Investments
The following describes some of the types of securities the Funds may
purchase under normal market conditions. All Funds will not buy all of the
securities listed below.
For cash management or for temporary defensive purposes in response to
market conditions, each Fund may hold all or a portion of its assets in cash
or short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause a Fund to fail to meet its investment
objective.
For more information on ratings, detailed descriptions of each of these
investments, and a more complete description of which Funds can invest in
certain types of securities, see the SAI.
Revenue Bonds. Payable only from the proceeds of a specific revenue source,
such as the users of a municipal facility.
General Obligation Bonds. Secured by the issuer's full faith, credit, and
taxing power for payment of interest and principal.
When-Issued and Delayed-Delivery Securities. A security that is purchased for
delivery at a later time. The market value may change before the delivery
date, and the value is included in the NAV of a Fund.
Zero Coupon Bonds. These securities are purchased at a discount from the face
value. The bond's face value is received at maturity, with no interest
payments before then. These may be subject to greater risks of price
fluctuation than securities that periodically pay interest.
Municipal Lease Obligations. Issued to acquire land, equipment, or
facilities. They may become taxable if the lease is assigned. The lease could
terminate, resulting in default.
Certificates of Participation. A certificate that states that an investor
will receive a portion of the lease payments from a municipality.
Refunding Contracts. Issued to refinance an issuer's debt. A Fund buys these
at a stated price and yield on a future settlement date.
Tax, Revenue, and Bond Anticipation Notes. Issued in expectation of future
revenues.
* Variable & Floating Rate Securities. Investment grade instruments, some of
which may be derivatives or illiquid, with interest rates that reset
periodically.
* Mortgage-Backed Securities, Tax-Exempt. Tax-exempt investments secured by a
mortgage or pools of mortgages.
8
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Investments (continued)
Resource Recovery Bonds. Issued to build waste-to-energy facilities and
equipment.
Tax Preference Items. Tax-exempt obligations that pay interest which is
subject to the federal "alternative minimum tax."
Industrial Development Bonds and Private Activity Bonds. Secured by lease
payments made by a corporation, these bonds are issued for financing large
industrial projects; i.e., building industrial parks or factories.
Tax Exempt Commercial Paper. Short-term obligations that are exempt from
state and federal income tax.
Demand Features, or "Puts." Contract for the right to sell or redeem a
security at a predetermined price on or before a stated date. Usually the
issuer may obtain either a stand-by or direct pay letter of credit or
guarantee from banks as backup.
* Derivative Instruments: Indicates a "derivative instrument," whose value
is linked to, or derived from another security, instrument, or index. Each
Fund may, but is not required to, use derivative instruments for any of the
following reasons:
- -- To hedge against adverse changes in the market value of securities
- -- As a temporary substitute for purchasing or selling securities
- -- In limited situations, to attempt to profit from anticipated market
developments
9
<PAGE>
Risk Factors
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
An investment in a Fund is not a complete investment program.
This Prospectus describes the principal risks that you may assume as an
investor in the Funds. The "Investments" section in this Prospectus provides
additional information on the securities mentioned in the Risk/Return Summary
for each Fund. As with any mutual fund, there is no guarantee that the Funds
will earn income or show a positive total return over time. Each Fund's
price, yield, and total return will fluctuate. You may lose money if a Fund's
investments do not perform well.
Each Fund is subject to the principal risks described below.
General risks:
* Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for the security, or more or less than the security was worth
at an earlier time. Market risk may affect a single issuer, an industry, a
sector of the economy, or the entire market and is common to all investments.
* Manager risk is the risk that a Fund's portfolio manager may use a strategy
that does not produce the intended result. Manager risk also refers to the
possibility that the portfolio manager may fail to execute the Fund's
investment strategy effectively and, thus, fail to achieve its objective.
Risks associated with investing in debt securities:
* Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a debt security typically goes down. When interest rates go
down, the value of a debt security typically goes up. Generally, the market
values of securities with longer maturities are more sensitive to changes in
interest rates.
* Inflation risk is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities or equity securities that have a record of dividend growth.
* Reinvestment risk is the risk that when interest rates are declining a Fund
that receives interest income or prepayments on a security will have to
reinvest at lower interest rates. Generally, interest rate risk and
reinvestment risk tend to have offsetting effects, though not necessarily of
the same magnitude.
* Credit (or default) risk is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although the
Funds generally invest in only high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities. Credit
risk is measured by NRSROs such as S&P, Fitch IBCA, or Moody's.
Risks associated with investing in municipal debt securities:
* Tax-exempt status risk is the risk that a municipal debt security issued as
a tax-exempt security may be declared by the Internal Revenue Service to be
taxable.
Risks associated with investing in the securities of a single state:
* Concentration and diversification risk is the risk that only a limited
number of high-quality securities of a particular type may be available.
Concentration and diversification risk is greater for funds that primarily
invest in the securities of a single state. Concentration risk may result in
a Fund being invested in securities that are related in such a way that
changes in economic, business,
10
<PAGE>
Risk Factors (continued)
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
or political circumstances that would normally affect one security also could
affect other securities within that particular segment of the bond market.
Risks associated with investing in mortgage-related securities:
* Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. The level
of interest rates and other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the prepayment rate tends
to decrease, lengthening the average life of a pool of mortgage-related
securities. In periods of falling interest rates, the prepayment rate tends
to increase, shortening the average life of a pool of mortgage-related
securities. Prepayment risk is the risk that, because prepayments generally
occur when interest rates are falling, a Fund may have to reinvest the
proceeds from prepayments at lower interest rates.
* Extension risk is the risk that the rate of anticipated prepayments on
principal may not occur, typically because of a rise in interest rates, and
the expected maturity of the security will increase. During periods of
rapidly rising interest rates, the effective average maturity of a security
may be extended past what a Fund's portfolio manager anticipated that it
would be. The market value of securities with longer maturities tend to be
more volatile.
Share Price
The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own gives you the value of your investment.
Each Fund calculates its share price, called its "net asset value" (NAV),
each business day at 4:00 p.m. Eastern Time or at the close of trading on the
New York Stock Exchange, Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based
on the NAV that is calculated after you place your order. A business day is a
day on which the NYSE is open.
The Funds value their investments based on market value. When market
quotations are not readily available, the Funds value their investments based
on fair value methods approved by the Board of Trustees of the Victory
Portfolios. Each Class of each Fund calculates its NAV by adding up the total
value of its investments and other assets, subtracting its liabilities, and
then dividing that figure by the number of outstanding shares of the Class.
Total Assets-Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find a Fund's net asset value each day in The Wall Street
Journal and other newspapers. Newspapers do not normally publish fund
information until a Fund reaches a specific number of shareholders or level
of assets.
11
<PAGE>
Dividends, Distributions, and Taxes
Buying a Dividend. You should check a Fund's distribution schedule before you
invest. If you buy shares of a Fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at 800-539-FUND.
As a shareholder, you are entitled to your share of net income and capital
gains on a Fund's investments. The Funds pass their earnings along to
investors in the form of dividends. Dividend distributions are the net income
earned on investments after expenses. A Fund will distribute short-term
gains, as necessary, and if a Fund makes a long-term capital gain
distribution, it is normally paid once a year. As with any investment, you
should consider the tax consequences of an investment in a Fund.
Ordinarily, the Funds declare and pay dividends monthly.
You can receive distributions in one of the following ways.
Reinvestment Option
You can have distributions automatically reinvested in additional shares of a
Fund. If you do not indicate another choice on your Account Application, you
will be assigned this option automatically.
Cash Option
A check will be mailed to you no later than seven days after the pay date.
Income Earned Option
You can automatically reinvest your dividends in additional shares of a Fund
and have your capital gains paid in cash, or reinvest capital gains and have
your dividends paid in cash.
Directed Dividends Option
In most cases, you can automatically reinvest distributions in the same class
of shares of another fund of the Victory Group. If you reinvest your
distributions in a different class of another fund, you may pay a sales
charge on the reinvested distributions.
Directed Bank Account Option
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, the Transfer Agent
will transfer your distributions within seven days of the dividend payment
date. The bank account must have a registration identical to that of your
Fund account.
12
<PAGE>
Dividends, Distributions, and Taxes (continued)
The tax information in this prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in a Fund.
* Important Information about Taxes
Each Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
* Certain dividends from a Fund will be "exempt-interest dividends," which
are exempt from federal income tax. However, exempt-interest dividends are
not necessarily exempt from state or local taxes.
* Ordinary dividends from a Fund, if taxable, are treated as ordinary income;
dividends from a Fund's long-term capital gain are taxable as long-term
capital gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* An exchange of a Fund's shares for shares of another fund will be treated
as a sale. When you sell or exchange shares of a Fund, you must recognize any
gain or loss.
* Certain dividends paid to you in January may be taxable as if they had been
paid to you the previous December.
* Tax statements will be mailed from a Fund every January showing the amounts
and tax status of distributions made to you.
* Certain dividends from the Ohio Municipal Bond Fund will be exempt from
certain Ohio state and local taxes.
* Certain dividends from the New York Tax-Free Fund will be exempt from
certain New York state and local taxes.
* Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
13
<PAGE>
Investing with Victory
All you need to do to get started is to fill out an application.
For historical expense information on Class A and G Shares, see the
"Financial Highlights" at the end of this Prospectus.
If you are looking for a convenient way to open an account or to add money to
an existing account, Victory can help. The sections that follow will serve as
a guide to your investments with Victory. "Choosing a Share Class" will help
you decide whether it would be more to your advantage to buy Class A or Class
G Shares of a Fund. The following sections will describe how to open an
account, how to access information on your account, and how to buy, exchange,
and sell shares of a Fund. We want to make it simple for you to do business
with us. If you have questions about any of this information, please call
your Investment Professional or one of our customer service representatives
at 800-539-FUND. They will be happy to assist you.
Choosing a Share Class
Each Fund offers Class A and Class G Shares. Each class has its own cost
structure, allowing you to choose the one that best meets your requirements.
Your Investment Professional also can help you decide. An Investment
Professional is an investment consultant, salesperson, financial planner,
investment adviser, or trust officer who provides you with investment
information.
CLASS A
* Front-end sales charge, as described on the next page. There are several
ways to reduce this charge.
CLASS G
* No front-end sales charge. All your money goes to work for you right away.
* No deferred sales charge.
* Class G Shares are sold only by certain broker-dealers.
14
<PAGE>
Choosing a Share Class (continued)
There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.
* Calculation of Sales Charges -- Class A
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are as follows:
Sales Charge Sales Charge
as a % of as a % of
Your Investment in the Fund Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
* There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% will be
charged to the shareholder if any shares are redeemed in the first year after
purchase, or at 0.50% within two years of the purchase. This charge will be
based on either the cost of the shares or net asset value at the time of
redemption, whichever is lower. There will be no CDSC on reinvested
distributions.
* Sales Charge Reductions and Waivers for Class A Shares
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of a Fund over a 13-month
period and receive the same sales charge as if all shares had been purchased
at one time. You must start with a minimum initial investment of 5% of the
total amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares
you already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds, (excluding
money market funds) for purposes of calculating the sales charge. The
combination privilege also allows you to combine the total investments from
the accounts of household members of your immediate family (spouse and
children under 21) for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers,"* and
dealers who have an agreement with the Distributor and any trade organization
to which the Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors in Class A Shares who reinvest a distribution from a deferred
compensation plan, agency, trust, or custody account that was maintained by
KeyBank National Associates and its affiliates, the Victory Group, or
invested in a fund of the Victory Group.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
15
<PAGE>
Choosing a Share Class (continued)
d. Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales charge
for those shares.
e. Investment Professionals who purchased Fund shares for fee-based
investment products or accounts, and selling brokers and their sales
representatives.
* Shareholder Servicing Plan
The Funds have adopted a Shareholder Servicing Plan for Class A Shares of
each Fund. The shareholder servicing agent performs a number of services for
its customers who are shareholders of the Funds. It establishes and maintains
accounts and records, processes dividend payments, arranges for bank wires,
assists in transactions, and changes account information. For these services
a Fund pays a fee at an annual rate of up to 0.25% of the average daily net
assets of the appropriate class of shares serviced by the agent. The Funds
may enter into agreements with various shareholder servicing agents,
including KeyBank National Association and its affiliates, other financial
institutions, and securities brokers. The Funds may pay a servicing fee to
broker-dealers and others who sponsor "no transaction fee" or similar
programs for the purchase of shares. Shareholder servicing agents may waive
all or a portion of their fee periodically.
* Distribution Plan
In accordance with Rule 12b-1 under the Investment Company Act of 1940,
Victory has adopted a Distribution and Service Plan for the Class A Shares of
the National Municipal Bond Fund and the New York Tax-Free Fund. The Class
A Shares do not pay expenses under this plan.
Victory has also adopted a Distribution and Service Plan for Class G
Shares of each Fund. Under the Class G Plan, each Fund will pay to the
Distributor a monthly service fee at an annual rate of 0.25% of its average
daily net assets. These service fees are paid to securities broker dealers or
other financial intermediaries for providing personal services to
shareholders of the Funds, including responding to inquiries, providing
information to shareholders about their Fund accounts, establishing and
maintaining accounts and records, processing dividend and distribution
payments, arranging for bank wires, assisting in transactions, and changing
account information. Each Fund may enter into agreements with various
shareholder servicing agents, including KeyCorp and its affiliates, and with
other financial institutions that provide such services.
Because Rule 12b-1 fees are paid out of a Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
16
<PAGE>
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum initial investment
required to open an account is $500 ($100 for IRAs), with additional
investments of at least $25. You can send in your payment by check, wire
transfer, exchange from another Victory Fund, or through arrangements with
your Investment Professional. Sometimes an Investment Professional will
charge you for these services. This fee will be in addition to, and unrelated
to, the fees and expenses charged by a Fund.
If you buy Shares directly from the Funds and your investment is
received and accepted by 4:00 p.m. Eastern Time or the close of trading on
the NYSE (whichever time is earlier), your purchase will be processed the
same day using that day's share price.
Make your check payable to:
The
Victory
Funds
17
<PAGE>
How to Buy Shares (continued)
Telecommunication Device for the Deaf (TDD):
800-970-5296
Keep the following addresses handy for purchases, exchanges, or redemptions:
By Regular U.S. Mail
Send completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
580 Walnut Street
Cincinnati, OH 45202
or
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
By Overnight Mail
Use the following address ONLY for overnight packages.
The Victory Funds
580 Walnut Street
Cincinnati, OH 45202
or
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
By Wire
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring
funds to obtain a confirmation number.
The Victory Funds
Firstar Bank ABA
#042000013
For Credit to DDA Account #821602133
(insert account number, name,
and confirmation number assigned by the Fund)
or
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
(insert account number, name,
and confirmation number assigned by the Fund)
By Telephone
800-539-FUND
(800-539-3863)
18
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement
and send it with your check to the address indicated.
* ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up an ACH account. Currently, the Funds do not
charge a fee for ACH transfers.
* Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up
by an Investment Professional, account activity will be detailed in your
account statements. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Funds. By January 31 of each year, you
will be mailed an IRS form reporting distributions for the previous year,
which also will be filed with the IRS.
* Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual,
or annual investments. You should attach a voided personal check so the
proper information can be obtained. You must first meet the minimum
investment requirement of $500, ($100 for IRA's) then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account
and invest it in Shares of a Fund.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you will be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only buy or
exchange into fund shares legally available in your state. If your account
falls below $500, we may ask you to re-establish the minimum investment. If
you do not do so within 60 days, we may close your account and send you the
value of your account.
19
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling
800-539-FUND.
You can sell shares of one fund of the Victory Portfolios to buy shares of
another. This is considered an exchange. You may exchange shares of one
Victory fund for shares of the same class of any other, generally without
paying any additional sales charges.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the
following in mind:
* Shares of the fund selected for exchange must be available for sale in your
state of residence.
* The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
* Shares of the Fund may be exchanged at relative net asset value. This means
that if you own Class A Shares of the Fund, you can only exchange them for
Class A Shares of another fund and not pay a sales charge. The same rules
apply to Class G Shares except that holders of Class G Shares who acquired
their shares as a result of the reorganization of the Gradison Funds into the
Victory Funds can exchange into Class A Shares of any Victory Fund that does
not offer Class G Shares without paying a sales charge.
* You must meet the minimum purchase requirements for the fund you purchase
by exchange.
* The registration and tax identification numbers of the two accounts must be
identical.
* You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
* Each Fund may refuse any exchange purchase request if the Adviser
determines that the request is associated with a market timing strategy. Each
Fund may terminate or modify the exchange privilege at any time on 30 days'
notice to shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
20
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the
same mailing addresses listed for purchases.
If your request is received in good order by 4:00 p.m. Eastern Time or the
close of trading on the NYSE (whichever time is earlier), your redemption
will be processed the same day.
By Telephone
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one
of the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and
takes measures to verify the identity of the caller. If the Transfer Agent
properly acts on telephone instructions and follows reasonable procedures to
ensure against unauthorized transactions, neither Victory, its servicing
agents, the Adviser, nor the Transfer Agent will be responsible for any
losses. If the Transfer Agent does not follow these procedures, it may be
liable to you for losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach
the Transfer Agent or your Investment Professional by telephone, consider
placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to sell shares. Send us a
letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account; or
* The redemption proceeds are being transferred to another Victory Group
account with a different registration.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
By Wire
If you want to sell shares by wire, you must establish a Fund account that
will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time or
the close of trading on the NYSE (whichever time is earlier), your funds will
be wired on the next business day.
By ACH
Normally, your redemption will be processed on the same day or the next day
if received after 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier). It will be transferred by ACH as long as the
transfer is to a domestic bank.
21
<PAGE>
How to Sell Shares (continued)
* Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. We
will need a voided personal check to activate this feature. You should be
aware that your account eventually may be depleted and that each withdrawal
may be a taxable transaction. However, you cannot automatically close your
account using the Systematic Withdrawal Plan. If your balance falls below
$500, we may ask you to bring the account back to the minimum balance. If you
decide not to increase your account to the minimum balance, your account
maybe closed and the proceeds mailed to you.
* Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be
held until the purchase check has cleared, which may take up to 15 days.
* A Fund may suspend your right to redeem your shares in the following
circumstances:
o During non-routine closings of the NYSE;
o When the Securities and Exchange Commission (SEC) determines either that
trading on the NYSE is restricted or that an emergency prevents the sale or
valuation of the Fund's securities; or
o When the SEC orders a suspension to protect a Fund's shareholders.
* Each Fund will pay redemptions by any one shareholder during any 90-day
period in cash up to the lesser of $250,000 or 1% of the Fund's net assets.
Each Fund reserves the right to pay the remaining portion "in kind," that is,
in portfolio securities rather than cash.
22
<PAGE>
Organization and Management of the Funds
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
* About Victory
Each Fund is a member of the Victory Portfolios, a group of more than 30
distinct investment portfolios. The Board of Trustees of Victory has the
overall responsibility for the management of the Funds.
* The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered
as an investment adviser with the SEC, is the Adviser to each of the Funds.
KAM, a subsidiary of KeyCorp, oversees the operations of the Funds according
to investment policies and procedures adopted by the Board of Trustees.
Affiliates of the Adviser manage approximately $79 billion for a limited
number of individual and institutional clients. KAM's address is 127 Public
Square, Cleveland, Ohio 44114.
During the fiscal year ended October 31, 1998, KAM was paid an advisory
fee at an annual rate based on a percentage of the average daily net assets
of each Fund (after waivers) as shown in the following table.
National Municipal Bond Fund 0.00%
New York Tax-Free Fund 0.27%
Ohio Municipal Bond Fund 0.50%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc.,
the Funds' Administrator, pays KAM a fee at the annual rate of up to 0.05% of
each Fund's average daily net assets to perform some of the administrative
duties for the Funds.
* Portfolio Management
Paul A. Toft is the portfolio manager or co-portfolio manager of each of the
Funds. Mr. Toft, a Senior Portfolio Manager and Managing Director of KAM, has
served as the portfolio manager of each of the Funds since 1994.
Stephen C. Dilbone has been the co-portfolio manager of the Ohio
Municipal Bond Fund since March 1999. A Chartered Financial Analyst, he
formerly served as portfolio manager of the Gradison Ohio Tax-Free Income
Fund from its inception in 1992 until March 1999.
23
<PAGE>
Organization and Management of the Funds (continued)
The Funds are supervised by the Board of Trustees which monitors the services
provided to investors.
OPERATIONAL STRUCTURE OF THE FUNDS
Trustees
Adviser
Shareholders
Financial Services Firms and their Investment Professionals
Advise current and prospective shareholders on their Fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy and
sell requests, distribution of dividends, and servicing of shareholder
accounts.
Administrator, Distributor, and Fund Accountant
BISYS Fund Services
and its affiliates
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares through Investment Professionals, and
calculates the value of shares. As Administrator, handles the day-to-day
activities of the Funds.
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles
trades made by the Funds.
Sub-Administrator
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain sub-administrative services.
24
<PAGE>
Additional Information
Some additional information you should know about the Funds.
If you would like to receive additional copies of any materials, please call
the Funds at 800-539-FUND.
* Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
* Banking Laws
The Adviser is a subsidiary of a bank holding company. Banking laws,
including the Glass-Steagall Act, currently prevent a bank holding company or
its affiliates from sponsoring, organizing, or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may
act as an investment adviser, transfer agent, custodian, or shareholder
servicing agent. They also may pay third parties for performing these
functions and buy shares of such an investment company for their customers.
On November 12, 1999, President Clinton signed a bill repealing the
Glass-Steagall Act. As a result, the Adviser or its affiliates may in the
future perform certain functions for the Fund that previously were not
permitted under federal law.
* Performance
The Victory Funds may advertise the performance of each Fund by comparing it
to other mutual funds with similar objectives and policies. Performance
information also may appear in various publications. Any fees charged by
Investment Professionals may not be reflected in these performance
calculations. Advertising information may include the yield, tax-effective
yield, and the average annual total return of each Fund calculated on a
compounded basis for specified periods of time. Yield and total return
information will be calculated according to rules established by the SEC.
Such information may include performance rankings and similar information
from independent organizations, such as Lipper, Inc., and industry
publications such as Morningstar Inc., Business Week, or Forbes. You also
should see the "Investment Performance" section for the Fund in which you
would like to invest.
* Year 2000 Issues
Like all mutual funds, the Funds could be adversely affected if the computer
systems used by its service providers, including shareholder servicing
agents, are unable to recognize dates after 1999. The Funds' service
providers have been actively updating their systems to be able to process
Year 2000 data. There can be no assurance, however, that these steps will be
adequate to avoid a temporary service disruption or other adverse impact on
the Funds. In addition, an issuer's failure to process accurately Year 2000
data may cause that issuer's securities to decline in value or delay the
payment of interest to the Funds.
* Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only one
copy of any financial reports, prospectuses, and their supplements.
25
<PAGE>
Financial Highlights National Municipal Bond Fund
The Financial Highlights table is intended to help you understand the
National Municipal Bond Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
National Municipal Bond Fund. The total returns in the table represent the
rate that an investor would have earned on an investment in the National
Municipal Bond Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about Class A
Shares of the National Municipal Bond Fund. The financial highlights for the
three fiscal years ended October 31, 1998 and the six months ended October
31, 1995 were audited by PricewaterhouseCoopers LLP, whose report, along with
the financial statements of the National Municipal Bond Fund, are included in
the Fund's annual report, which is available by calling the Fund at
800-539-FUND. The financial highlights for the fiscal year ended April 30,
1995 and the period from February 3, 1994 to April 30, 1994, were audited by
other auditors.
<TABLE>
<CAPTION>
Prior to
Designation
Class A Shares as Class A
Shares
Six Six
Months Year Year Year Months Year Feb. 3,
Ended Ended Ended Ended Ended Ended 1994 to
Apr. 30, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Apr. 30, Apr. 30,
1999 1998 1997 1996 1995<F4> 1995<F5> 1994<F6>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.92 $ 10.51 $ 10.16 $ 10.06 $ 9.59 $ 9.64 $ 10.00
Investment Activities
Net investment income 0.21 0.43 0.45 0.44 0.24 0.44 0.08
Net realized and unrealized gains
(losses) from investments (0.07) 0.41 0.35 0.13 0.46 (0.05) (0.36)
Total from Investment Activities 0.14 0.84 0.80 0.57 0.70 0.39 (0.28)
Distributions
Net investment income (0.21) (0.43) (0.45) (0.44) (0.23) (0.44) (0.08)
Net realized gains (0.24) -- -- -- -- -- --
In excess of net realized gains -- -- -- (0.03) -- -- --
Total Distributions (0.45) (0.43) (0.45) (0.47) (0.23) (0.44) (0.08)
Net Asset Value, End of Period $ 10.61 $ 10.92 $ 10.51 $ 10.16 $ 10.06 $ 9.59 $ 9.64
Total Return (excludes sales charges) 1.31%<F2> 8.15% 8.10% 5.83% 7.39%<F2> 4.21% (2.82)%<F2>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $46,906 $47,296 $47,705 $36,958 $11,964 $5,118 $ 494
Ratio of expenses to
average net assets 0.79%<F3> 0.67% 0.36% 0.29% 0.02%<F3> 0.20% 0.65%<F3>
Ratio of net investment income
(loss) to average net assets 3.81%<F3> 4.02% 4.43% 4.37% 5.11%<F3> 5.01% 3.15%<F3>
Ratio of expenses to
average net assets<F1> 1.23%<F3> 1.22% 1.27% 1.35% 2.57%<F3> 3.95% 26.10%<F3>
Ratio of net investment income
to average net assets<F1> 3.37%<F3> 3.47% 3.52% 3.31% 2.56%<F3> 1.26% (22.30)%<F3>
Portfolio turnover 57% 152% 154% 143% 72% 52% 13%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary fee reductions and/or
reimbursements had not occurred, the ratios would have been as indicated.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory National Municipal Bond Portfolio became the National Municipal Bond Fund.
<F5> Effective September 26, 1994, the Fund designated the existing shares as Class A Shares.
<F6> Period from commencement of operations.
</FN>
</TABLE>
26
<PAGE>
Financial Highlights New York Tax-Free Fund
The Financial Highlights table is intended to help you understand the New
York Tax-Free Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the New York
Tax-Free Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the New York Tax-Free Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the New York Tax-Free Fund. The financial highlights for the four
fiscal years ended October 31, 1998 were audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements of the New York
Tax-Free Fund, are included in the Fund's annual report, which is available
by calling the Fund at 800-539-FUND. The financial highlights for the period
from January 1, 1994 to October 31, 1994 and the fiscal year ended December
31, 1993, were audited by other auditors.
<TABLE>
<CAPTION>
Prior to
Designation
Class A Shares as Class A
Shares
Six
Months Year Year Year Year Jan. 1, Year
Ended Ended Ended Ended Ended 1994 to Ended
Apr. 30, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Dec. 31
1999 1998 1997 1996 1995<F4> 1994<F5> 1993
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.80 $ 12.68 $ 12.73 $ 12.85 $ 12.39 $ 13.54 $ 12.76
Investment Activities
Net investment income 0.31 0.61 0.68 0.68 0.87 0.57 0.70
Net realized and unrealized gains
(losses) from investments (0.15) 0.14 0.03 (0.11) 0.42 (1.15) 0.84
Total from Investment Activities 0.16 0.75 0.71 0.57 1.29 (0.58) 1.54
Distributions
Net investment income (0.30) (0.61) (0.72) (0.68) (0.83) (0.57) (0.70)
Net realized gains -- (0.02) (0.04) (0.01) -- -- (0.06)
Total Distributions (0.30) (0.63) (0.76) (0.69) (0.83) (0.57) (0.76)
Net Asset Value, End of Period $ 12.66 $ 12.80 $ 12.68 $ 12.73 $ 12.85 $ 12.39 $ 13.54
Total Return (excludes sales charges) 1.28%<F2> 6.12% 5.77% 4.53% 10.82% (4.31)%<F2> 12.34%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $14,899 $18,073 $15,335 $13,754 $15,374 $17,840 $28,530
Ratio of expenses to
average net assets 0.95%<F3> 0.94% 0.94% 0.93% 1.16% 0.91%<F3> 0.87%
Ratio of net investment income
to average net assets 4.75%<F3> 4.85% 5.32% 5.25% 5.50% 5.33%<F3> 5.28%
Ratio of expenses to
average net assets<F1> 1.29%<F3> 1.35% 1.49% 1.58% 1.96% 1.25%<F3> 0.96%
Ratio of net investment income
to average net assets<F1> 4.41%<F3> 4.44% 4.77% 4.60% 4.70% 4.99%<F3> 5.19%
Portfolio turnover 5% 38% 11% 0% 18% 18% 12%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary fee reductions
and/or reimbursements had not occurred, the ratios would have been as indicated.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory New York Tax-Free Portfolio became the New York Tax-Free Fund.
<F5> Effective September 26, 1994, the Fund designated the existing shares as Class A Shares.
</FN>
</TABLE>
27
<PAGE>
Financial Highlights Ohio Municipal Bond Fund
The Financial Highlights table is intended to help you understand the Ohio
Municipal Bond Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Ohio
Municipal Bond Fund. The total returns in the table represent the rate that
an investor would have earned on an investment in the Ohio Municipal Bond
Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
and Class G Shares of the Ohio Municipal Bond Fund. The financial highlights
for the five fiscal years ended October 31, 1998 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements
of the Fund, are included in the Ohio Municipal Bond Fund's annual report,
which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Class A Shares Class G Shares
Six Mar. 26,
Months Year Year Year Year Year 1999
Ended Ended Ended Ended Ended Ended through
Apr. 30, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Apr. 30,
1999 1998 1997 1996 1995 1994 1999<F4><F5>
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.04 $ 11.72 $ 11.43 $ 11.32 $ 10.33 $ 11.52 $ 11.79
Investment Activities
Net investment income 0.25 0.51 0.53 0.54 0.52 0.49 0.04
Net realized and unrealized
gains (losses) from investments (0.09) 0.42 0.29 0.11 1.00 (0.94) (0.03)
Total from
Investment Activities 0.16 0.93 0.82 0.65 1.52 (0.45) 0.01
Distributions
Net investment income (0.25) (0.51) (0.53) (0.54) (0.52) (0.49) (0.04)
In excess of net investment income -- -- -- -- (0.01) -- --
Net realized gains (0.18) (0.10) -- -- -- (0.25) --
Total Distributions (0.43) (0.61) (0.53) (0.54) (0.53) (0.74) (0.04)
Net Asset Value, End of Period $ 11.77 $ 12.04 $ 11.72 $ 11.43 $ 11.32 $ 10.33 $ 11.76
Total Return (excludes sales charges) 1.36%<F2> 8.18% 7.37% 5.87% 15.03% (4.08)% (0.17)%<F2>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $83,105 $82,704 $78,043 $73,463 $60,031 $57,704 $122,665
Ratio of expenses to
average net assets <F6> 0.92%<F3> 0.91% 0.89% 0.89% 0.66% 0.51% 0.87%<F3>
Ratio of net investment income
to average net assets <F6> 4.20%<F3> 4.31% 4.60% 4.72% 4.78% 4.58% 4.22%<F3>
Ratio of expenses to
average net assets<F1> 1.14%<F3> 1.13% 0.99% 1.05% 0.94% 1.09% 1.07%<F3>
Ratio of net investment income
to average net assets<F1> 3.98%<F3> 4.09% 4.50% 4.56% 4.49% 4.01% 4.02%<F3>
Portfolio turnover <F7> 51% 95% 74% 81% 125% 53% 51%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios
would have been as indicated.
<F2> Not annualized.
<F3> Annualized.
<F4> Period from commencement of operations.
<F5> Effective March 26, 1999, the Gradison Ohio Tax-Free Fund merged into the Victory Ohio Municipal Bond Fund.
<F6> On March 26, 1999, the adviser agreed to waive its management fee or to reimburse expenses, as allowed by law, to the
extent necessary to maintain the net operating expenses of the Class G shares of the Fund at a maximum of 0.91% until
at least April 1, 2001. The Adviser will also waive its management fee for Class A shares to the same extent the fee
is waived for Class G shares until at least April 1, 2001.
<F7> Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of
shares issued.
</FN>
</TABLE>
28
<PAGE>
If you would like a free copy of any of the following documents or would like
to request other information regarding the Funds, you can call or write the
Funds or your Investment Professional.
* Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has
been filed with the Securities and Exchange Commission (SEC), and is
incorporated by reference in this Prospectus.
* Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a
Fund's performance during its last fiscal year.
* How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863). You also may
obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.)
By mail: The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
Copies of this information may be obtained, after paying a duplicating fee,
by electronic request at the following e-mail address: [email protected], or
by writing the SEC's Public Reference Section, Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line
or downloaded from the SEC at http://www.sec.gov or from the Victory Funds'
website at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this Prospectus and the SAI.
If you would like to receive copies of the annual and semi-annual reports
and/or the SAI at no charge, please call the Funds at 800-539-FUND.
(800-539-3863)
(LOGO)(R)
Victory Funds
PRINTED ON RECYCLED PAPER
Investment Company Act File Number 811-4852
VF-TEFI-PRO (12/99)
<PAGE>
December 15, 1999
(LOGO)(R)
Victory Funds
PROSPECTUS
*
Limited Term Income Fund
Class A Shares
Intermediate Income Fund
Class A and G Shares
Government Mortgage Fund
Class A Shares
Investment Quality Bond Fund
Class A and G Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at:
www.victoryfunds.com
<PAGE>
TABLE OF CONTENTS
*
RISK/RETURN SUMMARY FOR EACH OF THE FUNDS
An analysis which includes the investment objective, principal strategies,
principal risks, performance and expenses of each Fund.
INTRODUCTION 1
Limited Term Income Fund, Class A Shares 2
Intermediate Income Fund, Class A and G Shares 4
Government Mortgage Fund, Class A Shares 6
Investment Quality Bond Fund, Class A and G Shares 8
INVESTMENTS 10
RISK FACTORS 11
SHARE PRICE 12
DIVIDENDS, DISTRIBUTIONS, AND TAXES 13
INVESTING WITH VICTORY
* Choosing a Share Class 15
* How to Buy Shares 18
* How to Exchange Shares 21
* How to Sell Shares 22
ORGANIZATION AND MANAGEMENT OF THE FUNDS 24
ADDITIONAL INFORMATION 26
FINANCIAL HIGHLIGHTS
Limited Term Income Fund 27
Intermediate Income Fund 28
Government Mortgage Fund 29
Investment Quality Bond Fund 30
The Victory Portfolios
KEY TO FUND INFORMATION
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its
investment objective.
RISK FACTORS
The risks you may assume as an investor in a Fund.
PERFORMANCE
A summary of the historical performance of a Fund in comparison to an
unmanaged index.
EXPENSES
The costs you will pay, directly or indirectly, as an investor in a Fund,
including sales charges and ongoing expenses.
Shares of the Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the
principal amount invested.
<PAGE>
Introduction
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for
future reference.
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Investment Strategy
Each of the Funds pursues its objective by investing primarily in debt
securities. However, each of the Funds has unique investment strategies and
its own risk/reward profile. Please review the "Risk/Return Summary" for each
Fund and the "Investments" section for an overview.
Risk Factors
Certain Funds may share many of the same risk factors. For example, all of
the Funds are subject to interest rate inflation, reinvestment, and credit
risks. The Funds are not insured by the FDIC. In addition, there are other
potential risks, discussed in each "Risk/Return Summary" and in "Risk
Factors."
Who May Want to Invest in the Funds
* Investors seeking income
* Investors seeking higher potential returns than provided by money market
funds
* Investors willing to accept the risk of price and dividend fluctuations
Share Classes
Each Fund offers Class A Shares. The Intermediate Income Fund and the
Investment Quality Bond Fund also offer Class G Shares. See "Choosing a Share
Class."
The following pages provide you with an overview of each of the Funds. Please
look at the objective, policies, strategies, risks, and expenses to determine
which Fund will suit your risk tolerance and investment needs.
1
<PAGE>
LIMITED TERM INCOME FUND Risk/Return Summary
Investment Objective
The Limited Term Income Fund seeks to provide income consistent with limited
fluctuation of principal.
Principal Investment Strategies
The Limited Term Income Fund pursues its investment objective by investing in
a portfolio of high grade, fixed income securities with a dollar-weighted
average maturity of one to five years, based on remaining maturities.
Under normal conditions, the Limited Term Income Fund primarily invests
in:
* Investment-grade corporate securities, asset-backed securities, convertible
securities and exchangeable debt securities;
* Obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities;
* Mortgage-backed securities issued by government agencies and
non-governmental entities; and
* Commercial paper.
Important Characteristics of the Limited Term Income Fund's Investments:
* Quality: The Limited Term Income Fund will only invest in high-grade debt
securities rated in one of the top four rating categories at the time of
purchase by Standard & Poor's (S&P), Fitch IBCA International (Fitch IBCA),
Moody's Investors Service (Moody's), or another NRSRO,** or if unrated, of
comparable quality. For more information on ratings, see the Appendix to the
Statement of Additional Information (SAI).
* Maturity: The dollar-weighted effective average maturity of the Limited
Term Income Fund will generally range from one to five years. Under certain
market conditions, the portfolio manager may go outside these boundaries.
** An NRSRO is a nationally recognized statistical ratings organization that
assigns credit ratings to securities based on the borrower's ability to meet
its obligation to make principal and interest payments.
The Limited Term Income Fund's high portfolio turnover may result in
higher expenses and taxable gain distributions.
There is no guarantee that the Limited Term Income Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Limited Term Income Fund. The Limited
Term Income Fund is subject to the following principal risks, more fully
described in "Risk Factors." The Limited Term Income Fund's net asset value,
yield and/or total return may be adversely affected if any of the following
occurs:
* The market value of securities acquired by the Limited Term Income Fund
declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Limited Term Income Fund must reinvest interest or sale proceeds at
lower rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Limited Term Income Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
2
<PAGE>
LIMITED TERM INCOME FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Limited Term Income Fund by showing changes in its
performance for various time periods.
The bar chart shows returns for Class A Shares of the Limited Term
Income Fund. Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1990 8.74%
1991 11.49%
1992 5.36%
1993 6.12%
1994 -1.26%
1995 10.97%
1996 4.02%
1997 5.75%
1998 5.96%1
1 The Limited Term Income Fund's year-to-date return as of September 30, 1999
was 1.32%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 3.79% (quarter ending December 31, 1991) and the lowest return for a
quarter was -1.19% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares
of the Limited Term Income Fund for one year, five years and since inception
compare to those of two broad-based market indices. The figures shown in this
table assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998) One Year 5 Years (10/20/89)
Class A 3.87% 4.60% 6.11%
Merrill Lynch 1-3 Year
Treasury Index1 7.00% 5.99% 7.13%
Lehman 1-3 Year
Government Index2 6.97% 5.96% 7.09%
1 The Merrill Lynch 1-3 Year Treasury Index is a broad-based unmanaged index
that represents the general performance of short-term (one to three year)
U.S. Treasury securities.
2 The Lehman Brothers 1-3 Year Government Index is an unmanaged index
comprised of U.S. government agency debt securities that mature in one to
three years.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Limited Term Income Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A
Maximum Sales Charge
Imposed on Purchases
(as a percentage of offering price) 2.00%
Maximum Deferred Sales Charge
(as a percentage of the lower of purchase or sale price) NONE2
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses
(The Limited Term Income Fund pays
these expenses from its assets.)
Management Fees 0.50%
Distribution (12b-1) Fees 0.00%
Other Expenses
(includes a shareholder servicing fee of 0.25%) 0.69%
Total Fund Operating Expenses 1.19%
Fee Waiver / Expense Reimbursement (0.29)%
Net Expenses 0.90%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain
the net operating expenses of Class A Shares of the Limited Term Fund at a
maximum of .90%, until at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Limited Term Income Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Limited Term
Income Fund for the time periods shown and then sell 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 Limited Term Income Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A1 $290 $543 $817 $1,606
1 This Example assumes that Net Annual Fund Operating Expenses will equal
0.90% until February 28, 2001 and will equal 1.19% thereafter.
3
<PAGE>
INTERMEDIATE INCOME FUND Risk/Return Summary
Investment Objective
The Intermediate Income Fund seeks to provide a high level of income.
Investment Policies And Strategy
The Intermediate Income Fund pursues its investment objective by investing in
debt securities. Some of these debt securities are issued by corporations,
the U.S. Government and its agencies and instrumentalities. "Investment
grade" obligations are rated within the top four rating categories by an
NRSRO.
Under normal conditions, the Intermediate Income Fund will invest at
least 65% of its total assets in:
* Investment grade corporate securities, asset-backed securities, convertible
securities, or exchangeable debt securities;
* Obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities;
* Mortgage-related securities issued by government agencies and
non-governmental entities; and
* Commercial paper.
Important characteristics of the Intermediate Income Fund's investments:
* Quality: Investment grade corporate securities rated in the top four rating
categories at the time of purchase by S&P, Fitch IBCA, Moody's or another
NRSRO, or if unrated, of comparable quality.
* Maturity: The dollar-weighted effective average maturity of the
Intermediate Income Fund generally will range from 3 to 10 years. Under
certain market conditions, the portfolio manager may go outside these
boundaries.
The Intermediate Income Fund's high portfolio turnover may result in
higher expenses and taxable gain distributions.
There is no guarantee that the Intermediate Income Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Intermediate Income Fund. The
Intermediate Income Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Intermediate Income Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
* The market value of securities acquired by the Intermediate Income Fund
declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Intermediate Income Fund must reinvest interest or sale proceeds at
lower rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Intermediate Income Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
4
<PAGE>
INTERMEDIATE INCOME FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Intermediate Income Fund by showing changes in its
performance for various time periods.
The bar chart shows returns for Class A Shares of the Intermediate
Income Fund. Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1994 -2.39%
1995 14.03%
1996 3.06%
1997 7.05%
1998 7.51%1
1 The Intermediate Income Fund's year-to-date return as of September 30, 1999
was -0.25%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 4.72% (quarter ending June 30, 1995) and the lowest return for a quarter
was -1.81% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares
of the Intermediate Income Fund for one year, five years and since inception
compare to those of a broad-based market index. The figures shown in this
table assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (12/10/93)
Class A 1.29% 4.46% 4.37%
Lehman Int. Gov't/Corp
Bond Index2 8.44% 6.59% 6.60%
1 The Intermediate Income Fund did not offer Class G Shares prior to December
15, 1999.
2 The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index comprised of investment-grade corporate debt securities and
U.S. Treasury and U.S. government agency debt securities that mature in one
to ten years.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Intermediate Income Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases
(as a percentage of offering price) 5.75% NONE
Maximum Deferred Sales Charge
(as a percentage of the lower
of purchase or sale price) NONE2 NONE
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Intermediate Income Fund pays
these expenses from its assets.)
Management Fees 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable
to Class A Shares) 0.49% 0.34%
Total Fund Operating Expenses 1.24% 1.34%
Fee Waiver / Expense Reimbursement (0.34)% (0.34)%
Net Expenses 0.90%3 1.00%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Estimated Class G expenses are based on historical expenses of Class A
Shares of the Intermediate Income Fund for the fiscal year ended October 31,
1998. The Adviser has contractually agreed to waive its management fee and to
reimburse expenses, as allowed by law, to the extent necessary to maintain
the net operating expenses of Class A Shares and Class G Shares of the
Intermediate Income Fund at a maximum of 0.90% and 1.00%, respectively until
at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Intermediate Income Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Intermediate
Income Fund for the time periods shown and then sell 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 Intermediate Income Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A1 $662 $915 $1,190 $1,981
Class G2 $102 $392 $ 703 $1,588
1 This Example assumes that Net Annual Fund Operating Expenses for Class A
Shares will equal 0.90% until February 28, 2001 and will equal 1.24%
thereafter.
2 This Example assumes that Net Annual Fund Operating Expenses for Class G
Shares will equal 1.00% until February 28, 2001 and will equal 1.34%
thereafter.
5
<PAGE>
GOVERNMENT MORTGAGE FUND Risk/Return Summary
Investment Objective
The Government Mortgage Fund seeks to provide a high level of current income
consistent with safety of principal.
Investment Policies And Strategies
The Government Mortgage Fund pursues its investment objective by investing
exclusively in obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities. Under normal market conditions, at least 80%
of the total assets of the Government Mortgage Fund will be invested in U.S.
government mortgage-backed securities.
Important characteristics of the Government Mortgage Fund's investments:
* Quality: Securities purchased by the Government Mortgage Fund are
considered to be of the highest quality. For more information on ratings, see
the Appendix to the SAI.
* Maturity: The dollar-weighted effective average maturity of the Government
Mortgage Fund generally will not exceed 12 years. Under certain market
conditions, the portfolio manager may go outside these boundaries.
The Government Mortgage Fund's high portfolio turnover may result in
higher expenses and taxable gain distributions.
There is no guarantee that the Government Mortgage Fund will achieve its
objectives.
Proposed Reorganization
The Board of Trustees of the Victory Portfolios has approved a Plan of
Reorganization and Liquidation for the Victory Government Mortgage Fund. At a
special meeting, anticipated to be held in March 2000, shareholders of the
Government Mortgage Fund will be asked to approve the transfer of the assets
of their Fund into Class A Shares of the Victory Fund For Income. If the
reorganization of the Government Mortgage Fund is approved, shareholders will
exchange their Fund shares for Class A shares of the Victory Fund For Income,
and the Victory Government Mortgage Fund will no longer be available for
purchases, exchanges or redemptions. Shareholders will receive shares of the
Fund For Income with the same value as the total value of their Fund shares.
(In other words, a shareholder who owns $1,000 worth of Class A Shares of the
Victory Government Mortgage Fund will receive $1,000 worth of Class A Shares
of the Victory Fund For Income.) The exchange will not be subject to any
sales charges and will not be taxable. The Victory Fund For Income has the
same investment adviser and service providers as the Government Mortgage
Fund.
Principal Risks
You may lose money by investing in the Government Mortgage Fund. The
Government Mortgage Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Government Mortgage Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
* The market value of securities acquired by the Government Mortgage Fund
declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Government Mortgage Fund must reinvest interest or sale proceeds at
lower rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Government Mortgage Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
6
<PAGE>
GOVERNMENT MORTGAGE FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Government Mortgage Fund by showing changes in its
performance for various time periods.
The bar chart shows returns for Class A Shares of the Government
Mortgage Fund. Sales loads are not reflected on the bar chart and if they
were reflected, returns would be lower than those shown.
1991 15.04%
1992 6.25%
1993 8.18%
1994 -2.06%
1995 15.21%
1996 4.19%
1997 8.76%
1998 6.70%1
1 The Government Mortgage Fund's year-to-date return as of September 30, 1999
was 0.12%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 5.54% (quarter ending December 31, 1991) and the lowest return for a
quarter was -2.37% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares
of the Government Mortgage Fund for one year, five years and since inception
compare to those of a broad-based market index. The figures shown in this
table assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998) One Year 5 Years (5/18/90)
Class A 0.57% 5.16% 7.39%
Lehman Mortgage-Backed
Index1 6.96% 7.23% 8.90%
1 The Lehman Brothers Mortgage-Backed Securities Index is a broad-based
unmanaged index that represents the general performance of fixed-rate
mortgage bonds.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Government Mortgage Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A
Maximum Sales Charge
Imposed on Purchases 5.75%
(as a percentage of offering price)
Maximum Deferred Sales Charge
(as a percentage of the lower of purchase or sale price) NONE2
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses
(The Government Mortgage Fund pays
these expenses from its assets.)
Management Fees 0.50%
Distribution (12b-1) Fees 0.00%
Other Expenses
(includes a shareholder servicing fee of 0.25%) 0.58%
Total Fund Operating Expenses 1.08%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed
by law, so that the net operating expenses of Class A Shares of the
Government Mortgage Fund will equal 1.00%. The Adviser may terminate this
waiver/reimbursement at any time.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Government Mortgage Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Government
Mortgage Fund for the time periods shown and then sell 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 Government Mortgage Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $679 $899 $1,136 $1,816
7
<PAGE>
INVESTMENT QUALITY BOND FUND Risk/Return Summary
Investment Objective
The Investment Quality Bond Fund seeks to provide a high level of income.
Investment Policies And Strategies
The Investment Quality Bond Fund pursues its investment objective by
investing primarily in investment-grade bonds issued by corporations and the
U.S. government and its agencies or instrumentalities. "Investment grade"
obligations are rated within the top four rating categories by an NRSRO.
Under normal market conditions, the Investment Quality Bond Fund will
invest at least 80% of its total assets in the following securities:
* Investment grade corporate securities, asset-backed securities, convertible
securities and exchangeable debt securities;
* Mortgage-related securities issued by governmental agencies and
non-governmental entities;
* Obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities; and
* Commercial paper.
Important characteristics of the Investment Quality Bond Fund's
investments:
* Quality: All instruments will be rated, at the time of purchase, within the
four highest rating categories by S&P, Fitch IBCA, Moody's, or another NRSRO,
or, if unrated, be of comparable quality. For more information on ratings,
see the Appendix to the SAI.
* Maturity: The dollar-weighted effective average maturity of the Investment
Quality Bond Fund will range from 5 to 15 years. Individual assets held by
the Investment Quality Bond Fund may vary from the average maturity of the
Fund.
Under certain market conditions, the portfolio manager may go outside
these boundaries.
The Investment Quality Bond Fund's high portfolio turnover may result in
higher expenses and taxable gain distributions.
There is no guarantee that the Investment Quality Bond Fund will achieve
its objectives.
Principal Risks
You may lose money by investing in the Investment Quality Bond Fund. The
Investment Quality Bond Fund is subject to the following principal risks,
more fully described in "Risk Factors." The Investment Quality Bond Fund's
net asset value, yield and/or total return may be adversely affected if any
of the following occurs:
* The market value of securities acquired by the Investment Quality Bond Fund
declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Investment Quality Bond Fund must reinvest interest or sale proceeds at
lower rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Investment Quality Bond Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
8
<PAGE>
INVESTMENT QUALITY BOND FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Investment Quality Bond Fund by showing changes in its
performance for various time periods.
The bar chart shows returns for Class A Shares of the Investment Quality
Bond Fund. Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1994 -2.62%
1995 16.66%
1996 2.46%
1997 8.45%
1998 7.51%1
1 The Investment Quality Bond Fund's year-to-date return as of September 30,
1999 was -1.75%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 5.85% (quarter ending June 30, 1995) and the lowest return for a quarter
was -2.51% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares
of the Investment Quality Bond Fund for one year, five years and since
inception compare to those of a broad-based market index. The figures shown
in this table assume reinvestment of dividends and distributions and reflect
all applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (12/10/93)
Class A 1.30% 5.04% 4.91%
Lehman Aggregate Index2 8.69% 7.27% 7.32%
1 The Investment Quality Bond Fund did not offer Class G Shares prior to
December 15, 1999.
2 The Lehman Brothers Aggregate Bond Index is a broad-based unmanaged index
that represents the general performance of longer-term (greater than one
year), investment-grade fixed-income securities.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Investment Quality Bond Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases
(as a percentage of offering price) 5.75% NONE
Maximum Deferred Sales Charge
(as a percentage of the lower of
purchase or sale price) NONE2 NONE
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Investment Quality Bond Fund pays
these expenses from its assets.)
Management Fees 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.25%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable
to Class A Shares) 0.60% 0.35%
Total Fund Operating Expenses 1.35% 1.35%
Fee Waiver / Expense Reimbursement (0.25)% (0.25)%
Net Expenses 1.10%3 1.10%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Estimated Class G expenses are based on historical expenses of Class A
Shares of the Investment Quality Bond Fund for the fiscal year ended October
31, 1998. The Adviser has contractually agreed to waive its management fee
and to reimburse expenses, as allowed by law, to the extent necessary to
maintain the net operating expenses of Class A Shares and Class G Shares of
the Investment Quality Bond Fund at a maximum of 1.10% until at least
February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Investment Quality Bond Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the
Investment Quality Bond Fund for the time periods shown and then sell 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 Investment Quality Bond
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A1 $681 $956 $1,252 $2,101
Class G1 $112 $404 $ 717 $1,606
1 This Example assumes that Net Annual Fund Operating Expenses for Class A
Shares and Class G Shares will equal 1.10% until February 28, 2001 and will
equal 1.35% thereafter.
9
<PAGE>
Investments
The following describes some of the types of securities the Funds may
purchase under normal market conditions. All Funds will not buy all of the
securities listed below.
For cash management or for temporary defensive purposes in response to
market conditions, each Fund may hold all or a portion of its assets in cash
or short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause a Fund to fail to meet its investment
objective.
For more information on ratings, detailed descriptions of each of these
investments, and a more complete description of which Funds can invest in
certain types of securities, see the SAI.
U.S. Government Securities. Notes and bonds issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Some are direct obligations of
the U.S. Treasury; others are obligations only of the U.S. agency.
Corporate Debt Obligations. Debt instruments issued by public corporations.
They may be secured or unsecured.
Asset Backed Securities. Debt securities backed by loans or accounts
receivable originated by banks, credit card companies, student loan issuers,
or other providers of credit. These securities may be enhanced by a bank
letter of credit or by insurance coverage provided by a third party.
Convertible or Exchangeable Corporate Debt Obligations. Debt instruments
which may be exchanged or converted to other securities.
Mortgage-Backed Securities. Instruments secured by a mortgage or pools of
mortgages.
When-Issued and Delayed-Delivery Securities. A security that is purchased for
delivery at a later time. The market value may change before the delivery
date, and the value is included in the net asset value of a Fund.
Zero Coupon Bonds. These securities are purchased at a discount from face
value. The bond's face value is received at maturity, with no interest
payments before then. These securities may be subject to greater risks of
price fluctuation than securities that periodically pay interest.
Yankee Securities. Debt instruments issued by non-domestic issuers and traded
in U.S. dollars.
Receipts. Separately traded interest or principal components of U.S.
government securities.
Dollar-Weighted Effective Average Maturity. Based on the value of a Fund's
investments in securities with different maturity dates. This measures the
sensitivity of a debt security's value to changes in interest rates. Longer
term debt securities are more volatile than shorter term debt securities
because their prices are more sensitive to interest rate changes. Therefore,
the NAV of a fund with a longer dollar-weighted effective average maturity
may fluctuate more.
10
<PAGE>
Risk Factors
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
An investment in a Fund is not a complete investment program.
This Prospectus describes the principal risks that you may assume as an
investor in the Funds. The "Investments" section in this Prospectus provides
additional information on the securities mentioned in the Risk/Return Summary
for each Fund. As with any mutual fund, there is no guarantee that the Funds
will earn income or show a positive total return over time. Each Fund's
price, yield, and total return will fluctuate. You may lose money if a Fund's
investments do not perform well.
Each Fund is subject to the principal risks described below.
General risks:
* Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for the security, or more or less than the security was worth
at an earlier time. Market risk may affect a single issuer, an industry, a
sector of the economy, or the entire market and is common to all investments.
* Manager risk is the risk that a Fund's portfolio manager may use a strategy
that does not produce the intended result. Manager risk also refers to the
possibility that the portfolio manager may fail to execute the Fund's
investment strategy effectively and, thus, fail to achieve its objective.
Risks associated with investing in debt securities:
* Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a debt security typically goes down. When interest rates go
down, the value of a debt security typically goes up. Generally, the market
values of securities with longer maturities are more sensitive to changes in
interest rates.
* Inflation risk is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities or equity securities that have a record of dividend growth.
* Reinvestment risk is the risk that when interest rates are declining a Fund
that receives interest income or prepayments on a security will have to
reinvest these moneys at lower interest rates. Generally, interest rate risk
and reinvestment risk tend to have offsetting effects, though not necessarily
of the same magnitude.
* Credit (or default) risk is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although the
Funds generally invest in only high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities. Credit
risk is measured by NRSROs such as S&P, Fitch IBCA, or Moody's.
11
<PAGE>
Risk Factors (continued)
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own gives you the value of your investment.
Risks associated with investing in mortgage-related securities:
* Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. The level
of interest rates and other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the prepayment rate tends
to decrease, lengthening the average life of a pool of mortgage-related
securities. In periods of falling interest rates, the prepayment rate tends
to increase, shortening the average life of a pool of mortgage-related
securities. Prepayment risk is the risk that, because prepayments generally
occur when interest rates are falling, a Fund may have to reinvest the
proceeds from prepayments at lower interest rates.
* Extension risk is the risk that the rate of anticipated prepayments on
principal may not occur, typically because of a rise in interest rates, and
the expected maturity of the security will increase. During periods of
rapidly rising interest rates, the effective average maturity of a security
may be extended past what a Fund's portfolio manager anticipated that it
would be. The market value of securities with longer maturities tend to be
more volatile.
Share Price
Each Fund calculates its share price, called its "net asset value" (NAV),
each business day at 4:00 p.m. Eastern Time or at the close of trading on the
New York Stock Exchange Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based
on the NAV that is calculated after you place your order. A business day is a
day on which the NYSE is open.
A Fund's NAV may change on days when shareholders will not be able to
purchase or redeem a Fund's shares if a Fund has portfolio securities that
are listed on foreign exchanges that trade on weekends or other days when a
Fund does not price its shares.
The Funds value their investments based on market value. When market
quotations are not readily available, the Funds value their investments based
on fair value methods approved by the Board of Trustees of the Victory
Portfolios. Each Class of each Fund calculates its NAV by adding up the total
value of its investments and other assets, subtracting its liabilities, and
then dividing that figure by the number of outstanding shares of the Class.
Total Assets-Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find a Fund's net asset value each day in The Wall Street
Journal and other newspapers. Newspapers do not normally publish fund
information until a Fund reaches a specific number of shareholders or level
of assets.
12
<PAGE>
Dividends, Distributions, and Taxes
Buying a Dividend. You should check a Fund's distribution schedule before you
invest. If you buy shares of a Fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.
As a shareholder, you are entitled to your share of net income and capital
gains on a Fund's investments. The Funds pass their earnings along to
investors in the form of dividends. Dividend distributions are the net income
earned on investments after expenses. Each Fund will distribute short-term
gains, as necessary, and if a Fund makes a long-term capital gain
distribution, it is normally paid once a year. As with any investment, you
should consider the tax consequences of an investment in a Fund.
Ordinarily, the Funds declare and pay dividends monthly.
Distributions can be received in one of the following ways.
Reinvestment Option
You can have distributions automatically reinvested in additional shares of a
Fund. If you do not indicate another choice on your Account Application, you
will be assigned this option automatically.
Cash Option
A check will be mailed to you no later than seven days after the pay date.
Income Earned Option
You can automatically reinvest your dividends in additional shares of a Fund
and have your capital gains paid in cash, or reinvest capital gains and have
your dividends paid in cash.
Directed Dividends Option
You can automatically reinvest distributions in the same class of shares of
another fund of the Victory Group. If you reinvest your distributions in a
different class of another fund, you may pay a sales charge on the reinvested
distributions.
Directed Bank Account Option
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, the Transfer Agent
will transfer your distributions within seven days of the dividend payment
date. The bank account must have a registration identical to that of your
Fund account.
13
<PAGE>
Dividends, Distributions, and Taxes (continued)
The tax information in this Prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in a Fund.
* Important Information about Taxes
The Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
* Ordinary dividends from a Fund are taxable as ordinary income; dividends
from a Fund's long-term capital gain are taxable as long-term capital gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* Dividends from a Fund that are attributable to interest on certain U.S.
government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to U.S.
government obligations will be provided with tax statements you receive from
a Fund.
* An exchange of a Fund's shares for shares of another fund will be treated
as a sale. When you sell or exchange shares of a Fund, you must recognize any
gain or loss.
* Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
* Tax statements will be mailed from a Fund every January showing the amounts
and tax status of distributions made to you.
* Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
14
<PAGE>
Investing with Victory
All you need to do to get started is to fill out an application.
For historical expense information on Class A and G shares, see the
"Financial Highlights" at the end of this Prospectus.
If you are looking for a convenient way to open an account or to add money to
an existing account, Victory can help. The sections that follow will serve as
a guide to your investments with Victory. "Choosing a Share Class" will help
you decide whether it would be more to your advantage to buy Class A or Class
G Shares of a Fund. The following sections will describe how to open an
account, how to access information on your account, and how to buy, exchange,
and sell shares of a Fund. We want to make it simple for you to do business
with us. If you have questions about any of this information, please call
your Investment Professional or one of our customer service representatives
at 800-539-FUND. They will be happy to assist you.
Each Fund described in this prospectus offers Class A Shares, which have a
front-end sales charge of 2.00% to 5.75%, depending upon the Fund in which
you invest. Please look at the "Fund Expenses" section of the Fund in which
you are investing to find the sales charge.
Choosing a Share Class
Each Fund offers Class A Shares. The Intermediate Income Fund and Investment
Quality Bond Fund also offer Class G Shares.
Each class has its own cost structure, allowing you to choose the one
that best meets your requirements. Your Investment Professional also can help
you decide.
CLASS A
* Front-end sales charge, as described on the next page. There are several
ways to reduce this charge.
CLASS G
* No front-end sales charge. All your money goes to work for you right away.
* No deferred sales charge.
* Class G Shares are sold only by certain broker-dealers.
15
<PAGE>
Choosing a Share Class (continued)
An Investment Professional is an investment consultant, salesperson,
financial planner, investment adviser, or trust officer who provides you with
investment information.
* Calculation of Sales Charges -- Class A
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are listed in the following table.
Your Investment in:
o Intermediate Income Fund Sales Charge Sales Charge
o Government Mortgage Fund as a % of as a % of
o Investment Quality Bond Fund Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.
Sales Charge Sales Charge
Your Investment in: as a % of as a % of
o Limited Term Income Fund Offering Price Your Investment
Up to $49,999 2.00% 2.04%
$50,000 up to $99,999 1.75% 1.78%
$100,000 up to $249,999 1.50% 1.52%
$250,000 up to $499,999 1.25% 1.27%
$500,000 up to $999,999 1.00% 1.01%
$1,000,000 and above* 0.00% 0.00%
* Except as indicated in the last sentence of this note, there is no initial
sales charge on purchases of $1 million or more. However, a contingent
deferred sales charge (CDSC) of up to 1.00% will be charged to the
shareholder if any shares are redeemed in the first year after purchase, or
at 0.50% within two years of the purchase. This charge will be based on
either the cost of the shares or net asset value at the time of redemption,
whichever is lower. There will be no CDSC on reinvested distributions. The
initial sales charge exemption for investments of $1 million or more does not
apply to tax deferred retirement accounts (except IRA accounts); the sales
charge on investments by such tax deferred retirement accounts of $1 million
or more is the same as for investments between $500,000 and $999,999.
16
<PAGE>
Choosing a Share Class (continued)
* Sales Charge Reductions and Waivers
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of a Fund over a 13-month
period and receive the same sales charge as if all shares had been purchased
at one time. You must start with a minimum initial investment of 5% of the
total amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares
you already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds (excluding the
money market funds) for purposes of calculating the sales charge. The
combination privilege also allows you to combine the total investments from
the accounts of household members of your immediate family (spouse and
children under 21) for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers"**, and
dealers who have an agreement with the Distributor and any trade organization
to which the Adviser or the Administrator belong.
b. Investors who buy shares for trust or other advisory accounts established
with KeyCorp or its affiliates.
c. Investors in Class A Shares who reinvest a distribution from a deferred
compensation plan, agency, trust, or custody account that was maintained by
KeyBank National Association or its affiliates, the Victory Group, or
invested in a fund of the Victory Group.
d. Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales charge
for those shares.
e. Investment Professionals who purchased Fund shares for fee-based
investment products or accounts, selling brokers, and their sales
representatives.
f. Purchase of shares in connection with financial institution sponsored
bundled omnibus retirement programs sponsored by financial institutions that
have entered into agreements with the Funds' Distributor in connection with
the operational requirements of such programs.
g. Participants in tax-deferred retirement plans who purchased shares
pursuant to waiver provisions in effect prior to December 15, 1999.
** Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
* Shareholder Servicing Plan
The Funds have adopted a Shareholder Servicing Plan for Class A Shares of the
Funds. The shareholder servicing agent performs a number of services for its
customers who are shareholders of a Fund. It establishes and maintains
accounts and records, processes dividend payments, arranges for bank wires,
assists in transactions, and changes account information. For these services
a Fund pays a fee at an annual rate of up to 0.25% of the average daily net
assets of the appropriate class of shares serviced by the agent. The Funds
may enter into agreements with various shareholder servicing agents,
including KeyBank National Association and its affiliates, other financial
institutions, and securities brokers. The Funds may pay a servicing fee to
broker-dealers and others who sponsor "no transaction fee" or similar
programs for the purchase of shares. Shareholder servicing agents may waive
all or a portion of their fee periodically.
17
<PAGE>
Choosing a Share Class (continued)
* Distribution Plan
In accordance with Rule 12b-1 under the Investment Company Act of 1940,
Victory has adopted a Distribution and Service Plan for Class A Shares of the
Funds, under which these shares do not pay any expenses.
Victory has also adopted a Distribution and Service Plan for Class G
Shares of the Intermediate Income Fund and Investment Quality Bond Fund,
under which these shares will pay to the distributor a monthly service fee at
an annual rate of 0.25% of the average daily net assets of each Fund. The
service fee is paid to securities broker-dealers or other financial
intermediaries for providing personal services to shareholders of these
Funds, including responding to inquiries, providing information to
shareholders about their fund accounts, establishing and maintaining accounts
and records, processing dividend and distribution payments, arranging for
bank wires, assisting in transactions, and changing account information. Each
Fund may enter into agreements with various shareholder servicing agents,
including KeyCorp and its affiliates, and with other financial institutions
that provide such services.
Because Rule 12b-1 fees are paid out of a Fund's assets on an ongoing
basis, over time, these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum initial investment
required to open an account is $500 ($100 for IRAs), with additional
investments of at least $25. You can send in your payment by check, wire
transfer, exchange from another Victory Fund, or through arrangements with
your Investment Professional. Sometimes an Investment Professional will
charge you for these services. Their fee will be in addition to, and
unrelated to, the fees and expenses charged by a Fund.
If you buy shares directly from the Funds and your investment is
received and accepted by 4:00 p.m. Eastern Time or the close of trading on
the NYSE (whichever time is earlier), your purchase will be processed the
same day using that day's share price.
Make your check payable to:
The
Victory
Funds
18
<PAGE>
How to Buy Shares (continued)
Telecommunication Device for the Deaf (TDD):
800-970-5296
Keep the following addresses handy for purchases, exchanges, or redemptions:
By Regular U.S. Mail
Send completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
580 Walnut Street
Cincinnati, OH 45202
or
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
By Overnight Mail
Use the following address ONLY for overnight packages.
The Victory Funds
580 Walnut Street
Cincinnati, OH 45202
or
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
By Wire
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring
funds to obtain a confirmation number.
The Victory Funds
Firstar Bank
ABA #042000013
For Credit to DDA
Account #821602133
(insert account number, name, and confirmation number assigned by the Fund)
or
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
(insert account number, name, and confirmation number assigned by the Fund)
By Telephone
800-539-FUND
(800-539-3863)
19
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement
and send it with your check to the address indicated.
* ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up an ACH account. Currently, the Funds do not
charge a fee for ACH transfers.
* Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up
by an Investment Professional, account activity will be detailed in your
account statements. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Funds. By January 31 of each year, you
will be mailed an IRS form reporting distributions for the previous year,
which also will be filed with the IRS.
* Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual,
or annual investments. You should attach a voided personal check so the
proper information can be obtained. You must first meet the minimum
investment requirement of $500, then we will make automatic withdrawals of
the amount you indicate ($25 or more) from your bank account and invest it in
shares of a Fund.
* Retirement Plans
You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Funds
for details regarding an IRA or other retirement plan that works best for
your financial situation.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you will be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only buy or
exchange into fund shares legally available in your state. If your account
falls below $500, we may ask you to re-establish the minimum investment. If
you do not do so within 60 days, we may close your account and send you the
value of your account.
20
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling 800-539-FUND
You can sell shares of one fund of the Victory Portfolios to buy shares of
another. This is considered an exchange. You may exchange shares of one
Victory fund for shares of the same class of any other, generally without
paying any additional sales charges.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the
following in mind:
* Shares of the Fund selected for exchange must be available for sale in your
state of residence.
* The Fund whose shares you would like to exchange and the fund whose shares
you want to buy must offer the exchange privilege.
* Shares of a Fund may be exchanged at relative net asset value. This means
that if you own Class A shares of a Fund, you can only exchange them for
Class A shares of another fund and not pay a sales charge. The same rules
apply to Class G Shares, except that holders of Class G Shares who acquired
their shares as a result of the reorganization of the Gradison Funds into the
Victory Funds can exchange into Class A Shares of any Victory Fund that does
not offer Class G Shares without paying a sales charge.
* If you exchange into a fund with a higher sales charge, you pay the
percentage-point difference between that fund's sales charge and any sales
charge you have previously paid in connection with the shares you are
exchanging. If you exchange from the Limited Term Income Fund to buy Class A
shares of another fund in the Victory Group that has a 5.75% sales charge,
you would pay the 3.75% difference in sales charge.
* You must meet the minimum purchase requirements for the fund you buy by
exchange.
* The registration and tax identification numbers of the two accounts must be
identical.
* You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
* Each Fund may refuse any exchange purchase request if the Adviser
determines that the request is associated with a market timing strategy. Each
Fund may terminate or modify the exchange privilege at any time on 30 days'
notice to shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
21
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the
same mailing addresses listed for purchases.
If your request is received in good order by 4:00 p.m. Eastern Time or the
close of trading on the NYSE (whichever time is earlier), your redemption
will be processed the same day.
By Telephone
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one
of the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and
takes measures to verify the identity of the caller. If the Transfer Agent
properly acts on telephone instructions and follows reasonable procedures to
ensure against unauthorized transactions, neither Victory, its servicing
agents, the Adviser, nor the Transfer Agent will be responsible for any
losses. If the Transfer Agent does not follow these procedures, it may be
liable to you for losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach
the Transfer Agent or your Investment Professional by telephone, consider
placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to sell shares. Send us a
letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account; or
* The redemption proceeds are being transferred to another Victory Group
account with a different registration.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
By Wire
If you want to sell shares by wire, you must establish a Fund account that
will accommodate wire transactions. If you call by 4:00 p.m. Eastern time or
the close of trading on the NYSE (whichever time is earlier), your funds will
be wired on the next business day.
By ACH
Normally, your redemption will be processed on the same day or the next day
if received after 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier). It will be transferred by ACH as long as the
transfer is to a domestic bank.
22
<PAGE>
How to Sell Shares (continued)
* Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more.
Once again, we will need a voided personal check to activate this feature.
You should be aware that your account eventually may be depleted and that
each withdrawal will be a taxable transaction. However, you cannot
automatically close your account using the Systematic Withdrawal Plan. If
your balance falls below $500, we may ask you to bring the account back to
the minimum balance. If you decide not to increase your account to the
minimum balance, your account may be closed and the proceeds mailed to you.
* Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be
held until the purchase check has cleared, which may take up to 15 days.
* A Fund may suspend your right to redeem your shares in the following
circumstances:
o During non-routine closings of the NYSE;
o When the Securities and Exchange Commission (SEC) determines either that
trading on the NYSE is restricted or that an emergency prevents the sale or
valuation of the Fund's securities; or
o When the SEC orders a suspension to protect the Fund's shareholders.
* Each Fund will pay redemptions by any one shareholder during any 90-day
period in cash up to the lesser of $250,000 or 1% of the Fund's net assets.
Each Fund reserves the right to pay the remaining portion "in kind," that is,
in portfolio securities rather than cash.
23
<PAGE>
Organization and Management of the Funds
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
* About Victory
Each Fund is a member of the Victory Funds, a group of more than 30 distinct
investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Funds.
* The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered
as an investment adviser with the SEC, is the Adviser to each of the Funds.
KAM, a subsidiary of KeyCorp, oversees the operations of the Funds according
to investment policies and procedures adopted by the Board of Trustees.
Affiliates of the Adviser manage approximately $79 billion for a limited
number of individual and institutional clients. KAM's address is 127 Public
Square, Cleveland, Ohio 44114.
During the fiscal year ended October 31, 1998, KAM was paid an advisory
fee at an annual rate based on a percentage of the average daily net assets
of each Fund (after waivers) as follows:
Government Mortgage Fund 0.50%
Intermediate Income Fund 0.62%
Limited Term Income Fund 0.48%
Investment Quality Bond Fund 0.62%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc.,
the Funds' administrator, pays KAM a fee at the annual rate of up to 0.05% of
each Fund's average daily net assets to perform some of the administrative
duties for the Funds.
* Portfolio Management
Deborah Svoboda has been the portfolio manager of the Limited Term Income
Fund since September 1998. Ms. Svoboda has been Portfolio Manager and
Managing Director of KAM since 1998, prior to which she was a Senior Vice
President responsible for asset-backed securities syndication and marketing
for McDonald & Company Investments Inc.
Matthew D. Meyer is the portfolio manager of the Intermediate Income
Fund, a position he has held since May 1, 1999. He has been a Senior
Portfolio Manager and Director in the Taxable Fixed Income Group of KAM since
January 25, 1999. Prior to this position, he was employed by McDonald &
Company as a First Vice President, Senior Mortgage-Backed Securities Trader
since 1995. Prior to this position, he was a Mortgage-Backed and Agency
Securities Trader with First Tennessee National Corporation from February
1993 to December 1995. He has been in the fixed income securities business
since 1987.
Trenton T. Fletcher is the portfolio manager of the Government Mortgage
Fund, a position he has held since January, 1998. A Portfolio Manager and
Director of KAM, he has been working in the fixed income markets at KAM since
1989.
Richard T. Heine is the portfolio manager of the Investment Quality Bond
Fund, a position he has held since its inception in 1993. A Portfolio Manager
and Director with KAM, he has been in the investment advisory business since
1977.
24
<PAGE>
Organization and Management of the Funds (continued)
The Funds are supervised by the Board of Trustees which monitors the services
provided to investors.
OPERATIONAL STRUCTURE OF THE FUNDS
Trustees
Adviser
Shareholders
Financial Services Firms and their Investment Professionals
Advise current and prospective shareholders on their Fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy and
sell requests, distribution of dividends, and servicing of shareholder
accounts.
Administrator, Distributor, and Fund Accountant
BISYS Fund Services
and its affiliates
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares through Investment Professionals, and
calculates the value of shares. As Administrator, handles the day-to-day
activities of the Funds.
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles
trades made by the Funds.
Sub-Administrator
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain sub-administrative services.
25
<PAGE>
Additional Information
Some additional information you should know about the Funds.
If you would like to receive additional copies of any materials, please call
the Funds at 800-539-FUND.
* Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
* Banking Laws
The Adviser is a subsidiary of a bank holding company. Banking laws,
including the Glass-Steagall Act, currently prevent a bank holding company or
its affiliates from sponsoring, organizing, or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may
act as an investment adviser, transfer agent, custodian, or shareholder
servicing agent. They also may pay third parties for performing these
functions and buy shares of such an investment company for their customers.
On November 12, 1999, President Clinton signed a bill repealing the
Glass-Steagall Act. As a result, the Adviser or its affiliates may in the
future perform certain functions for the Funds that previously were not
permitted under federal law.
* Performance
The Victory Funds may advertise the performance of each Fund by comparing it
to other mutual funds with similar objectives and policies. Performance
information also may appear in various publications. Any fees charged by
Investment Professionals may not be reflected in these performance
calculations. Advertising information may include the yield and average
annual total return of each Fund calculated on a compounded basis for
specified periods of time. Yield and total return information will be
calculated according to rules established by the SEC. Such information may
include performance rankings and similar information from independent
organizations, such as Lipper, Inc., and industry publications such as
Morningstar Inc., Business Week, or Forbes. You also should see the
"Investment Performance" section for the Fund in which you would like to
invest.
* Year 2000 Issues
Like all mutual funds, the Funds could be adversely affected if the computer
systems used by its service providers, including shareholder servicing
agents, are unable to recognize dates after 1999. The risk of such a computer
failure may be greater as it relates to investments in foreign countries. The
Funds' service providers have been actively updating their systems to be able
to process Year 2000 data. There can be no assurance, however, that these
steps will be adequate to avoid a temporary service disruption or other
adverse impact on the Funds. In addition, an issuer's failure to process
accurately Year 2000 data may cause that issuer's securities to decline in
value or delay the payment of interest to a Fund.
* Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only one
copy of any financial reports, prospectuses, and their supplements.
26
<PAGE>
Financial Highlights Limited Term Income Fund
The Financial Highlights table is intended to help you understand the Limited
Term Income Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Limited
Term Income Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the Limited Term Income Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Limited Term Income Fund. The financial highlights for the five
fiscal years ended October 31, 1998 were audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements of the Limited Term
Income Fund, are included in the Fund's annual report, which is available by
calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Six
Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
Apr. 30, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995<F2> 1994
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.06 $ 9.94 $ 10.01 $ 10.15 $ 9.88 $ 10.53
Investment Activities
Net investment income 0.25 0.54 0.61 0.63 0.57 0.54
Net realized and unrealized gains
(losses) from investments (0.19) 0.12 (0.07) (0.14) 0.27 (0.61)
Total from Investment Activities 0.06 0.66 0.54 0.49 0.84 (0.07)
Distributions
Net investment income (0.25) (0.54) (0.61) (0.62) (0.57) (0.54)
In excess of net investment income -- -- -- (0.01) -- --
Net realized gains -- -- -- -- -- (0.04)
Total Distributions (0.25) (0.54) (0.61) (0.63) (0.57) (0.58)
Net Asset Value, End of Period $ 9.87 $ 10.06 $ 9.94 $ 10.01 $ 10.15 $ 9.88
Total Return (excludes sales charges) 0.61%<F3> 6.86% 5.57% 4.94% 8.77% (0.66)%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $78,922 $81,343 $81,913 $90,019 $172,002 $79,150
Ratio of expenses to
average net assets 0.94%<F4> 0.87% 0.85% 0.86% 0.78% 0.79%
Ratio of net investment income
to average net assets 5.06%<F4> 5.44% 6.06% 5.90% 5.77% 5.29%
Ratio of expenses to
average net assets<F1> 1.07%<F4> 1.02% 0.87% 0.89% 0.79% 0.97%
Ratio of net investment income
to average net assets<F1> 4.93%<F4> 5.29% 6.04% 5.87% 5.76% 5.10%
Portfolio turnover 126% 177% 139% 221% 97% 41%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not
occurred, the ratios would have been as indicated.
<F2> Effective June 5, 1995, the Victory Short-Term Government Income Portfolio merged into the Limited
Term Income Fund. Financial highlights for the periods prior to June 5, 1995 represent the Limited Term Income Fund.
<F3> Not annualized.
<F4> Annualized.
</FN>
</TABLE>
27
<PAGE>
Financial Highlights Intermediate Income Fund
The Financial Highlights table is intended to help you understand the
Intermediate Income Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Intermediate Income Fund. The total returns in the table represent the rate
that an investor would have earned on an investment in the Intermediate
Income Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Intermediate Income Fund. The financial highlights for the four
fiscal years ended October 31, 1998 and the period from December 30, 1993 to
October 31, 1994 were audited by PricewaterhouseCoopers LLP, whose report,
along with the financial statements of the Intermediate Income Fund, are
included in the Fund's annual report, which is available by calling the Fund
at 800-539-FUND.
<TABLE>
<CAPTION>
Six
Months Year Year Year Year Dec. 30,
Ended Ended Ended Ended Ended 1993
Apr. 30, Oct. 31, Oct. 31, Oct. 31, Oct. 31, to Oct. 31,
1999 1998 1997 1996 1995 1994<F2>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.85 $ 9.61 $ 9.56 $ 9.69 $ 9.25 $ 10.00
Investment Activities
Net investment income 0.24 0.53 0.56 0.56 0.60 0.52
Net realized and unrealized gains
(losses) from investments (0.22) 0.24 0.05 (0.13) 0.44 (0.76)
Total from Investment Activities 0.02 0.77 0.61 0.43 1.04 (0.24)
Distributions
Net investment income (0.24) (0.53) (0.56) (0.56) (0.60) (0.51)
Net realized gains (0.01) -- -- -- -- --
Total Distributions (0.25) (0.53) (0.56) (0.56) (0.60) (0.51)
Net Asset Value, End of Period $ 9.62 $ 9.85 $ 9.61 $ 9.56 $ 9.69 $ 9.25
Total Return (excludes sales charges) 0.27%<F3> 8.30% 6.62% 4.56% 11.65% (2.48)%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $246,398 $256,267 $248,841 $272,087 $163,281 $112,923
Ratio of expenses to
average net assets 0.99%<F4> 0.96% 0.96% 0.94% 0.82% 0.79%<F4>
Ratio of net investment income
to average net assets 5.11%<F4> 5.48% 5.87% 5.81% 6.32% 6.23%<F4>
Ratio of expenses to
average net assets<F1> 1.27%<F4> 1.24% 1.09% 1.11% 1.06% 1.25%<F4>
Ratio of net investment income
to average net assets<F1> 4.83%<F4> 5.20% 5.74% 5.64% 6.08% 5.77%<F4>
Portfolio turnover 152% 318% 195% 164% 98% 55%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not
occurred, the ratios would have been as indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
</FN>
</TABLE>
28
<PAGE>
Financial Highlights Government Mortgage Fund
The Financial Highlights table is intended to help you understand the
Government Mortgage Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Government Mortgage Fund. The total returns in the table represent the rate
that an investor would have earned on an investment in the Government
Mortgage Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Government Mortgage Fund. The financial highlights for the five
fiscal years ended October 31, 1998 were audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements of the Government
Mortgage Fund, are included in the Fund's annual report, which is available
by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Six
Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
Apr. 30, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996 1995 1994
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.07 $ 10.93 $ 10.76 $ 10.86 $ 10.33 $ 11.36
Investment Activities
Net investment income 0.30 0.63 0.69 0.70 0.72 0.68
Net realized and unrealized gains
(losses) from investments (0.13) 0.14 0.16 (0.12) 0.62 (1.02)
Total from Investment Activities 0.17 0.77 0.85 0.58 1.34 (0.34)
Distributions
Net investment income (0.30) (0.63) (0.68) (0.67) (0.71) (0.67)
Net realized gains -- -- -- -- -- (0.02)
In excess of net realized gains -- -- -- -- (0.08) --
Tax return of capital -- -- <F3> (0.01) (0.02) --
Total Distributions (0.30) (0.63) (0.68) (0.68) (0.81) (0.69)
Net Asset Value, End of Period $ 10.94 $ 11.07 $ 10.93 $ 10.76 $ 10.86 $ 10.33
Total Return (excludes sales charges) 1.57%<F4> 7.23% 8.22% 5.54% 13.55% (3.01)%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $103,995 $105,085 $103,761 $125,992 $136,103 $148,168
Ratio of expenses to
average net assets 0.96%<F5> 0.88% 0.85% 0.89% 0.77% 0.76%
Ratio of net investment income
to average net assets 5.56%<F5> 5.72% 6.32% 6.46% 6.81% 6.38%
Ratio of expenses to
average net assets<F1> 1.08%<F5> 1.01% <F2> 0.90% 0.79% 0.96%
Ratio of net investment income
to average net assets<F1> 5.44%<F5> 5.59% <F2> 6.45% 6.80% 6.18%
Portfolio turnover 156% 296% 115% 127% 59% 132%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not
occurred, the ratios would have been as indicated.
<F2> There were no voluntary fee reductions during the period.
<F3> Amount rounds to less than $0.01.
<F4> Not annualized.
<F5> Annualized.
</FN>
</TABLE>
29
<PAGE>
Financial Highlights Investment Quality Bond Fund
The Financial Highlights table is intended to help you understand the
Investment Quality Bond Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Investment Quality Bond Fund. The total returns in the table represent the
rate that an investor would have earned on an investment in the Investment
Quality Bond Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Investment Quality Bond Fund. The financial highlights for the
four fiscal years ended October 31, 1998 and the period from December 30,
1993 to October 31, 1994 were audited by PricewaterhouseCoopers LLP, whose
report, along with the financial statements of the Investment Quality Bond
Fund, are included in the Fund's annual report, which is available by calling
the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Six
Months Year Year Year Year Dec. 30,
Ended Ended Ended Ended Ended 1993
Apr. 30, Oct. 31, Oct. 31, Oct. 31, Oct. 31, to Oct. 31,
1999 1998 1997<F6> 1996 1995<F5> 1994<F2>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.00 $ 9.78 $ 9.63 $ 9.76 $ 9.10 $ 10.00
Investment Activities
Net investment income 0.26 0.55 0.57 0.57 0.62 0.53
Net realized and unrealized gains
(losses) from investments (0.23) 0.22 0.14 (0.13) 0.67 (0.92)
Total from Investment Activities 0.03 0.77 0.71 0.44 1.29 (0.39)
Distributions
Net investment income (0.26) (0.55) (0.56) (0.56) (0.62) (0.51)
In excess of net investment income -- -- -- -- (0.01) --
Tax return of capital -- -- -- (0.01) -- --
Total Distributions (0.26) (0.55) (0.56) (0.57) (0.63) (0.51)
Net Asset Value, End of Period $ 9.77 $ 10.00 $ 9.78 $ 9.63 $ 9.76 $ 9.10
Total Return (excludes sales charges) 0.25%<F3> 8.06% 7.67% 4.65% 14.63% (3.92)%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $159,065 $169,932 $181,007 $150,807 $125,248 $94,685
Ratio of expenses to
average net assets 1.10%<F4> 1.06% 1.04% 1.01% 0.88% 0.79%<F4>
Ratio of net investment income
to average net assets 5.22%<F4> 5.49% 5.90% 5.99% 6.59% 6.33%<F4>
Ratio of expenses to
average net assets<F1> 1.35%<F4> 1.31% 1.17% 1.14% 1.10% 1.25%<F4>
Ratio of net investment income
to average net assets<F1> 4.97%<F4> 5.24% 5.77% 5.86% 6.37% 5.87%<F4>
Portfolio turnover 226% 492% 249% 182% 160% 90%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such voluntary fee reductions
had not occurred, the ratios would have been as indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
<F5> Effective June 5, 1995, the Victory Corporate Bond Portfolio merged into the Investment
Quality Bond Fund. Financial highlights for the periods prior to June 5, 1995 represent
the Investment Quality Bond Fund.
<F6> Effective June 13, 1997, the Victory Government Bond Fund merged into the Investment Quality
Bond Fund. Financial highlights for the periods prior to June 13, 1997 represent the
Investment Quality Bond Fund.
</FN>
</TABLE>
30
<PAGE>
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31
<PAGE>
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32
<PAGE>
If you would like a free copy of any of the following documents or would like
to request other information regarding the Funds, you can call or write the
Funds or your Investment Professional.
* Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has
been filed with the Securities and Exchange Commission (SEC), and is
incorporated by reference in this Prospectus.
* Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a
Fund's performance during its last fiscal year.
The securities described in this Prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this Prospectus and the SAI.
* How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863). You also may
obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.)
By mail: The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
Copies of this information may be obtained, after paying a duplicating fee,
by electronic request at the following e-mail address: [email protected], or
by writing the SEC's Public Reference Section, Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line
or downloaded from the SEC at http://www.sec.gov or from the Victory Funds'
website at http://www.victoryfunds.com.
If you would like to receive copies of the annual and semi-annual reports
and/or the SAI at no charge, please call the Funds at 800-539-FUND.
(800-539-3863)
(LOGO)(R)
Victory Funds
PRINTED ON RECYCLED PAPER
Investment Company Act File Number 811-4852
VF-TXFI-PRO (12/99)
<PAGE>
December 15, 1999
(LOGO)(R)
Victory Funds
PROSPECTUS
*
Value Fund
Class A and G Shares
Diversified Stock Fund
Class A and G Shares
Stock Index Fund
Class A and G Shares
Growth Fund
Class A and G Shares
Special Value Fund
Class A and G Shares
Ohio Regional Stock Fund
Class A Shares
International Growth Fund
Class A and G Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at: www.victoryfunds.com
<PAGE>
TABLE OF CONTENTS
*
RISK/RETURN SUMMARY FOR EACH OF THE FUNDS
An analysis which includes the investment objective, principal strategies,
principal risks, performance, and expenses of each Fund
INTRODUCTION 1
Value Fund, Class A and G Shares 2
Diversified Stock Fund, Class A and G Shares 4
Stock Index Fund, Class A and G Shares 6
Growth Fund, Class A and G Shares 8
Special Value Fund, Class A and G Shares 10
Ohio Regional Stock Fund, Class A Shares 12
International Growth Fund, Class A and G Shares 14
INVESTMENTS 16
RISK FACTORS 17
SHARE PRICE 19
DIVIDENDS, DISTRIBUTIONS, AND TAXES 20
INVESTING WITH VICTORY
* Choosing a Share Class 22
* How to Buy Shares 25
* How to Exchange Shares 28
* How to Sell Shares 29
ORGANIZATION AND MANAGEMENT OF THE FUNDS 31
ADDITIONAL INFORMATION 34
FINANCIAL HIGHLIGHTS
Value Fund 35
Diversified Stock Fund 36
Stock Index Fund 37
Growth Fund 38
Special Value Fund 39
Ohio Regional Stock Fund 40
International Growth Fund 41
The Victory Portfolios
KEY TO FUND INFORMATION
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its
investment objective.
RISK FACTORS
The risks you may assume as an investor in a Fund.
PERFORMANCE
A summary of the historical performance of a Fund in comparison to an
unmanaged index.
EXPENSES
The costs you will pay, directly or indirectly, as an investor in a Fund,
including sales charges and ongoing expenses.
Shares of the Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any of
its affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the
principal amount invested.
<PAGE>
Introduction
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for
future reference.
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Investment Objective and Strategy
Each Fund pursues its investment objective by investing primarily in equity
securities. Each Fund generally seeks to provide long-term growth of capital.
In addition, the Value Fund and Special Value Fund each seeks to provide
dividend income. The Stock Index Fund seeks to achieve its investment
performance by attempting to match the investment performance of the Standard
& Poor's 500 Composite Stock Index. However, each Fund has unique investment
strategies and its own risk/reward profile. Please review the "Risk/Return
Summary" for each Fund and the "Investments" section for an overview.
Risk Factors
Each Fund invests primarily in equity securities. The value of equity
securities may fluctuate in response to the activities of an individual
company, or in response to general market or economic conditions. There are
other potential risks discussed in each "Risk/Return Summary" and in "Risk
Factors."
Who May Want to Invest in the Funds
* Investors who want a diversified portfolio
* Investors willing to accept the risk of price and dividend fluctuations
* Investors willing to accept higher short-term risk along with higher
potential long-term returns
* Long-term investors with a particular goal, like saving for retirement
or a child's education
Share Classes
Each Fund offers Class A Shares and each Fund, other than the Ohio Regional
Stock Fund, offers Class G Shares. See "Choosing a Share Class."
The following pages provide you with an overview of each of the Funds. Please
look at the objective, policies, strategies, risks, and expenses to determine
which Fund will suit your risk tolerance and investment needs.
1
<PAGE>
VALUE FUND Risk/Return Summary
Investment Objective
The Value Fund seeks to provide long-term growth of capital and dividend
income.
Principal Investment Strategies
The Value Fund pursues its investment objective by investing primarily in a
diversified group of equity securities with an emphasis on companies with
above average total return potential. The securities in the Value Fund
usually are listed on a national exchange.
KAM seeks equity securities of under-valued companies that are
inexpensive in light of the following measurements: below-average
price-to-earnings ratios, below-average price-to-book ratios,
lower-than-average price-to-cash-flow ratios and above-average dividend
yields. KAM may consider factors such as a company's earnings growth, return
on equity, stock price volatility relative to the market, management, the
general business cycle, the company's position within a specific industry and
the company's responsiveness to changing conditions.
Under normal market conditions, the Value Fund will invest at least 80%
of its total assets in equity securities and securities convertible or
exchangeable into common stock.
There is no guarantee that the Value Fund will achieve its objectives.
Principal Risks
You may lose money by investing in the Value Fund. The Value Fund is subject
to the following principal risks, more fully described in "Risk Factors." The
Value Fund's net asset value, yield and/or total return may be adversely
affected if any of the following occurs:
* The market value of securities acquired by the Value Fund declines.
* Value stocks fall out of favor relative to growth stocks.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* A company's earnings do not increase as expected.
An investment in the Value Fund is not a deposit of KeyBank or any of
its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
By itself, the Value Fund does not constitute a complete investment plan
and should be considered a long-term investment for investors who can afford
to weather changes in the value of their investment.
2
<PAGE>
VALUE FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Value Fund by showing changes in its performance for various
time periods.
The bar chart shows returns for Class A Shares of the Value Fund. Sales
loads are not reflected on the bar chart and if they were reflected, returns
would be lower than those shown.
1994 0.26%
1995 33.73%
1996 22.40%
1997 27.51%
1998 26.33%1
1 The Value Fund's year-to-date return as of September 30, 1999 was 2.34%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 18.21% (quarter ending December 31, 1998) and the lowest return for a
quarter was -7.37% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares
of the Value Fund for one year, five years and since inception compare to
those of a broad-based market index. The figures shown in this table assume
reinvestment of dividends and distributions and reflect all applicable sales
charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (12/3/93)
Class A 19.07% 20.02% 19.96%
S&P 500 Index2 28.58% 24.06% 23.75%
1 The Value Fund did not offer Class G Shares prior to December 15, 1999.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-size companies.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Value Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Value Fund pays these expenses from its assets.)
Management Fees 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.45% 0.20%
Total Fund Operating Expenses 1.20% 1.45%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Estimated Class G expenses are based on historical expenses of Class A
Shares of the Value Fund for the fiscal year ended October 31, 1998.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Value Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Value Fund for the time
periods shown and then sell 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 Value Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
1 Year 3 Years 5 Years 10 Years
Class A $690 $934 $1,197 $1,946
Class G $148 $459 $ 792 $1,735
3
<PAGE>
DIVERSIFIED STOCK FUND Risk/Return Summary
Investment Objective
The Diversified Stock Fund seeks to provide long-term growth of capital.
Principal Investment Strategies
The Diversified Stock Fund pursues its investment objective by investing
primarily in equity securities and securities convertible into common stocks
traded on U.S. exchanges and issued by large, established companies.
The Adviser seeks to invest in both growth and value securities. In
making investment decisions, the Adviser may consider cash flow, book value,
dividend yield, growth potential, quality of management, adequacy of
revenues, earnings, capitalization, relation to historical earnings, the
value of the issuer's underlying assets, and expected future relative
earnings growth. The Adviser will pursue investments that provide above
average dividend yield or potential for appreciation.
Under normal market conditions, the Diversified Stock Fund will invest
at least 80% of its total assets in equity securities of large, established
companies and securities convertible or exchangeable into common stock,
including:
* Growth stocks, which are stocks of companies that the Adviser believes
will experience earnings growth; and
* Value stocks, which are stocks that the Adviser believes are intrinsically
worth more than their market value.
There is no guarantee that the Diversified Stock Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Diversified Stock Fund. The
Diversified Stock Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Diversified Stock Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
* The market value of securities acquired by the Diversified Stock Fund
declines.
* Growth stocks fall out of favor because the companies' earnings growth does
not meet expectations.
* Value stocks fall out of favor relative to growth stocks.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* A company's earnings do not increase as expected.
An investment in the Diversified Stock Fund is not a deposit of KeyBank
or any of its affiliates and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
By itself, the Diversified Stock Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment.
4
<PAGE>
DIVERSIFIED STOCK FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Diversified Stock Fund by showing changes in its performance
for various time periods.
The bar chart shows returns for Class A Shares of the Diversified Stock
Fund. Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1990 0.57%
1991 23.98%
1992 9.43%
1993 9.97%
1994 3.96%
1995 35.37%
1996 24.72%
1997 28.28%
1998 23.15%1
1 The Diversified Stock Fund's year-to-date return as of September 30, 1999
was 5.45%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 17.60% (quarter ending December 31, 1998) and the lowest return for a
quarter was -12.43% (quarter ending September 30, 1990).
The table shows how the average annual total returns for Class A Shares
of the Diversified Stock Fund for one year, five years and since inception
compare to those of a broad-based market index. The figures shown in this
table assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (10/20/89)
Class A 16.08% 21.18% 16.49%
S&P 500 Index2 28.58% 24.06% 17.63%
1 The Diversified Stock Fund did not offer Class G Shares prior to March 29,
1999.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-size companies.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Diversified Stock Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Diversified Stock Fund pays these expenses from its assets.)
Management Fees 0.65% 0.65%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.48% 0.20%
Total Fund Operating Expenses 1.13%3 1.35%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed
by law, so that the net operating expenses of Class A and Class G Shares of
the Diversified Stock Fund will equal 1.07% and 1.29% respectively. The
Adviser may terminate these waivers/reimbursements at any time to the extent
allowed by law.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Diversified Stock Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Diversified
Stock Fund for the time periods shown and then sell all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Diversified Stock Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $684 $913 $1,161 $1,871
Class G $137 $428 $ 739 $1,624
5
<PAGE>
STOCK INDEX FUND Risk/Return Summary
Investment Objective
The Stock Index Fund seeks to provide long-term capital appreciation by
attempting to match the investment performance of the Standard & Poor's 500
Composite Stock Index (S&P 500 Index).*
Principal Investment Strategies
The Stock Index Fund pursues its investment objective by attempting to
duplicate the capital performance and dividend income of the S&P 500 Index.
The Stock Index Fund primarily invests in many of the equity securities that
are in the S&P 500 Index, including American Depository Receipts (ADRs), and
secondarily in related futures and options contracts.
The S&P 500 Index is comprised of 500 common stocks. To minimize small
positions and transactions expenses, the Stock Index Fund need not invest in
every stock included in the S&P 500 Index. The Stock Index Fund may purchase
stocks that are not included in the S&P 500 Index if the Adviser believes
that these investments will reduce "tracking error" (the difference between
the Stock Index Fund's investment results, before expenses, and that of the
S&P 500 Index).
The Stock Index Fund is not managed in the traditional sense using
economic, financial, and market analysis. Therefore, the Stock Index Fund
will not necessarily sell a stock that is underperforming. Brokerage costs,
fees, operating expenses, and tracking errors will normally result in the
Stock Index Fund's total return being lower than that of the S&P 500 Index.
There is no guarantee that the Stock Index Fund will achieve its
objectives.
*"Standard & Poor's 500" is a registered service mark of Standard and Poor's,
which does not sponsor and is in no way affiliated with the Stock Index Fund.
Principal Risks
You may lose money by investing in the Stock Index Fund. The Stock Index Fund
is subject to the following principal risks, more fully described in "Risk
Factors." The Stock Index Fund's net asset value, yield and/or total return
may be adversely affected if any of the following occurs:
* The market value of securities acquired by the Stock Index Fund declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* Hedges created by using derivative instruments, including futures or
options contracts, do not respond to economic or market conditions as
expected.
In addition, the Stock Index Fund may purchase, retain, and sell
securities when such transactions would not be consistent with traditional
investment criteria. The Stock Index Fund generally will remain fully
invested in common stocks even when stock prices generally are falling.
Accordingly, an investor is exposed to a greater risk of loss (or conversely,
a greater prospect of gain) from fluctuations in the value of such securities
than would be the case if the Stock Index Fund was not fully invested,
regardless of market conditions.
An investment in the Stock Index Fund is not a deposit of KeyBank or any
of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
By itself, the Stock Index Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather sudden and sometimes substantial changes in the
value of their investment.
6
<PAGE>
STOCK INDEX FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Stock Index Fund by showing changes in its performance for
various time periods.
The bar chart shows returns for Class A Shares of the Stock Index Fund.
Sales loads are not reflected on the bar chart and if they were reflected,
returns would be lower than those shown.
1994 0.92%
1995 36.47%
1996 22.18%
1997 32.40%
1998 27.70%1
1 The Stock Index Fund's year-to-date return as of September 30, 1999 was
4.85%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 21.11% (quarter ending December 31, 1998) and the lowest return for a
quarter was -10.01% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares
of the Stock Index Fund for one year, five years and since inception compare
to those of a broad-based market index. The figures shown in this table
assume reinvestment of dividends and distributions and reflect all applicable
sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (12/3/93)
Class A 20.36% 21.81% 21.57%
S&P 500 Index2 28.58% 24.06% 23.75%
1 The Stock Index Fund did not offer Class G Shares prior to June 30, 1999.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-size companies.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Stock Index Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Stock Index Fund pays these expenses from its assets.)
Management Fees 0.60% 0.60%
Distribution (12b-1) Fees 0.00% 0.00%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class G Shares) 0.08% 0.51%
Total Fund Operating Expenses 0.68%3 1.11%
Fee Waiver/Reimbursement (0.00)% (0.29)%
Net Expenses 0.68% 0.82%4
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed
by law, so that the net operating expenses of Class A Shares of the Stock
Index Fund will equal 0.57%. The Adviser may terminate this
waiver/reimbursement at any time to the extent allowed by law.
4 The Adviser has contractually agreed to waive its management fees and to
reimburse expenses, as allowed by law, to the extent necessary to maintain
the net operating expenses of Class G Shares of the Stock Index Fund at a
maximum of 0.82% until at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Stock Index Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the Stock Index Fund
for the time periods shown and then redeem all of your shares at the end of
those periods. The Example also assumes that your investment has a 5% return
each year and that the Stock Index Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $640 $780 $932 $1,373
Class G1 $113 $353 $612 $1,352
1 This Example assumes that Net Annual Fund Operating Expenses for Class G
Shares will equal 0.82% until February 28, 2001 and will equal 1.11%
thereafter.
7
<PAGE>
GROWTH FUND Risk/Return Summary
Investment Objective
The Growth Fund seeks to provide long-term growth of capital.
Principal Investment Strategies
The Growth Fund pursues its investment objective by investing primarily in
equity securities of companies with superior prospects for long-term earnings
growth and price appreciation. The issuers usually are listed on a nationally
recognized exchange.
In making investment decisions, the Adviser will look for above average
growth rates, high return on equity, issuers that reinvest their earnings in
their business, and strong balance sheets.
Under normal market conditions, the Growth Fund will invest at least 80%
of its total assets in common stocks and securities convertible into common
stocks.
There is no guarantee that the Growth Fund will achieve its objectives.
Principal Risks
You may lose money by investing in the Growth Fund. The Growth Fund is
subject to the following principal risks, more fully described in "Risk
Factors." The Growth Fund's net asset value, yield and/or total return may be
adversely affected if any of the following occurs:
* The market value of securities acquired by the Growth Fund declines.
* Growth stocks fall out of favor because the companies' earnings growth does
not meet expectations.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* A company's earnings do not increase as expected.
An investment in the Growth Fund is not a deposit of KeyBank or any of
its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
By itself, the Growth Fund does not constitute a complete investment
plan and should be considered a long-term investment for investors who can
afford to weather changes in the value of their investment and do not require
significant current income from their investments.
8
<PAGE>
GROWTH FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Growth Fund by showing changes in its performance for
various time periods.
The bar chart shows returns for Class A Shares of the Growth Fund. Sales
loads are not reflected on the bar chart and if they were reflected, returns
would have been lower than those shown.
1994 -0.50%
1995 31.47%
1996 24.95%
1997 31.35%
1998 37.18%1
1 The Growth Fund's year-to-date return as of September 30, 1999 was 2.21%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 22.81% (quarter ending December 31, 1998) and the lowest return for a
quarter was -6.70% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares
of the Growth Fund for one year, five years and since inception compare to
those of a broad-based market index. The figures shown in this table assume
reinvestment of dividends and distributions and reflect all applicable sales
charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (12/3/93)
Class A 29.26% 22.66% 22.36%
S&P 500 Index2 28.58% 24.06% 23.75%
1 The Growth Fund did not offer Class G Shares prior to December 15, 1999.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-size companies.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Growth Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Growth Fund pays these expenses from its assets.)
Management Fees 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.48% 0.24%
Total Fund Operating Expenses 1.23% 1.49%
Fee Waiver/Reimbursement (0.03)% (0.04)%
Net Expenses 1.20%3 1.45%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Estimated Class G expenses are based on historical expenses of Class A
Shares of the Growth Fund for the fiscal year ended October 31, 1998. The
Adviser has contractually agreed to waive its management fee and to reimburse
expenses, as allowed by law, to the extent necessary to maintain the net
operating expenses of Class A and Class G Shares of the Growth Fund at a
maximum of 1.20% and 1.45%, respectively, until at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Growth Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the Growth Fund for the
time periods shown and then sell 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 Growth Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, based on these assumptions your
costs would be:
1 Year 3 Years 5 Years 10 Years
Class A1 $690 $940 $1,209 $1,977
Class G2 $152 $471 $ 813 $1,779
1 This Example assumes that Net Annual Fund Operating Expenses for Class A
Shares will equal 1.20% until February 28, 2001 and will equal 1.23%
thereafter.
2 This Example assumes that Net Annual Fund Operating Expenses for Class G
Shares will equal 1.45% until February 28, 2001 and will equal 1.49%
thereafter.
9
<PAGE>
SPECIAL VALUE FUND Risk/Return Summary
Investment Objective
The Special Value Fund seeks to provide long-term growth of capital and
dividend income.
Principal Investment Strategies
The Special Value Fund pursues its investment objective by investing
primarily in equity securities of small- and medium-sized companies listed on
a national exchange. Small-sized companies are defined as those having market
capitalization of less than $1 billion at the time of purchase, and
medium-size companies are defined as those having a market capitalization of
between $1 billion and $5 billion at the time of purchase.
The Adviser looks for companies with above average total return
potential whose equity securities are under-valued. KAM looks for equity
securities that have relatively low price-to-book ratios, low
price-to-earnings ratios or lower-than-average price-to-cash-flow ratios. KAM
may consider factors such as a company's earnings growth, dividend payout
ratio, return on equity, stock price volatility relative to the market, new
management and upcoming corporate restructuring, the general business cycle,
the company's position within a specific industry and the company's
responsiveness to changing conditions.
Under normal market conditions the Special Value Fund will invest at
least 80% of its total assets in common stocks and securities convertible
into common stock of small- and medium-sized companies.
There is no guarantee that the Special Value Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Special Value Fund. The Special Value
Fund is subject to the following principal risks, more fully described in
"Risk Factors." The Special Value Fund's net asset value, yield and/or total
return may be adversely affected if any of the following occurs:
* The market value of securities acquired by the Special Value Fund declines.
* Smaller, less seasoned companies lose market share or profits to a greater
extent than larger, established companies as a result of deteriorating
economic conditions.
* Value stocks fall out of favor relative to growth stocks.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* A company's earnings do not increase as expected.
An investment in the Special Value Fund is not a deposit of KeyBank or
any of its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
By itself, the Special Value Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment.
10
<PAGE>
SPECIAL VALUE FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Special Value Fund by showing changes in its performance for
various time periods.
The bar chart shows returns for Class A Shares of the Special Value
Fund. Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1994 1.27%
1995 26.80%
1996 19.22%
1997 27.79%
1998 -9.08%1
1 The Special Value Fund's year-to-date return as of September 30, 1999 was
- -9.04%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 14.13% (quarter ending December 31, 1998) and the lowest return for a
quarter was -20.87% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares
of the Special Value Fund for one year, five years and since inception
compare to those of a broad-based market index. The figures shown in this
table assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (12/3/93)
Class A -14.31% 10.88% 11.35%
S&P 400 Mid-Cap Index2 19.11% 18.84% 17.21%
1 The Special Value Fund did not offer Class G Shares prior to December 15,
1999.
2 The Standard & Poor's 400 Mid-Cap Index is a broad-based unmanaged index
that represents the general performance of domestically traded common stocks
of mid-size companies.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Special Value Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Special Value Fund pays these expenses from its assets.)
Management Fees 0.80% 0.80%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.55% 0.30%
Total Fund Operating Expenses 1.35% 1.60%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Estimated Class G expenses are based on historical expenses of Class A
Shares of the Special Value Fund for the fiscal year ended October 31, 1998.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Special Value Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Special
Value Fund for the time periods shown and then redeem all of your shares at
the end of those periods. The Example also assumes that your investment has a
5% return each year and that the Special Value Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $705 $978 $1,272 $2,105
Class G $163 $505 $ 871 $1,900
11
<PAGE>
OHIO REGIONAL STOCK FUND Risk/Return Summary
Investment Objective
The Ohio Regional Stock Fund seeks to provide capital appreciation.
Principal Investment Strategies
The Ohio Regional Stock Fund pursues its investment objective by investing at
least 80% of its total assets in equity securities issued by companies
headquartered in the State of Ohio.
In making investment decisions, the Adviser analyzes cash flow, book
value, dividend growth potential, quality of management, earnings, and
capitalization. The Ohio Regional Stock Fund looks at any information that
reflects the potential for future earnings growth. The Ohio Regional Stock
Fund invests in nationally recognized companies and lesser-known companies
that may have smaller capitalization, but also the potential for growth.
Under normal market conditions, the Ohio Regional Stock Fund will invest
at least 80% of its total assets in common stocks and securities convertible
into common stocks.
There is no guarantee that the Ohio Regional Stock Fund will achieve its
objectives.
Proposed Reorganization
The Board of Trustees of the Victory Portfolios has approved a Plan of
Reorganization and Liquidation for the Victory Ohio Regional Stock Fund. At a
special meeting, anticipated to be held in March 2000, shareholders of the
Ohio Regional Stock Fund will be asked to approve the transfer of the assets
of their Fund into Class A Shares of the Victory Established Value Fund. If
the Reorganization of the Ohio Regional Stock Fund is approved, shareholders
will exchange their Fund shares for Class A Shares of the Victory Established
Value Fund, and the Victory Ohio Regional Stock Fund will no longer be
available for purchases, exchanges or redemptions. Shareholders will receive
shares of the Established Value Fund with the same value as the total value
of their Fund shares. (In other words, a shareholder who owns $1,000 worth of
Class A Shares of the Victory Ohio Regional Stock Fund will receive $1,000
worth of Class A Shares of the Victory Established Value Fund.) The exchange
will not be subject to any sales charges and will not be taxable. The Victory
Established Value Fund has the same investment adviser and service providers
as the Ohio Regional Stock Fund.
Principal Risks
You may lose money by investing in the Ohio Regional Stock Fund. The Ohio
Regional Stock Fund is subject to the following principal risks, more fully
described in "Risk Factors." The Ohio Regional Stock Fund's net asset value,
yield and/or total return may be adversely affected if any of the following
occurs:
* The market value of securities acquired by the Ohio Regional Stock Fund
declines.
* Growth stocks fall out of favor because the companies' earnings growth does
not meet expectations.
* Value stocks fall out of favor relative to growth stocks.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* A company's earnings do not increase as expected.
Since the Ohio Regional Stock Fund concentrates its investments in the
State of Ohio, its assets may be at greater risk because of economic,
political, or regulatory risks associated with the state. The Ohio Regional
Stock Fund is subject to additional risks because it concentrates its
investments in a single geographic area.
An investment in the Ohio Regional Stock Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
By itself, the Ohio Regional Stock Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investment.
12
<PAGE>
OHIO REGIONAL STOCK FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Ohio Regional Stock Fund by showing changes in its
performance for various time periods.
Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1990 -17.24%
1991 -18.50%
1992 58.65%
1993 10.88%
1994 0.05%
1995 26.43%
1996 20.85%
1997 29.66%
1998 -1.76%1
1 The Ohio Regional Stock Fund's year-to-date return as of September 30, 1999
was -11.92%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 26.20% (quarter ending March 31, 1991) and the lowest return for a
quarter was -25.47% (quarter ending September 30, 1990).
The table shows how the average annual total returns for Class A Shares
of the Ohio Regional Stock Fund for one year, five years and since inception
compare to those of two broad-based market indices. The figures shown in this
table assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998) One Year 5 Years (10/20/89)
Class A -7.41% 12.91% 12.69%
S&P 500 Index1 28.58% 24.06% 17.63%
S&P 400 Mid-Cap Index2 19.11% 18.84% 17.26%
1 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-size companies.
2 The Standard & Poor's 400 Mid-Cap Index is a broad-based unmanaged index
that represents the general performance of domestically traded common stocks
of mid-size companies.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Ohio Regional Stock Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A
Maximum Sales Charge
Imposed on Purchases 5.75%
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Fund Operating Expenses
(The Ohio Regional Stock Fund pays these expenses from its assets.)
Management Fees 0.75%
Distribution (12b-1) Fees 0.00%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.87%
Total Fund Operating Expenses3 1.62%
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser may waive its management fee and reimburse expenses, as allowed
by law, so that the net operating expenses of the Ohio Regional Stock Fund
will equal 1.54% for Class A Shares. The Adviser may terminate this
waiver/reimbursement at any time.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Ohio Regional Stock Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Ohio
Regional Stock Fund for the time periods shown and then redeem all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Ohio Regional Stock Fund's
operating expenses remain the same. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $730 $1,057 $1,406 $2,386
13
<PAGE>
INTERNATIONAL GROWTH FUND Risk/Return Summary
Investment Objective
The International Growth Fund seeks to provide capital growth consistent with
reasonable investment risk.
Principal Investment Strategies
The International Growth Fund pursues its objective by investing primarily in
equity securities of foreign corporations, most of which are denominated in
foreign currencies.
The International Growth Fund will invest most of its assets in
securities of companies traded on exchanges outside of the U.S., including
developed and emerging countries. In making investment decisions, KAM and
Indocam International Investment Services, S.A., the International Growth
Fund's sub-adviser, may analyze the economies of foreign countries and the
growth potential for individual sectors and securities.
Under normal market conditions, the International Growth Fund:
* Will invest at least 65% of its total assets in:
* Securities (including "sponsored" and "unsponsored" ADRs) of companies that
derive more than 50% of their gross revenues from, or have more than 50% of
their assets, outside the United States; and
* Securities for which the principal trading markets are located in at least
three different countries (excluding the United States); and
* The International Growth Fund may invest up to 20% of its total assets in
securities of companies located in emerging countries.
There is no guarantee that the International Growth Fund will achieve
its objectives.
Principal Risks
You may lose money by investing in the International Growth Fund. The
International Growth Fund is subject to the following principal risks, more
fully described in "Risk Factors." The International Growth Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
* Foreign securities experience more volatility than their domestic
counterparts, in part because of higher political and economic risks, lack of
reliable information, fluctuations in currency exchange rates, and the risks
that a foreign government may take over assets, restrict the ability to
exchange currency or restrict the delivery of securities.
* The prices of foreign securities issued in emerging countries experience
more volatility because the securities markets in these countries may not be
well established.
* The market value of securities acquired by the International Growth Fund
declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
An investment in the International Growth Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
The International Growth Fund may be appropriate for investors who are
comfortable with assuming the added risks associated with stocks that do not
pay out significant portions of their earnings as dividends. It also may be
appropriate for investors who are comfortable with assuming the added risks
associated with investments in foreign countries and investments denominated
in foreign currencies. By itself, the International Growth Fund does not
constitute a complete investment plan and should be considered a long-term
investment for investors who can afford to weather changes in the value of
their investment and do not require significant current income from their
investments.
14
<PAGE>
INTERNATIONAL GROWTH FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the International Growth Fund by showing changes in its
performance for various time periods.
The bar chart shows returns for Class A Shares of the International
Growth Fund. Sales loads are not reflected on the bar chart and if they were
reflected, returns would be lower than those shown.
1991 9.75%
1992 -6.41%
1993 35.91%
1994 2.72%
1995 7.71%
1996 6.29%
1997 2.33%
1998 17.48%1
1 The International Growth Fund's year-to-date return as of September 30,
1999 was 9.30%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 19.78% (quarter ending December 31, 1998) and the lowest return for a
quarter was -15.23% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares
of the International Growth Fund for one year, five years and since inception
compare to those of a broad-based market index. The figures shown in this
table assume reinvestment of dividends and distributions and reflect all
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (5/18/90)
Class A 10.76% 5.91% 6.62%
MSACWI Free ex US Index2 14.46% 7.80% 6.30%
1 The International Growth Fund did not offer Class G Shares prior to March
29, 1999.
2 The Morgan Stanley All Country World Index Free ex US is a widely
recognized unmanaged index of common stock prices with country weightings of
international companies.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the International Growth Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The International Growth Fund pays these expenses from its assets.)
Management Fees 1.10% 1.10%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable to Class A Shares) 0.73% 0.47%
Total Fund Operating Expenses 1.83% 2.07%
Fee Waiver/Reimbursement (0.00)% (0.07)%
Net Expenses 1.83%3 2.00%4
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 The Adviser may waive fees and reimburse expenses, as allowed by law, so
that the net operating expenses of the International Growth Fund will equal
1.75% for Class A Shares. The Adviser may terminate this waiver/reimbursement
at any time to the extent allowed by law.
4 The Adviser has contractually agreed to waive its management fee or to
reimburse expenses, as allowed by law, to the extent necessary to maintain
the net operating expenses of Class G Shares of the International Growth Fund
at a maximum of 2.00% until at least April 1, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the International Growth Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the
International Growth Fund for the time periods shown and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the International Growth Fund's
operating expenses remain the same. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $750 $1,117 $1,508 $2,599
Class G1 $210 $ 649 $1,114 $2,400
1 This Example assumes that Net Annual Fund Operating Expenses for Class G
Shares will equal 2.00% until April 1, 2001 and will equal 2.07% thereafter.
15
<PAGE>
Investments
The following describes some of the types of securities the Funds may
purchase under normal market conditions to achieve their investment
objectives. All Funds will not buy all of the securities listed below.
For cash management or for temporary defensive purposes in response to
market conditions, each Fund may hold all or a portion of its assets in cash
or short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause a Fund to fail to meet its investment
objective.
For detailed descriptions of each of these investments and a more
complete description of which Funds can invest in certain types of
securities, see the Statement of Additional Information (SAI).
U.S. Equity Securities. Can include common stock and securities that are
convertible or exchangeable into common stock of U.S. corporations.
Equity Securities of Companies Traded on Foreign Exchanges. Can include
common stock and securities convertible into stock of non-U.S. corporations.
Equity Securities of Foreign Companies Traded on U.S. Exchanges. Can
include common stock, and convertible preferred stock of non-U.S.
corporations. Also may include American Depository Receipts (ADRs) and Global
Depository Receipts (GDRs).
Futures Contracts and Options on Futures Contracts. Contracts involving the
right or obligation to deliver or receive assets or money depending on the
performance of one or more assets or an economic index. To reduce the effects
of leverage, liquid assets equal to the contract commitment are set aside to
cover the commitment. A Fund may invest in futures in an effort to hedge
against market risk, or as a temporary substitute for buying or selling
securities, foreign currencies or for temporary cash management purposes. The
Stock Index Fund invests in futures as a substitution for S&P 500 stock.
16
<PAGE>
Risk Factors
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
This Prospectus describes the principal risks that you may assume as an
investor in the Funds. The "Investments" section in this Prospectus provides
additional information on the securities mentioned in the Risk/Return Summary
for each Fund. As with any mutual fund, there is no guarantee that the Funds
will earn income or show a positive total return over time. Each Fund's
price, yield, and total return will fluctuate. You may lose money if a Fund's
investments do not perform well.
This table summarizes the principal risks, described in the following
pages, to which the Funds are subject.
<TABLE>
<CAPTION>
Ohio
Diversified Stock Special Regional International
Value Stock Index Growth Value Stock Growth
Fund Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C> <C>
Market risk, and
manager risk X X X X X X X
Equity risk X X X X X X X
Currency risk and/or
foreign issuer risk X X
Concentration risk X
Correlation risk X
</TABLE>
General risks:
* Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for the security, or more or less than the security was worth
at an earlier time. Market risk may affect a single issuer, an industry, a
sector of the economy, or the entire market and is common to all investments.
* Manager risk is the risk that a Fund's portfolio manager may use a strategy
that does not produce the intended result. Manager risk also refers to the
possibility that the portfolio manager may fail to execute a Fund's
investment strategy effectively and, thus, fail to achieve its objective.
Risk associated with investing in equity securities:
* Equity Risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
earnings and cash flow in case of liquidation, equity securities are entitled
to the residual value after
17
<PAGE>
Risk Factors (continued)
the company meets its other obligations. For example, in the event of
bankruptcy, holders of debt securities have priority over holders of equity
securities to a company's assets.
Risks associated with investing in foreign securities:
* Currency risk is the risk that fluctuations in the exchange rates between
the U.S. dollar and foreign currencies may negatively affect an investment.
Adverse changes in exchange rates may erode or reverse any gains produced by
foreign currency denominated investments and may widen any losses. Political
and economic risks, along with other factors, could adversely affect the
value of the International Growth Fund's securities.
* Foreign issuer risk. Compared to U.S. companies, there generally is less
publicly available information about foreign companies and there may be less
governmental regulation and supervision of foreign stock exchanges, brokers,
and listed companies. Foreign issuers may not be subject to the uniform
accounting, auditing, and financial reporting standards and practices
prevalent in the U.S. In addition, foreign securities markets may be more
volatile and subject to less governmental supervision than their counterparts
in the U.S. Investments in foreign countries could be affected by factors not
present in the U.S., including expropriation, confiscation of property, and
difficulties in enforcing contracts. All of these factors can make foreign
investments, especially those in developing countries, more volatile than
U.S. investments.
Risk associated with investing in the securities of a single state:
* Concentration risk is the risk that only a limited number of high-quality
securities of a particular type may be available. Concentration risk is
greater for funds that primarily invest in the securities of a single state.
Concentration risk may result in a Fund being invested in securities that are
related in such a way that changes in economic, business, or political
circumstances that would normally affect one security could also affect other
securities within that particular segment of the bond market.
Risk associated with futures and options contracts:
* Correlation risk. Futures and options contracts can be used in an effort to
hedge against certain risks. Generally, an effective hedge generates an
offset to gains or losses of other investments made by a Fund. Correlation
risk is the risk that a hedge created using futures or options contracts (or
any derivative, for that matter) does not, in fact, respond to economic or
market conditions in the manner the portfolio manager expected. In such a
case, the futures or options contract hedge may not generate gains sufficient
to offset losses and may actually generate losses.
It is important to keep in mind one basic principle of investing: the
greater the risk, the greater the potential reward. The reverse is also
generally true: the lower the risk, the lower the potential reward.
An investment in a Fund is not a complete investment program.
18
<PAGE>
Share Price
The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own gives you the value of your investment.
Each Fund calculates its share price, called its "net asset value" (NAV),
each business day at 4:00 p.m. Eastern Time or at the close of trading on the
New York Stock Exchange Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based
on the NAV that is calculated after you place your order. A business day is a
day on which the NYSE is open.
A Fund's NAV may change on days when shareholders will not be able to
purchase or redeem the Fund's shares if the Fund has portfolio securities
that are primarily listed on foreign exchanges that trade on weekends or
other days when a Fund does not price its shares.
The Funds value their investments based on market value. When market
quotations are not readily available, the Funds value their investments based
on fair value methods approved by the Board of Trustees of the Victory
Portfolios. Each Class of each Fund calculates its NAV by adding up the total
value of its investments and other assets, subtracting its liabilities, and
then dividing that figure by the number of outstanding shares of the Class.
Total Assets -- Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find a Fund's net asset value each day in The Wall Street
Journal and other newspapers. Newspapers do not normally publish fund
information until a Fund reaches a specific number of shareholders or level
of assets.
19
<PAGE>
Dividends, Distributions, and Taxes
Buying a Dividend. You should check a Fund's distribution schedule before you
invest. If you buy shares of a Fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.
As a shareholder, you are entitled to your share of net income and capital
gains on the Fund's investments. The Funds pass their earnings along to
investors in the form of dividends. Dividend distributions are the net income
earned on investments after expenses. A Fund will distribute short-term
gains, as necessary, and if a Fund makes a long-term capital gain
distribution, it is normally paid once a year. As with any investment, you
should consider the tax consequences of an investment in a Fund.
Ordinarily, each Fund described in this Prospectus declares and pays
dividends quarterly. Each class of shares declares and pays dividends
separately.
Distributions can be received in one of the following ways.
Reinvestment Option
You can have distributions automatically reinvested in additional shares of a
Fund. If you do not indicate another choice on your Account Application, you
will be assigned this option automatically.
Cash Option
A check will be mailed to you no later than seven days after the dividend pay
date.
Income Earned Option
You can automatically reinvest your dividends in additional shares of a Fund
and have your capital gains paid in cash, or reinvest capital gains and have
your dividends paid in cash.
Directed Dividends Option
In most cases, you can automatically reinvest distributions in shares of
another fund of The Victory Portfolios. If you reinvest your distributions in
a different class of another fund, you may pay a sales charge on the
reinvested distributions.
Directed Bank Account Option
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, the Transfer Agent
will transfer your distributions within seven days of the dividend payment
date. The bank account must have a registration identical to that of your
Fund account.
20
<PAGE>
Dividends, Distributions, and Taxes (continued)
The tax information in this Prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in a Fund.
* Important Information about Taxes
Each Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
* Ordinary dividends from a Fund are taxable as ordinary income; dividends
from a Fund's long-term capital gains are taxable as long-term capital gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* Dividends from a Fund that are attributable to interest on certain U.S.
Government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to these U.S.
Government obligations will be provided on the tax statements you receive
from a Fund.
* An exchange of a Fund's shares for shares of another fund will be treated
as a sale. When you sell or exchange shares of a Fund, you must recognize any
gain or loss.
* Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
* Tax statements will be mailed from each Fund every January showing the
amounts and tax status of distributions made to you.
* Under certain circumstances, the International Growth Fund may be in a
position to (in which case it would) "pass through" to you the right to a
credit or deduction for income or other tax credits earned from foreign
investments.
* Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
21
<PAGE>
Investing with Victory
All you need to do to get started is to fill out an application.
For historical expense information on Class A and G Shares, see the
"Financial Highlights" at the end of this Prospectus.
If you are looking for a convenient way to open an account or to add money to
an existing account, Victory can help. The sections that follow will serve as
a guide to your investments with Victory. "Choosing a Share Class" will help
you decide whether it would be more to your advantage to buy Class A or Class
G Shares of a Fund. The following sections will describe how to open an
account, how to access information on your account, and how to buy, exchange
and sell shares of a Fund. We want to make it simple for you to do business
with us. If you have questions about any of this information, please call
your Investment Professional or one of our customer service representatives
at 800-539-FUND. They will be happy to assist you.
Choosing a Share Class
Each Fund offers Class A Shares and each Fund, other than the Ohio Regional
Stock Fund, offers Class G Shares. Each class has its own cost structure,
allowing you to choose the one that best meets your requirements. Your
Investment Professional also can help you decide. An Investment Professional
is an investment consultant, salesperson, financial planner, investment
adviser, or trust officer who provides you with investment information.
CLASS A
* Front-end sales charge, as described on the next page. There are
several ways to reduce this charge.
* Lower annual expenses, generally, than Class G shares.
CLASS G
* No front-end sales charge. All your money goes to work for you right away.
* No deferred sales charge.
* Class G Shares are sold only by certain broker-dealers.
22
<PAGE>
Choosing a Share Class (continued)
There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.
* Calculation of Sales Charges -- Class A
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are as follows:
Sales Charge Sales Charge
as a % of as a % of
Your Investment in the Fund Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
* Except as indicated in the last sentence of this note, there is no initial
sales charge on purchases of $1 million or more. However, a contingent
deferred sales charge (CDSC) of up to 1.00% will be charged to the
shareholder if any shares are redeemed in the first year after purchase, or
at 0.50% within two years of the purchase. This charge will be based on
either the cost of the shares or net asset value at the time of redemption,
whichever is lower. There will be no CDSC on reinvested distributions. The
initial sales charge exemption for investments of $1 million or more does not
apply to tax deferred retirement accounts (except IRA accounts); the sales
charge on investments by such tax deferred retirement accounts of $1 million
or more is the same as for investments between $500,000 and $999,999.
* Sales Charge Reductions and Waivers for Class A Shares
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of a Fund over a 13-month
period and receive the same sales charge as if all shares had been purchased
at one time. You must start with a minimum initial investment of 5% of the
total amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares
you already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds, (excluding money
market funds) for purposes of calculating the sales charge. The combination
privilege also allows you to combine the total investments from the accounts
of household members of your immediate family (spouse and children under 21)
for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers,"* and
dealers who have an agreement with the Distributor and any trade organization
to which the Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors in Class A Shares who reinvest a distribution from a deferred
compensation plan, agency, trust, or custody account that was maintained by
KeyBank National Associates and its affiliates, the Victory Group, or
invested in a fund of the Victory Group.
* Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
23
<PAGE>
Choosing a Share Class (continued)
d. Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales charge
for those shares.
e. Investment Professionals who purchased Fund shares for fee-based
investment products or accounts, and selling brokers and their sales
representatives.
f. Purchase of shares in connection with financial institution sponsored
bundled omnibus retirement programs sponsored by financial institutions that
have entered into agreements with the Funds' Distributor in connection with
the operational requirements of such programs.
g. Participants in tax-deferred retirement plans who purchased shares
pursuant to waiver provisions in effect prior to December 15, 1999.
* Shareholder Servicing Plan
The Funds have adopted a Shareholder Servicing Plan for Class A Shares of
each Fund other than the Stock Index Fund. The Shareholder Servicing Plan
also applies to Class G Shares of the Stock Index Fund. The shareholder
servicing agent performs a number of services for its customers who are
shareholders of the Funds. It establishes and maintains accounts and records,
processes dividend payments, arranges for bank wires, assists in
transactions, and changes account information. For these services a Fund pays
a fee at an annual rate of up to 0.25% of the average daily net assets of the
appropriate class of shares serviced by the agent. The Funds may enter into
agreements with various shareholder servicing agents, including KeyBank
National Association and its affiliates, other financial institutions, and
securities brokers. The Funds may pay a servicing fee to broker-dealers and
others who sponsor "no transaction fee" or similar programs for the purchase
of shares. Shareholder servicing agents may waive all or a portion of their
fee periodically.
24
<PAGE>
Choosing a Share Class (continued)
* Distribution Plan
Victory has adopted a Distribution and Service Plan for Class G Shares of the
Value Fund, Diversified Stock Fund, Growth Fund, Special Value Fund, and
International Growth Fund, under which these shares will pay to the
Distributor a monthly service fee at an annual rate of 0.25% of the average
daily net assets of each Fund. The service fee is paid to securities
broker-dealers or other financial intermediaries for providing personal
services to shareholders of these Funds, including responding to inquiries,
providing information to shareholders about their fund accounts, establishing
and maintaining accounts and records, processing dividend and distribution
payments, arranging for bank wires, assisting in transactions, and changing
account information. Each Fund may enter into agreements with various
shareholder servicing agents, including KeyCorp and its affiliates, and with
other financial institutions that provide such services.
Under the Class G Rule 12b-1 Distribution and Service Plan, Class G
Shares of the Value Fund, Diversified Stock Fund, Growth Fund, Special Value
Fund, and International Growth Fund also annually pay the Distributor a
monthly distribution fee in an additional amount of up to 0.25% of each
Fund's average daily net assets. The distribution fee is paid to the
Distributor for general distribution services and for selling Class G Shares
of these Funds. The Distributor makes payments to agents who provide these
services.
Victory has adopted a separate Rule 12b-1 Distribution and Service Plan
for Class G Shares of the Stock Index Fund. Class G Shares of the Stock Index
Fund do not pay expenses under this plan.
Because Rule 12b-1 fees are paid out of a Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum investment required to
open an account is $500 ($100 for IRAs), with additional investments of at
least $25. You can send in your payment by check, wire transfer, exchange
from another Victory Fund, or through arrangements with your Investment
Professional. Sometimes an Investment Professional will charge you for these
services. This fee will be in addition to, and unrelated to, the fees and
expenses charged by a Fund.
If you buy shares directly from the Funds and your investment is
received and accepted by 4:00 p.m. Eastern Time or the close of trading on
the NYSE (whichever time is earlier), your purchase will be processed the
same day using that day's share price.
Make your check payable to:
The
Victory
Funds
25
<PAGE>
How to Buy Shares (continued)
Telecommunication Device for the Deaf (TDD):
800-970-5296
Keep the following addresses handy for purchases, exchanges, or redemptions:
By Regular U.S. Mail
Send completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
580 Walnut Street
Cincinnati, OH 45202
or
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
By Overnight Mail
Use the following address ONLY for overnight packages.
The Victory Funds
580 Walnut Street
Cincinnati, OH 45202
or
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
By Wire
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring
funds to obtain a confirmation number.
The Victory Funds
Firstar Bank
ABA #042000013
For Credit to DDA
Account #821602133
(insert account number, name, and confirmation number assigned by the Fund)
or
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number, name, and confirmation number assigned by the Fund)
By Telephone
800-539-FUND
(800-539-3863)
26
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement
and send it with your check to the address indicated.
* ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up an ACH account. Currently, the Funds do not
charge a fee for ACH transfers.
* Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up
by an Investment Professional, account activity will be detailed in your
account statements. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Funds. By January 31 of each year, you
will be mailed an IRS form reporting distributions for the previous year,
which also will be filed with the IRS.
* Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual,
or annual investments. You should attach a voided personal check so the
proper information can be obtained. You must first meet the minimum
investment requirement of $500, then we will make automatic withdrawals of
the amount you indicate ($25 or more) from your bank account and invest it in
shares of a Fund.
* Retirement Plans
You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Funds
for details regarding an IRA or other retirement plan that works best for
your financial situation.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you will be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only buy or
exchange into fund shares legally available in your state. If your account
falls below $500, we may ask you to re-establish the minimum investment. If
you do not do so within 60 days, we may close your account and send you the
value of your account.
27
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling
800-539-FUND.
You can sell shares of one fund of the Victory Portfolios to buy shares of
another. This is considered an exchange. You may exchange shares of one
Victory fund for shares of the same class of any other, generally without
paying any additional sales charges.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the
following in mind:
* Shares of the fund selected for exchange must be available for sale in your
state of residence.
* The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
* Shares of a Fund may be exchanged at relative net asset value. This means
that if you own Class A Shares of the Fund, you can only exchange them for
Class A Shares of another fund and not pay a sales charge. The same rules
apply to Class G Shares, except that holders of Class G Shares who acquired
their shares as a result of the reorganization of the Gradison Funds into the
Victory Funds can exchange into Class A Shares of any Victory Fund that does
not offer Class G Shares without paying a sales charge.
* On certain business days, such as Veteran's Day and Columbus Day, the
Federal Reserve Bank of Cleveland is closed. On those days, exchanges to or
from a money market fund will be processed on the exchange date, with the
corresponding purchase or sale of the money market fund shares being effected
on the next business day.
* You must meet the minimum purchase requirements for the fund you purchase
by exchange.
* The registration and tax identification numbers of the two accounts
must be identical.
* You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
* Each Fund may refuse any exchange purchase request if the Adviser
determines that the request is associated with a market timing strategy. Each
Fund may terminate or modify the exchange privilege at any time on 30 days'
notice to shareholders.
* Before exchanging, read the prospectus of the fund you wish to
purchase by exchange.
28
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the
same mailing addresses listed for purchases.
If your request is received in good order by 4:00 p.m. Eastern Time or the
close of trading on the NYSE (whichever time is earlier), your redemption
will be processed the same day.
By Telephone
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one
of the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing
House (ACH).
The Transfer Agent records all telephone calls for your protection and
takes measures to verify the identity of the caller. If the Transfer Agent
properly acts on telephone instructions and follows reasonable procedures to
ensure against unauthorized transactions, neither Victory, its servicing
agents, the Adviser, nor the Transfer Agent will be responsible for any
losses. If the Transfer Agent does not follow these procedures, it may be
liable to you for losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach
the Transfer Agent or your Investment Professional by telephone, consider
placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send us
a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account; or
* The redemption proceeds are being transferred to another Victory Group
account with a different registration.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
By Wire
If you want to sell shares by wire, you must establish a Fund account that
will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time or
the close of trading on the NYSE (whichever time is earlier), your funds will
be wired on the next business day.
By ACH
Normally, your redemption will be processed on the same day or the next day
if received after 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier). It will be transferred by ACH as long as the
transfer is to a domestic bank.
29
<PAGE>
How to Sell Shares (continued)
* Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. We
will need a voided personal check to activate this feature. You should be
aware that your account eventually may be depleted. However, you cannot
automatically close your account using the Systematic Withdrawal Plan. If
your balance falls below $500, we may ask you to bring the account back to
the minimum balance. If you decide not to increase your account to the
minimum balance, your account may be closed and the proceeds mailed to you.
* Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be
held until the purchase check has cleared, which may take up to 15 days.
* A Fund may suspend your right to redeem your shares in the following
circumstances:
* During non-routine closings of the NYSE;
* When the Securities and Exchange Commission (SEC) determines either that
trading on the NYSE is restricted or that an emergency prevents the sale or
valuation of the Fund's securities; or
* When the SEC orders a suspension to protect the Fund's shareholders.
* Each Fund will pay redemptions by any one shareholder during any 90-day
period in cash up to the lesser of $250,000 or 1% of a Fund's net assets.
Each Fund reserves the right to pay the remaining portion "in kind," that is,
in portfolio securities rather than cash.
30
<PAGE>
Organization and Management of the Funds
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for its services.
* About Victory
Each Fund is a member of the Victory Portfolios, a group of over 30 distinct
investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Funds.
* The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered
as an investment adviser with the SEC, is the Adviser to each of the Funds.
KAM, a subsidiary of KeyCorp, oversees the operations of the Funds according
to investment policies and procedures adopted by the Board of Trustees.
Affiliates of the Adviser manage approximately $79 billion for a limited
number of individual and institutional clients. KAM's address is 127 Public
Square, Cleveland, Ohio 44114.
For the fiscal year ended October 31, 1998, KAM was paid management fees
based on a percentage of the average daily net assets of each Fund (after
waivers) as shown in the following table. Under a Sub-Administration
Agreement, BISYS Fund Services Ohio, Inc. pays KAM a fee at the annual rate
of up to 0.05% of each Fund's average daily net assets to perform some of the
administrative duties for the Funds.
Value Fund 0.88%
Diversified Stock Fund 0.54%
Stock Index Fund 0.46%
Growth Fund 0.86%
Special Value Fund 0.90%
Ohio Regional Stock Fund 0.63%
International Growth Fund 0.99%
* Portfolio Management
Neil A. Kilbane is the portfolio manager of the Value Fund. Mr. Kilbane, a
Certified Financial Analyst, has been a portfolio manager of the Value Fund
since April 1998. He is a Portfolio Manager and Managing Director of KAM and
has been in the investment business since 1986.
Lawrence G. Babin is the portfolio manager of the Diversified Stock
Fund, a position he has held since its inception in 1989. A Chartered
Financial Analyst, Mr. Babin is a Portfolio Manager and Managing Director of
KAM.
Ernest C. Pelaia is the portfolio manager of the Stock Index Fund, a
position he has held since July 1999. He is a Portfolio Manager, and has been
with KAM since July 1991 as an Analyst, Trader, Investment Officer and most
recently Assistant Vice President of Funds Management.
William F. Ruple is the portfolio manager of the Growth Fund, a position
he has held since June 1995. He is a Portfolio Manager and Director of KAM,
and has been associated with KAM or an affiliate since 1970.
Anthony Aveni and Paul D. Danes are the portfolio managers of the
Special Value Fund and together are primarily responsible for the day-to-day
management of the Fund's portfolio. Mr. Aveni has been a portfolio manager of
the Special Value Fund since its inception in December 1993. He is the Chief
Investment Officer and a Senior Managing Director with KAM, and has been
associated with KAM or an affiliate since 1981. Mr. Danes has been a
portfolio manager of the Special Value Fund since October 1995. He is a
Portfolio Manager and Director with KAM, and has been associated with KAM or
an affiliate since 1987.
31
<PAGE>
Organization and Management of the Funds (continued)
Lynn S. Hamilton is the portfolio manager of the Ohio Regional Stock
Fund, a position he has held since October 1991. He is a Portfolio Manager
and Managing Director of KAM, and has been in the investment business since
1977.
Conrad R. Metz and Leslie Globits are primarily responsible for the
management of the International Growth Fund. Mr. Metz is a Managing Director
of KAM, and formerly served as the sole portfolio manager of the
International Growth Fund. He previously was Senior Vice President,
International Equities, at Bailard Biehl & Kaiser, and has over 20 years
experience in global equity research and portfolio management. Mr. Globits, a
Director of KAM, was previously a Senior Financial Analyst and Assistant Vice
President in KeyCorp's Corporate Treasury Department, and has been with KAM
or an affiliate since 1987.
* The Investment Sub-Adviser to the International Growth Fund
Manager of Managers. KAM, the investment adviser, serves as a Manager of
Managers of the International Growth Fund. As Manager of Managers, KAM may
select one or more sub-advisers to manage the International Growth Fund's
assets. KAM evaluates each sub-adviser's skills, investment styles and
strategies in light of KAM's analysis of the international securities
markets. Under its Advisory Agreement with Victory, KAM oversees the
investment advisory services that a sub-adviser provides to the International
Growth Fund. If KAM engages more than one sub-adviser, KAM may reallocate
assets among sub-advisers when it believes it is appropriate. KAM provides
investment advice regarding short-term debt securities. KAM has the ultimate
responsibility for the International Growth Fund's investment performance
because it is responsible for overseeing all sub-advisers and recommending to
the Fund's Board of Trustees that it hire, terminate or replace a particular
sub-adviser.
Victory and KAM have obtained an order from the Securities and Exchange
Commission that allows KAM, subject to certain conditions, to select
additional sub-advisers with the approval of the Funds' Board of Trustees,
without obtaining shareholder approval. The order also allows KAM to change
the terms of agreements with the sub-advisers or to keep a sub-adviser even
if certain events would otherwise require that sub-advisory agreement to
terminate. The Funds will notify shareholders of any sub-adviser change.
Shareholders, however, also have the right to terminate an agreement with a
particular sub-adviser. If KAM hires more than one sub-adviser, the order
also allows the International Growth Fund to disclose only the aggregate
amount of fees paid to all sub-advisers.
Indocam International Investment Services, S.A. KAM currently has a
Portfolio Management Agreement with Indocam International Investment
Services, S.A. (IIIS), a French corporation located in Paris, France. IIIS
has served as Sub-adviser for all of the International Growth Fund's assets
(other than short-term debt instruments) since June 1998. IIIS and its
advisory affiliates (Indocam) are the global asset management component of
the Credit Agricole banking and financial services group. As of June 30,
1999, Indocam managed approximately $145 billion for its clients.
Ayaz Ebrahim, Didier Le Conte, and Jean-Claude Kaltenbach together are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mr. Ebrahim has been employed by IIIS (or an affiliate) since 1991. Mr. Le
Conte is the Senior Portfolio Manager responsible for European Equities at
IIIS and has been employed by IIIS (or an affiliate) since 1966. Mr.
Kaltenbach is the Head of Equity Management at IIIS and has been employed by
IIIS (or an affiliate) since 1994.
Indocam International Investment Services, S.A. is the Sub-adviser for
the International Growth Fund.
32
<PAGE>
Organization and Management of the Funds (continued)
The Funds are supervised by the Board of Trustees which monitors the services
provided to investors.
OPERATIONAL STRUCTURE OF THE FUNDS
Trustees Adviser
Shareholders
Financial Services Firms and
their Investment Professionals
Advise current and prospective
shareholders on their Fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping,
statements, processing of buy and sell
requests, distribution of dividends,
and servicing of shareholder accounts.
Administrator, Distributor,
and Fund Accountant
BISYS Fund Services
and its affiliates
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares
through Investment Professionals,
and calculates the value of shares.
As Administrator, handles the
day-to-day activities of the Funds.
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the
Funds' investments and cash, and
Settles trades made by the Funds.
Sub-Administrator
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain
sub-administrative services.
33
<PAGE>
Additional Information
Some additional information you should know about the Funds.
If you would like to receive additional copies of any materials, please call
the Funds at 800-539-FUND.
* Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
* Banking Laws
The Adviser is a subsidiary of a bank holding company. Banking laws,
including the Glass-Steagall Act, currently prevent a bank holding company or
its affiliates from sponsoring, organizing, or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may
act as an investment adviser, transfer agent, custodian, or shareholder
servicing agent. They also may pay third parties for performing these
functions and buy shares of such an investment company for their customers.
On November 12, 1999, President Clinton signed a bill repealing the
Glass-Steagall Act. As a result, the Adviser or its affiliates may in the
future perform certain functions for the Funds that previously were not
permitted under federal law.
* Performance
The Victory Funds may advertise the performance of each Fund by comparing it
to other mutual funds with similar objectives and policies. Performance
information also may appear in various publications. Any fees charged by
Investment Professionals may not be reflected in these performance
calculations. Advertising information will include the average annual total
return of each Fund calculated on a compounded basis for specified periods of
time. Total return information will be calculated according to rules
established by the SEC. Such information may include performance rankings and
similar information from independent organizations, such as Lipper, Inc., and
industry publications such as Morningstar Inc., Business Week, or Forbes. You
also should see the "Investment Performance" section for the Fund in which
you would like to invest.
* Year 2000 Issues
Like all mutual funds, the Funds could be adversely affected if the computer
systems used by its service providers, including shareholder servicing
agents, are unable to recognize dates after 1999. The risk of such a computer
failure may be greater as it relates to investments in foreign countries. The
Funds' service providers have been actively updating their systems to be able
to process Year 2000 data. There can be no assurance, however, that these
steps will be adequate to avoid a temporary service disruption or other
adverse impact on the Funds. In addition, an issuer's failure to process
accurately Year 2000 data may cause that issuer's securities to decline in
value or delay the payment of interest to a Fund.
* Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only one
copy of any financial reports, prospectuses and their supplements.
34
<PAGE>
Financial Highlights Value Fund
The Financial Highlights table is intended to help you understand the Value
Fund's financial performance for the past five years. Certain information
shows the results of an investment in one share of the Value Fund. The total
returns in the table represent the rate that an investor would have earned on
an investment in the Value Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about Class A
Shares of the Value Fund. The financial highlights for the four fiscal years
ended October 31, 1998 and the period from December 3, 1993 to October 31,
1994 were audited by PricewaterhouseCoopers LLP, whose report, along with the
financial statements of the Value Fund, are included in the Fund's annual
report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Six
Months Year Year Year Year December 3,
Ended Ended Ended Ended Ended 1993 to
April 30, October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995<F5> 1994<F2>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.81 $ 17.07 $ 14.18 $ 11.87 $ 10.13 $ 10.00
Investment Activities
Net investment income 0.01 0.09 0.15 0.20 0.27 0.21
Net realized and unrealized
gains (losses) from investments 3.35 3.16 3.57 2.65 1.92 0.11
Total from Investment Activities 3.36 3.25 3.72 2.85 2.19 0.32
Distributions
Net investment income (0.02) (0.10) (0.16) (0.20) (0.27) (0.19)
In excess of net investment income -- -- -- -- (0.01) --
Net realized gains (3.13) (1.41) (0.67) (0.34) (0.17) --
Total Distributions (3.15) (1.51) (0.83) (0.54) (0.45) (0.19)
Net Asset Value, End of Period $ 19.02 $ 18.81 $ 17.07 $ 14.18 $ 11.87 $ 10.13
Total Return (excludes sales charges) 21.04%<F3> 20.46% 27.24% 24.66% 22.28% 3.27%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $611,450 $517,313 $472,047 $382,083 $295,871 $188,184
Ratio of expenses to
average net assets 1.40%<F4> 1.34% 1.32% 1.33% 0.99% 0.92%<F4>
Ratio of net investment income
to average net assets 0.15%<F4> 0.54% 0.93% 1.56% 2.55% 2.32%<F4>
Ratio of expenses to
average net assets<F1> 1.45%<F4> 1.46% <F6> 1.35% 1.30% 1.48%<F4>
Ratio of net investment income
to average net assets<F1> 0.10%<F4> 0.42% <F6> 1.54% 2.24% 1.76%<F4>
Portfolio turnover 17% 40% 25% 28% 23% 39%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
<F5> Effective June 5, 1995, the Victory Equity Income Portfolio merged into
the Value Fund. Financial highlights for the periods prior to June 5, 1995
represent the Value Fund.
<F6> There were no voluntary fee reductions during the period.
</FN>
</TABLE>
35
<PAGE>
Financial Highlights Diversified Stock Fund
The Financial Highlights table is intended to help you understand the
Diversified Stock Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Diversified Stock Fund. The total returns in the table represent the rate
that an investor would have earned on an investment in the Diversified Stock
Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
and Class G Shares of the Diversified Stock Fund. The financial highlights
for the five fiscal years ended October 31, 1998 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements
of the Diversified Stock Fund, are included in the Fund's annual report,
which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Prior to designation Class G
Class A Shares as Class A Shares Shares
Six March 26,
Months Year Year Year Year Year 1999
Ended Ended Ended Ended Ended Ended through
April 30, October 31, October 31, October 31, October 31, October 31, April 30,
1999 1998<F5> 1997 1996<F2> 1995 1994 1999<F7><F8>
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 18.85 $ 17.76 $ 15.75 $ 13.62 $ 12.68 $ 13.39 $ 17.14
Investment Activities
Net investment
income (loss) 0.03 0.11 0.16 0.20 0.27 0.25 (0.01)
Net realized and
unrealized
gains (losses)
from investments 3.39 3.07 3.84 3.21 2.33 0.64 1.29
Total from
Investment
Activities 3.42 3.18 4.00 3.41 2.60 0.89 1.28
Distributions
Net investment income (0.04) (0.11) (0.16) (0.19) (0.27) (0.23) --
In excess of net
investment income -- -- -- -- (0.01) -- --
Net realized gains (3.81) (1.98) (1.83) (1.09) (1.38) (1.37) --
Total Distributions (3.85) (2.09) (1.99) (1.28) (1.66) (1.60) --
Net Asset Value,
End of Period $ 18.42 $ 18.85 $ 17.76 $ 15.75 $ 13.62 $ 12.68 $ 18.42
Total Return
(excludes sales charges) 22.32%<F9> 19.60% 27.96% 27.16% 23.54% 7.39% 0.06%<F9>
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $1,059,591 $933,158 $762,270 $571,153 $409,549 $263,227 $87,958
Ratio of expenses
to average
net assets <F10> 1.06%<F3> 1.02% 1.03% 1.05% 0.92% 0.89% 1.24%<F3>
Ratio of net
investment income
(loss) to average
net assets <F10> 0.41%<F3> 0.64% 0.97% 1.40% 2.11% 2.06% (0.32)%<F3>
Ratio of expenses
to average
net assets<F1> 1.12%<F3> 1.13% <F4> 1.08% 0.95% 1.10% 1.28%<F3>
Ratio of net
investment income
(loss) to average
net assets<F1> 0.35%<F3> 0.53% <F4> 1.37% 2.07% 1.86% (0.36)%<F3>
Portfolio turnover <F6> 47% 84% 63% 94% 75% 104% 47%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
<F2> Effective March 1, 1996, the Fund designated the existing shares as
Class A Shares.
<F3> Annualized.
<F4> There were no voluntary fee reductions during the period.
<F5> Effective March 16, 1998, the SBSF Fund merged into the Victory
Diversified Stock Fund. Financial highlights for the period prior to March
16, 1998 represent the Victory Diversified Stock Fund.
<F6> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
<F7> Period from commencement of operations.
<F8> Effective March 26, 1999, the Gradison Growth and Income Fund
merged into the Victory Diversified Stock Fund.
<F9> Not Annualized.
<F10> On March 26, 1999, the adviser agreed to waive its management fee or to
reimburse expenses, as allowed by law, to the extent necessary to maintain
the net operating expenses of the Class G shares of the Fund at a maximum of
1.44% until at least April 1, 2001. The Adviser has also agreed to waive its
management fee for Class A shares to the same extent the fee is waived for
Class G shares until at least April 1, 2001.
</FN>
</TABLE>
36
<PAGE>
Financial Highlights Stock Index Fund
The Financial Highlights table is intended to help you understand the Stock
Index Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Stock
Index Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the Stock Index Fund (assuming
reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Stock Index Fund. The financial highlights for the four fiscal
years ended October 31, 1998 and the period from December 3, 1993 to October
31, 1994 were audited by PricewaterhouseCoopers LLP, whose report, along with
the financial statements of the Stock Index Fund, are included in the Fund's
annual report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Six
Months Year Year Year Year December 3,
Ended Ended Ended Ended Ended 1993 to
April 30, October 31, October 31, October 31, October 31, October 31,
1999 1998<F5> 1997 1996 1995 1994<F2>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 21.03 $ 18.75 $ 14.85 $ 12.50 $ 10.18 $ 10.00
Investment Activities
Net investment income 0.14 0.37 0.29 0.28 0.27 0.20
Net realized and unrealized gains
(losses) from investments 4.03 3.37 4.23 2.58 2.31 0.16
Total from Investment Activities 4.17 3.74 4.52 2.86 2.58 0.36
Distributions
Net investment income (0.15) (0.36) (0.29) (0.28) (0.26) (0.18)
Net realized gains (2.03) (1.10) (0.33) (0.23) -- --
Total Distributions (2.18) (1.46) (0.62) (0.51) (0.26) (0.18)
Net Asset Value, End of Period $ 23.02 $ 21.03 $ 18.75 $ 14.85 $ 12.50 $ 10.18
Total Return (excludes sales charges) 21.79%<F3> 20.99% 31.16% 23.38% 25.72% 3.66%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $813,309 $627,147 $465,015 $277,124 $160,822 $89,686
Ratio of expenses to
average net assets 0.57%<F4> 0.57% 0.56% 0.57% 0.55% 0.58%<F4>
Ratio of net investment income
to average net assets 1.37%<F4> 1.83% 1.74% 2.14% 2.53% 2.35%<F4>
Ratio of expenses to
average net assets<F1> 0.82%<F4> 0.84% 0.86% 0.89% 0.87% 1.10%<F4>
Ratio of net investment income
to average net assets<F1> 1.12%<F4> 1.56% 1.44% 1.82% 2.21% 1.82%<F4>
Portfolio turnover 1% 8% 11% 4% 12% 1%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
<F5> Effective March 16,1998, the Key Stock Index Fund merged into the
Victory Stock Index Fund. Financial highlights for the period prior to March
16, 1998 represent the Victory Stock Index Fund.
</FN>
</TABLE>
37
<PAGE>
Financial Highlights Growth Fund
The Financial Highlights table is intended to help you understand the Growth
Fund's financial performance for the past five years. Certain information
shows the results of an investment in one share of the Growth Fund. The total
returns in the table represent the rate that an investor would have earned on
an investment in the Growth Fund (assuming reinvestment of all dividends and
distributions).
These financial highlights reflect historical information about Class A
Shares of the Growth Fund. The financial highlights for the four fiscal years
ended October 31, 1998 and the period from December 3, 1993 to October 31,
1994 were audited by PricewaterhouseCoopers LLP, whose report, along with the
financial statements of the Growth Fund, are included in the Fund's annual
report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Six
Months Year Year Year Year December 3,
Ended Ended Ended Ended Ended 1993 to
April 30, October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995<F6> 1994<F2><F3>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 21.62 $ 18.01 $ 14.57 $ 12.15 $ 10.23 $ 10.00
Investment Activities
Net investment income (loss) (0.02) (0.03) 0.03 0.08 0.11 0.10
Net realized and unrealized gains
(losses) on investments 4.13 4.88 4.07 2.93 1.97 0.22
Total from Investment Activities 4.11 4.85 4.10 3.01 2.08 0.32
Distributions
Net investment income -- -- (0.04) (0.08) (0.11) (0.09)
Net realized gains (1.77) (1.24) (0.62) (0.51) (0.05) --
Total Distributions (1.77) (1.24) (0.66) (0.59) (0.16) (0.09)
Net Asset Value, End of Period $ 23.96 $ 21.62 $ 18.01 $ 14.57 $ 12.15 $ 10.23
Total Return (excludes sales charges) 20.48%<F4> 28.59% 29.08% 25.66% 20.54% 3.22%<F4>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $361,536 $269,476 $185,533 $147,753 $108,253 $66,921
Ratio of expenses to
average net assets 1.39%<F5> 1.35% 1.34% 1.33% 1.07% 0.94%<F5>
Ratio of net investment
income (loss) to
average net assets (0.22)%<F5> (0.13)% 0.19% 0.64% 1.00% 1.10%<F5>
Ratio of expenses to
average net assets<F1> 1.48%<F5> 1.49% <F7> 1.39% 1.42% 1.51%<F5>
Ratio of net investment
income (loss) to
average net assets<F1> (0.31)%<F5> (0.27)% <F7> 0.58% 0.65% 0.52%<F5>
Portfolio turnover 18% 29% 21% 27% 107% 28%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
<F2> Period from commencement of operations.
<F3> Effective March 17, 1994, the Society Earnings Momentum Fund merged into
the Growth Fund. Financial highlights for the period prior to March 17, 1994
represent the Growth Fund.
<F4> Not annualized.
<F5> Annualized.
<F6> Effective June 5, 1995, the Victory Equity Portfolio merged into the
Growth Fund. Financial highlights for the periods prior to June 5, 1995
represent the Growth Fund.
<F7> There were no voluntary fee reductions during the period.
</FN>
</TABLE>
38
<PAGE>
Financial Highlights Special Value Fund
The Financial Highlights table is intended to help you understand the Special
Value Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Special
Value Fund. The total returns in the table represent the rate that an
investor would have earned on an investment in the Special Value Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Special Value Fund. The financial highlights for the four
fiscal years ended October 31, 1998 and the period from December 3, 1993 to
October 31, 1994 were audited by PricewaterhouseCoopers LLP, whose report,
along with the financial statements of the Special Value Fund, are included
in the Fund's annual report, which is available by calling the Fund at
800-539-FUND.
<TABLE>
<CAPTION>
Prior to designation
Class A Shares as Class A Shares
December 3,
Six Months Year Year Year Year 1993
Ended Ended Ended Ended Ended through
April 30, October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996<F5> 1995 1994<F2>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 13.64 $ 16.68 $ 14.15 $ 12.15 $ 10.49 $ 10.00
Investment Activities
Net investment income (loss) 0.04 0.09 0.10 0.12 0.15 0.11
Net realized and unrealized
gains (losses) on investments 0.43 (1.79) 3.50 2.33 1.71 0.48
Total from Investment Activities 0.47 (1.70) 3.60 2.45 1.86 0.59
Distributions
Net investment income (0.05) (0.09) (0.12) (0.11) (0.15) (0.10)
In excess of net investment income -- -- -- -- -- --
Net realized gains (0.58) (1.25) (0.95) (0.34) (0.05) --
Total Distributions (0.63) (1.34) (1.07) (0.45) (0.20) (0.10)
Net Asset Value, End of Period $ 13.48 $ 13.64 $ 16.68 $ 14.15 $ 12.15 $ 10.49
Total Return (excludes sales charges) 3.57%<F3> (11.22)% 27.05% 20.60% 18.01% 5.92%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $272,551 $346,962 $420,020 $289,460 $194,700 $118,600
Ratio of expenses to
average net assets 1.43%<F4> 1.40% 1.37% 1.37% 1.04% 1.00%<F4>
Ratio of net investment income
(loss) to average net assets 0.61%<F4> 0.56% 0.65% 0.88% 1.35% 1.23%<F4>
Ratio of expenses to
average net assets<F1> 1.53%<F4> 1.51% <F7> 1.40% 1.30% 1.49%<F4>
Ratio of net investment income
(loss) to average net assets<F1> 0.51%<F4> 0.45% <F7> 0.85% 1.09% 0.74%<F4>
Portfolio turnover <F6> 19% 44% 39% 55% 39% 18%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
<F5> Effective March 1, 1996, the Fund designated the existing shares as
Class A Shares.
<F6> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
<F7> There were no voluntary fee reductions during the period.
</FN>
</TABLE>
39
<PAGE>
Financial Highlights Ohio Regional Stock Fund
The Financial Highlights table is intended to help you understand the Ohio
Regional Stock Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Ohio
Regional Stock Fund. The total returns in the table represent the rate that
an investor would have earned on an investment in the Ohio Regional Stock
Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Ohio Regional Stock Fund. The financial highlights for the five
fiscal years ended October 31, 1998 were audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements of the Ohio Regional
Stock Fund, are included in the Fund's annual report, which is available by
calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Prior to designation
Class A Shares as Class A Shares
Six Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
April 30, October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996<F2> 1995 1994
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 20.67 $ 23.56 $ 17.95 $ 15.94 $ 14.56 $ 14.69
Investment Activities
Net investment income (loss) 0.09 0.18 0.14 0.14 0.17 0.18
Net realized and unrealized
gains (losses) from investments 0.80 (0.80) 5.96 2.62 2.13 0.39
Total from Investment Activities 0.89 (0.62) 6.10 2.76 2.30 0.57
Distributions
Net investment income (0.09) (0.17) (0.14) (0.14) (0.17) (0.17)
In excess of net investment income -- -- -- -- (0.01) --
Net realized gains (2.42) (2.10) (0.35) (0.36) (0.65) (0.53)
In excess of net realized gains -- -- -- (0.25) (0.09) --
Total Distributions (2.51) (2.27) (0.49) (0.75) (0.92) (0.70)
Net Asset Value, End of Period $ 19.05 $ 20.67 $ 23.56 $ 17.95 $ 15.94 $ 14.56
Total Return (excludes sales charges) 4.52%<F5> (3.13)% 34.61% 17.79% 16.93% 3.96%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $33,576 $41,653 $53,703 $45,294 $39,048 $33,965
Ratio of expenses to
average net assets 1.36%<F3> 1.26% 1.26% 1.39% 1.20% 1.04%
Ratio of net investment income
(loss) to average net assets 0.90%<F3> 0.76% 0.67% 0.79% 1.13% 1.27%
Ratio of expenses to
average net assets<F1> 1.46%<F3> 1.37% 1.26% 1.40% 1.24% 1.27%
Ratio of net investment income
(loss) to average net assets<F1> 0.80%<F3> 0.65% 0.67% 0.78% 1.09% 1.04%
Portfolio turnover <F4> 1% 6% 8% 6% 11% 14%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
<F2> Effective March 1, 1996, the Fund designated the existing shares as
Class A Shares.
<F3> Annualized.
<F4> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
<F5> Not annualized.
</FN>
</TABLE>
40
<PAGE>
Financial Highlights International Growth Fund
The Financial Highlights table is intended to help you understand the
International Growth Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
International Growth Fund. The total returns in the table represent the rate
that an investor would have earned on an investment in the International
Growth Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
and Class G Shares of the International Growth Fund. The financial highlights
for the five fiscal years ended October 31, 1998 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements
of the International Growth Fund, are included in the Fund's annual report,
which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Prior to designation Class G
Class A Shares as Class A Shares Shares
Six
Months Year Year Year Year Year March 26,
Ended Ended Ended Ended Ended Ended 1999 to
April 30, October 31, October 31, October 31, October 31, October 31, April 30,
1999 1998 1997 1996<F3> 1995<F4> 1994 1999<F8><F9>
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 13.19 $ 13.31 $ 13.01 $ 12.33 $ 13.32 $ 11.93 $ 13.73
Investment Activities
Net investment
income (loss) (0.04) 0.07<F2> 0.09 0.08 0.05 (0.01) --
Net realized and
Unrealized gains
(losses) from
investments and
foreign currencies 1.84 0.65 0.67 0.62 (0.42) 1.40 0.77
Total from
Investment
Activities 1.80 0.72 0.76 0.70 (0.37) 1.39 0.77
Distributions
Net investment income -- (0.06) (0.01) (0.02) -- -- --
Net realized gains (0.48) (0.78) (0.45) -- (0.55) -- --
Tax return of capital -- -- -- -- (0.07) -- --
Total Distributions (0.48) (0.84) (0.46) (0.02) (0.62) -- --
Net Asset Value,
End of Period $ 14.51 $ 13.19 $ 13.31 $ 13.01 $ 12.33 $ 13.32 $ 14.50
Total Return
(excludes sales charges) 13.75%<F7> 5.79% 6.04% 5.65% (2.50)% 11.65% 5.61%<F7>
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $133,603 $134,491 $106,189 $121,517 $106,477 $81,307 $34,066
Ratio of expenses
to average net
assets <F10> 1.75%<F5> 1.71% 1.69% 1.73% 1.53% 1.48% 1.96%<F5>
Ratio of net investment
income (loss) to
average net assets <F10> (0.50)%<F5> 0.55% 0.63% 0.64% 0.75% (0.51)% (0.32)%<F5>
Ratio of expenses to
average net assets<F1> 1.90%<F5> 1.82% 1.69% 1.75% 1.65% 1.83% 2.14%<F5>
Ratio of net investment
income (loss) to
average net assets<F1> (0.65)%<F5> 0.44% 0.63% 0.62% 0.63% (0.86)% (0.50)%<F5>
Portfolio turnover <F6> 42% 86% 116% 178% 68% 51% 42%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratios would have been as indicated.
<F2> Calculated using average shares for the period.
<F3> Effective March 1, 1996, the Fund designated the existing shares as
Class A Shares.
<F4> Effective June 5, 1995, the Victory Foreign Markets Portfolio merged
into the International Growth Fund. Financial highlights for the periods
prior to June 5, 1995 represent the International Growth Portfolio.
<F5> Annualized.
<F6> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
<F7> Not Annualized.
<F8> Period from commencement of operations.
<F9> Effective March 26, 1999, the Gradison International Fund merged
into the Victory International Growth Fund.
<F10> On March 26, 1999, the adviser agreed to waive its management fee or to
reimburse expenses, as allowed by law, to the extent necessary to maintain
the net operating expenses of the Class G Shares of the Fund at a maximum of
2.00% until at least April 1, 2001. The Adviser has also agreed to waive its
management fee for Class A Shares to the same extent the fee is waived for
Class G Shares until at least April 1, 2001.
</FN>
</TABLE>
41
<PAGE>
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42
<PAGE>
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43
<PAGE>
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44
<PAGE>
If you would like a free copy of any of the following documents or would like
to request other information regarding the Funds, you can call or write the
Funds or your Investment Professional.
* Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has
been filed with the Securities and Exchange Commission (SEC), and is
incorporated by reference in this Prospectus.
* Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a
Fund's performance during its last fiscal year.
* How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863). You also may
obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.)
By mail: The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
Copies of this information may be obtained, after paying a duplicating fee,
by electronic request at the following e-mail address: [email protected], or
by writing the SEC's Public Reference Section, Washington, D.C.
20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line
or downloaded from the SEC at http://www.sec.gov or from the Victory Funds'
website at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this Prospectus and the SAI.
If you would like to receive copies of the annual and semi-annual
reports and/or the SAI at no charge, please call the Funds at 800-539-FUND.
(800-539-3863)
(LOGO)(R)
Victory Funds
PRINTED ON RECYCLED PAPER
Investment Company Act File Number 811-4852
VF-EQTY-PRO (12/99)
<PAGE>
December 15, 1999
(LOGO)(R)
Victory Funds
PROSPECTUS
*
Balanced Fund
Class A and G Shares
Convertible Securities Fund
Class A and G Shares
Real Estate Investment Fund
Class A and G Shares
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Call Victory at:
800-539-FUND
(800-539-3863)
or visit the Victory Funds' website at: www.victoryfunds.com
<PAGE>
TABLE OF CONTENTS
*
RISK/RETURN SUMMARY FOR EACH OF THE FUNDS
An analysis which includes the investment objective, principal strategies,
principal risks, performance, and expenses of each Fund
INTRODUCTION 1
Balanced Fund, Class A and G Shares 2
Convertible Securities Fund, Class A and G Shares 4
Real Estate Investment Fund, Class A and G Shares 6
INVESTMENTS 8
RISK FACTORS 9
SHARE PRICE 12
DIVIDENDS, DISTRIBUTIONS, AND TAXES 12
INVESTING WITH VICTORY
* Choosing a Share Class 15
* How to Buy Shares 18
* How to Exchange Shares 21
* How to Sell Shares 22
ORGANIZATION AND MANAGEMENT OF THE FUNDS 24
ADDITIONAL INFORMATION 26
FINANCIAL HIGHLIGHTS
Balanced Fund 27
Convertible Securities Fund 28
Real Estate Investment Fund 29
APPENDIX 30
The Victory Portfolios
KEY TO FUND INFORMATION
OBJECTIVE AND STRATEGIES
The goals and the strategies that a Fund plans to use to pursue its
investment objective.
RISK FACTORS
The risks you may assume as an investor in a Fund.
PERFORMANCE
A summary of the historical performance of a Fund in comparison to an
unmanaged index, and, in some cases, the average performance of a category of
mutual funds.
EXPENSES
The costs you will pay, directly or indirectly, as an investor in a Fund,
including sales charges and ongoing expenses.
Shares of the Funds are:
* Not insured by the FDIC;
* Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
* Subject to possible investment risks, including possible loss of the
principal amount invested.
<PAGE>
Introduction
Key Asset Management Inc., which we will refer to as the "Adviser" or "KAM"
throughout this Prospectus, manages the Funds.
Please read this Prospectus before investing in the Funds and keep it for
future reference.
This Prospectus explains the objectives, policies, risks, performance,
strategies, and expenses of the Shares of the Victory Funds described in this
Prospectus (the Funds).
Investment Strategy
Each Fund pursues its investment objectives by investing primarily in
equity securities. The Balanced Fund also invests a portion of its assets in
debt securities and the Convertible Securities Fund invests primarily in
fixed-income securities convertible into common stock. However, each Fund has
unique investment strategies and its own risk/reward profile. Please review
the "Risk/Return Summary" for each Fund and the "Investments" section for an
overview.
Risk Factors
Each Fund invests primarily in equity securities. The value of equity
securities may fluctuate in response to the activities of an individual
company, or in response to general market or economic conditions. The
Balanced Fund and the Convertible Securities Fund are subject to the risks of
both equity and debt securities, since both Funds are permitted to invest in
both types of securities. There are other potential risks discussed in each
"Risk/Return Summary" and in "Risk Factors."
Who May Want to Invest in the Funds
* Investors who want a diversified portfolio
* Investors willing to accept the risk of price and dividend fluctuations
* Investors willing to accept higher short-term risk along with higher
potential long-term returns
* Long-term investors with a particular goal, like saving for retirement or a
child's education
Share Classes
Each Fund offers Class A and Class G Shares. See "Choosing a Share Class."
The following pages provide you with an overview of each of the Funds. Please
look at the objective, policies, strategies, risks, and expenses to determine
which Fund will suit your risk tolerance and investment needs.
1
<PAGE>
BALANCED FUND Risk/Return Summary
Investment Objective
The Balanced Fund seeks to provide income and long-term growth of capital.
Principal Investment Strategies
The Balanced Fund pursues its investment objective by investing in equity
securities and fixed income securities. The Balanced Fund may invest in any
type or class of security, including foreign securities.
Under normal market conditions, the Balanced Fund will:
* Invest 40% to 75% of its total assets in equity securities and securities
convertible or exchangeable into common stock; and
* Invest at least 25% of its total assets in debt securities and preferred
stocks. The debt securities in which the Balanced Fund may invest include
asset backed securities, mortgage backed securities, corporate bonds and U.S.
government securities.
Important Characteristics of the Balanced Fund's Investments:
In making investment decisions involving Equity Securities, the Adviser
considers:
* The growth and profitability prospects for the economic sector and markets
in which the company operates and for the products or services it provides;
* The financial condition of the company; and
* The price of the security and how that price compares to historical price
levels, to current price levels in the general market, and to prices of
competing companies; projected earnings estimates; and the earnings growth
rate of the company.
In making investment decisions involving Debt Securities, the Adviser
considers:
* Quality: The Balanced Fund primarily purchases investment-grade debt
securities.
* Maturity: The average weighted maturity of the Balanced Fund's fixed income
securities will range from 5 to 15 years. This range may be changed in
response to changes in market conditions.
In making investment decisions involving Preferred Stock, the Adviser
considers:
* The issuer's financial strength, including its historic and current
financial condition;
* The issuer's projected earnings, cash flow, and borrowing requirements; and
* The issuer's continuing ability to meet its obligations.
The Balanced Fund's higher portfolio turnover rate may result in higher
expenses and taxable gain distributions.
There is no guarantee that the Balanced Fund will achieve its
objectives.
Principal Risks
You may lose money by investing in the Balanced Fund. The Balanced Fund is
subject to the following principal risks, more fully described in "Risk
Factors." The Balanced Fund's net asset value, yield and/or total return may
be adversely affected if any of the following occurs:
* The market value of securities acquired by the Balanced Fund declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* A company's earnings do not increase as expected.
* 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.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The Balanced Fund must reinvest interest or sale proceeds at lower rates.
* The rate of inflation increases.
* The average life of a mortgage-related security is shortened or lengthened.
An investment in the Balanced Fund is not a deposit of KeyBank or any of
its affiliates and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
By itself, the Balanced Fund does not constitute a complete investment
plan and should be considered a long-term investment for investors who can
afford to weather changes in the value of their investment and in the level
of income they receive from their investment.
2
<PAGE>
BALANCED FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Balanced Fund by showing changes in its performance for
various time periods.
The bar chart shows returns for Class A Shares of the Balanced Fund.
Sales loads are not reflected on the bar chart and if they were reflected,
returns would be lower than those shown.
1994 -1.73%
1995 26.11%
1996 14.55%
1997 19.51%
1998 17.91%1
1 The Balanced Fund's year-to-date return as of September 30, 1999 was 1.25%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 10.17% (quarter ending December 31, 1998) and the lowest return for a
quarter was -4.09% (quarter ending March 31, 1994).
The table shows how the average annual total returns for Class A Shares
of the Balanced Fund for one year, five years and since inception compare to
those of a broad-based market index and an index of mutual funds with similar
investment objectives. The figures shown in this table assume reinvestment of
dividends and distributions. The figures in this table with respect to the
Balanced Fund reflect all applicable sales charges while the figures with
respect to the Lipper Balanced Fund Index do not include the effects of
applicable sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Past Inception
December 31, 1998)1 One Year 5 Years (12/10/93)
Class A 11.10% 13.53% 13.44%
S&P 500 Stock Index2 28.58% 24.06% 23.75%
Lipper Balanced
Fund Index3 15.09% 13.87% 13.42%
1 The Balanced Fund did not offer Class G Shares prior to December 15, 1999.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-size companies.
3 The Lipper Balanced Fund Index is a non-weighted index of the 30 largest
funds within the Lipper Balanced Fund investment category.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Balanced Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Balanced Fund pays these
expenses from its assets.)
Management Fees 0.80% 0.80%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable
to Class A Shares) 0.50% 0.25%
Total Fund Operating Expenses 1.30% 1.55%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Estimated Class G expenses are based on historical expenses of Class A
Shares of the Balanced Fund for the fiscal year ended October 31, 1998.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Balanced Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the Balanced Fund for
the time periods shown and then sell 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 Balanced Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $700 $963 $1,247 $2,053
Class G $158 $490 $ 845 $1,845
3
<PAGE>
CONVERTIBLE SECURITIES FUND Risk/Return Summary
Investment Objective
The Convertible Securities Fund seeks a high level of current income together
with long-term capital appreciation.
Principal Investment Strategies
The Convertible Securities Fund pursues its investment objective by investing
at least 65% of its total assets in convertible securities. Investments in
securities are not limited by credit quality. Lower quality or lower-rated
debt securities are sometimes referred to as "junk bonds."
Under normal market conditions, the Convertible Securities Fund will
invest at least 65% of its total assets in:
* Securities convertible into common stocks, such as convertible bonds,
convertible notes, and convertible preferred stocks; and
* Synthetic convertible securities, which are created by combining fixed
income securities with the right to acquire equity securities.
There is no guarantee that the Convertible Securities Fund will achieve
its objectives.
Principal Risks
You may lose money by investing in the Convertible Securities Fund. The
Convertible Securities Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Convertible Securities Fund's net
asset value, yield and/or total return may be adversely affected if any of
the following occurs:
* The market value of securities acquired by the Convertible Securities
Fund declines.
*A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
* A company's earnings do not increase as expected.
* Interest rates rise.
* An issuer's credit quality is downgraded.
* The rate of inflation increases.
An investment in the Convertible Securities Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
In addition, the Convertible Securities Fund is subject to the risks
related to investments in lower-rated debt securities. By itself, the
Convertible Securities Fund does not constitute a complete investment plan
and should be considered a long-term investment for investors who can afford
to weather changes in the value of their investment.
4
<PAGE>
CONVERTIBLE SECURITIES FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Convertible Securities Fund by showing changes in its
performance for various time periods.
The bar chart shows returns for Class A Shares of the Convertible
Securities Fund. Sales loads are not reflected on the bar chart and if they
were reflected, returns would be lower than those shown.
1989 18.83%
1990 -4.96%
1991 27.69%
1992 11.30%
1993 20.09%
1994 -6.45%
1995 24.30%
1996 19.14%
1997 16.35%
1998 -0.78%1
1 The Convertible Securities Fund's year-to-date return as of September 30,
1999 was 5.22%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 9.38% (quarter ending March 31, 1991) and the lowest return for a quarter
was 10.67% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares
of the Convertible Securities Fund for one year, five years and ten years
compare to those of a broad-based market index and an index of mutual funds
with similar investment objectives. The figures shown in this table assume
reinvestment of dividends and distributions. The figures in this table with
respect to the Convertible Securities Fund reflect all applicable sales
charges while the figures with respect to the Lipper Convertible Securities
Fund Index do not include the effects of applicable sales charges.
Average Annual Total Returns
(for the Periods ended Past Past Past
December 31, 1998)1 One Year 5 Years 10 Years
Class A -6.48% 8.56% 11.26%
S&P 500 Index2 28.58% 24.06% 18.89%
Lipper Convertible
Securities Fund Index3 2.82% 9.96% 11.10%
1 The Convertible Securities Fund did not offer Class G Shares prior to
December 15, 1999.
2 The Standard & Poor's 500 Stock Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stocks of
mid- to large-size companies.
3 Mutual funds listed in the Lipper Convertible Securities Fund Index invest
primarily in convertible bonds and convertible preferred shares.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Convertible Securities Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Convertible Securities Fund pays
these expenses from its assets.)
Management Fees 0.75% 0.75%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable
to Class A Shares) 0.57% 0.37%
Total Fund Operating Expenses 1.32% 1.62%
Fee Waiver / Expense Reimbursement (0.07)% (0.07)%
Net Expenses 1.25%3 1.55%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Estimated Class G expenses are based on historical expenses of Class A
Shares of the Convertible Securities Fund for the fiscal year ended October
31, 1998. The Adviser has contractually agreed to waive its management fee
and reimburse expenses, as allowed by law, so that the net operating expenses
of Class A and Class G Shares of the Convertible Securities Fund will equal
1.25% and 1.55%, respectively, until at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Convertible Securities Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the
Convertible Securities Fund for the time periods shown and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Convertible Securities
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A $695 $963 $1,251 $2,072
Class G $158 $504 $ 875 $1,917
5
<PAGE>
REAL ESTATE INVESTMENT FUND Risk/Return Summary
Investment Objective
The Real Estate Investment Fund seeks to provide total return through
investments in real estate-related securities.
Principal Investment Strategies
The Real Estate Investment Fund pursues its investment objective by investing
at least 80% of the Fund's total assets in real estate-related companies.
Under normal market conditions, the Real Estate Investment Fund will
invest substantially all of its assets in:
* Equity securities (including equity and mortgage real estate investment
trusts (REITs));
* Rights or warrants to purchase common stocks;
* Securities convertible into common stocks when the Adviser thinks that the
conversion will be profitable; and
* Preferred stocks.
There is no guarantee that the Real Estate Investment Fund will achieve
its objectives.
Principal Risks
You may lose money by investing in the Real Estate Investment Fund. The Real
Estate Investment Fund is subject to the following principal risks, more
fully described in "Risk Factors." The Real Estate Investment Fund's net
asset value, yield and/or total return may be adversely affected if any of
the following occurs:
* The market value of securities acquired by the Real Estate Investment Fund
declines.
* A particular strategy does not produce the intended result or the portfolio
manager does not execute the strategy effectively.
An investment in the Real Estate Investment Fund is not a deposit of
KeyBank or any of its affiliates and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
The Real Estate Investment Fund is a non-diversified fund. As a
non-diversified fund, the Real Estate Investment Fund may devote a larger
portion of its assets to the securities of a single issuer than if it were
diversified. This could make the Real Estate Investment Fund more susceptible
to economic or credit risks.
In addition, the Real Estate Investment Fund is subject to the risks
related to direct investment in real estate. By itself, the Real Estate
Investment Fund does not constitute a complete investment plan and should be
considered a long-term investment for investors who can afford to weather
changes in the value of their investment.
6
<PAGE>
REAL ESTATE INVESTMENT FUND Risk/Return Summary
Investment Performance
The bar chart and table shown below provide an indication of the risks of
investing in the Real Estate Investment Fund by showing changes in its
performance for various time periods.
The bar chart shows returns for Class A Shares of the Real Estate
Investment Fund. Sales loads are not reflected on the bar chart and if they
were reflected, returns would be lower than those shown.
1998 -14.43%1
1 The Real Estate Investment Fund's year-to-date return as of September 30,
1999 was 1.09%.
Past performance does not indicate future results.
During the period shown in the bar chart, the highest return for a quarter
was 0.84% (quarter ending March 31, 1998) and the lowest return for a quarter
was -10.51% (quarter ending September 30, 1998).
The table shows how the average annual total returns for Class A Shares
of the Real Estate Investment Fund for one year and since inception compare
to those of a broad-based market index. The figures shown in this table
assume reinvestment of dividends and distributions and reflect all applicable
sales charges.
Average Annual Total Returns Since
(for the Periods ended Past Inception
December 31, 1998)1 One Year (4/30/97)
Class A -19.32% 1.58%
Morgan Stanley REIT Index2 -16.90% 2.17%
1 The Real Estate Investment Fund did not offer Class G Shares prior to
December 15, 1999.
2 The Morgan Stanley REIT Index is a capitalization-weighted index with
dividends reinvested of the most actively traded real estate investment
trusts and is designed to be a measure of real estate equity performance.
Fund Expenses
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Real Estate Investment Fund.
Shareholder Transaction Expenses
(paid directly from your investment)1 Class A Class G
Maximum Sales Charge
Imposed on Purchases 5.75% NONE
(as a percentage of offering price)
Maximum Deferred
Sales Charge (as a percentage of NONE2 NONE
the lower of purchase or sale price)
Maximum Sales Charge Imposed
on Reinvested Dividends NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Fund Operating Expenses
(The Real Estate Investment Fund pays
these expenses from its assets.)
Management Fees 0.80% 0.80%
Distribution (12b-1) Fees 0.00% 0.50%
Other Expenses (includes a shareholder
servicing fee of 0.25% applicable
to Class A Shares) 1.03% 0.78%
Total Fund Operating Expenses 1.83% 2.08%
Fee Waiver / Expense Reimbursement (0.43)% (0.43)%
Net Expenses 1.40%3 1.65%3
1 You may be charged additional fees if you buy, exchange, or sell shares
through a broker or agent.
2 Except for non-IRA tax deferred retirement accounts, there is no initial
sales charge on purchases of $1 million or more for Class A Shares. However,
if you sell any such Class A Shares within one year, you will be charged a
contingent deferred sales charge (CDSC) of 1.00%. If you sell any such Class
A Shares within two years, you will be charged a CDSC of 0.50%.
3 Estimated Class G expenses are based on historical expenses of Class A
Shares of the Real Estate Investment Fund for the fiscal year ended October
31, 1998. The Adviser has contractually agreed to waive its management fee
and to reimburse expenses, as allowed by law, to the extent necessary to
maintain the net operating expenses of Class A Shares and Class G Shares of
the Real Estate Investment Fund at a maximum of 1.40% and 1.65%,
respectively, until at least February 28, 2001.
EXAMPLE: The following Example is designed to help you compare the cost of
investing in the Real Estate Investment Fund with the cost of investing in
other mutual funds. The Example assumes that you invest $10,000 in the Real
Estate Investment Fund for the time periods shown and then sell 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 Real Estate Investment
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Class A1 $709 $1,080 $1,477 $2,603
Class G2 $168 $ 612 $1,083 $2,385
1 This Example assumes that Net Annual Fund Operating Expenses for Class A
Shares will equal 1.40% until February 28, 2001 and will equal 1.83%
thereafter.
2 This Example assumes that Net Annual Fund Operating Expenses for Class G
Shares will equal 1.65% until February 28, 2001 and will equal 2.08%
thereafter.
7
<PAGE>
Investments
The following describes some of the types of securities the Funds may
purchase under normal market conditions. All Funds will not buy all of the
securities listed below.
For cash management or for temporary defensive purposes in response to
market conditions, each Fund may hold all or a portion of its assets in cash
or short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause a Fund to fail to meet its investment
objective.
For more information on ratings, detailed descriptions of each of the
investments, and a more complete description of which Funds can invest in
certain types of securities, see the Statement of Additional Information
(SAI).
U.S. Equity Securities. Can include common stock, preferred stock, and
securities that are convertible or exchangeable into common stock of U.S.
corporations.
U.S. Government Securities. Notes and bonds issued or guaranteed by the
U.S. government, its agencies or instrumentalities. Some are direct
obligations of the U.S. Treasury; others are obligations only of the U.S.agency.
Corporate Debt Obligations. Debt instruments issued by public corporations.
They may be secured or unsecured.
Convertible or Exchangeable Corporate Debt Obligations. Debt instruments
which may be exchanged or converted to other securities.
Asset-Backed Securities. Debt securities backed by loans or accounts
receivable originated by banks, credit card companies, student loan issuers,
or other providers of credit. These securities may be enhanced by a bank
letter of credit or by insurance coverage provided by a third party.
Mortgage-Backed Securities. Instruments secured by a mortgage or pools of
mortgages.
Preferred Stock. A class of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets.
Real Estate Investment Trusts. Shares of ownership in real estate investment
trusts or mortgages on real estate.
8
<PAGE>
Risk Factors
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
This Prospectus describes the principal risks that you may assume as an
investor in the Funds. The "Investments" section in this Prospectus provides
additional information on the securities mentioned in the Risk/Return Summary
for each Fund. As with any mutual fund, there is no guarantee that the Funds
will earn income or show a positive total return over time. Each Fund's
price, yield, and total return will fluctuate. You may lose money if a Fund's
investments do not perform well.
This table summarizes the principal risks, described below, to which the
Funds are subject.
Convertible Real Estate
Balanced Securities Investment
Fund Fund Fund
Market risk and x x x
manager risk
Equity risk x x x
Foreign security
and currency risk x
Debt security risk x x
Lower rated
security risk x
Real estate
security risk x
Concentration and
diversification risk x
Mortgage-related
security risk x
9
<PAGE>
Risk Factors (continued)
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
General risks:
* Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for the security, or more or less than the security was worth
at an earlier time. Market risk may affect a single issuer, an industry, a
sector of the economy, or the entire market and is common to all investments.
* Manager risk is the risk that a Fund's portfolio manager may use a strategy
that does not produce the intended result. Manager risk also refers to the
possibility that the portfolio manager may fail to execute the Fund's
investment strategy effectively and, thus, fail to achieve its objective.
Risks associated with investing in equity securities:
* Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a company's
earnings and cash flow in case of liquidation, equity securities are entitled
to the residual value after the company meets its other obligations. For
example, in the event of bankruptcy, holders of debt securities have priority
over holders of equity securities to a company's assets.
Risks associated with investing in foreign securities:
* Currency risk is the risk that fluctuations in the exchange rates between
the U.S. dollar and foreign currencies may negatively affect an investment.
Adverse changes in exchange rates may erode or reverse any gains produced by
foreign currency denominated investments and may widen any losses. Political
and economic risks, along with other factors, could adversely affect the
value of the Balanced Fund's securities.
* Foreign issuer risk. Compared to U.S. companies, there generally is less
publicly available information about foreign companies and there may be less
governmental regulation and supervision of foreign stock exchanges, brokers,
and listed companies. Foreign issuers may not be subject to the uniform
accounting, auditing, and financial reporting standards and practices
prevalent in the U.S. In addition, foreign securities markets may be more
volatile and subject to less governmental supervision than their counterparts
in the U.S. Investments in foreign countries could be affected by factors not
present in the U.S., including expropriation, confiscation of property, and
difficulties in enforcing contracts. All of these factors can make foreign
investments more volatile than U.S. investments.
Risks associated with investing in debt securities:
* Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a debt security typically goes down. When interest rates go
down, the value of a debt security typically goes up. Generally, the market
values of securities with longer maturities are more sensitive to changes in
interest rates.
* Inflation risk is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities or equity securities that have a record of dividend growth.
10
<PAGE>
Risk Factors (continued)
An investment in a Fund is not a complete investment program.
* Reinvestment risk is the risk that when interest rates are declining, a
Fund that receives interest income or prepayments on a security will have to
reinvest these moneys at lower interest rates. Generally, interest rate risk
and reinvestment risk tend to have offsetting effects, though not necessarily
of the same magnitude.
* Credit (or default) risk is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although the
Balanced and Real Estate Investment Funds generally invest in only
high-quality securities, the interest or principal payments may not be
insured or guaranteed on all securities. Credit risk is measured by
nationally recognized statistical rating organizations (NRSROs) such as
Standard & Poor's (S&P), Fitch IBCA International, or Moody's Investors
Service (Moody's).
Risks associated with investing in below-investment-grade securities:
* Lower-rated securities ("junk bonds"). Lower-rated securities are subject
to certain risks in addition to those risks associated with higher-rated
securities. Lower-rated securities may be more susceptible to real or
perceived adverse economic conditions, less liquid, and more difficult to
evaluate than higher-rated securities.
Risks associated with investing in mortgage-related securities:
* Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. The level
of interest rates and other factors may affect the frequency of mortgage
prepayments. In periods of rising interest rates, the prepayment rate tends
to decrease, lengthening the average life of a pool of mortgage-related
securities. In periods of falling interest rates, the prepayment rate tends
to increase, shortening the average life of a pool of mortgage-related
securities. Prepayment risk is the risk that, because prepayments generally
occur when interest rates are falling, a Fund may have to reinvest the
proceeds from prepayments at lower interest rates.
* Extension risk is the risk that the rate of anticipated prepayments on
principal may not occur, typically because of a rise in interest rates, and
the expected maturity of the security will increase. During periods of
rapidly rising interest rates, the effective average maturity of a security
may be extended past what a Fund's portfolio manager anticipated that it
would be. The market value of securities with longer maturities tend to be
more volatile.
Risks associated with investing in real estate securities:
* Real Estate Risk is the risk that the value of a security will fluctuate
because of changes in property values, vacancies of rental properties,
overbuilding, changes in local laws, increased property taxes and operating
expenses, and other risks associated with real estate. While the Real Estate
Investment Fund will not invest directly in real estate, it may be subject to
the risks associated with direct ownership. Equity REITs** may be affected by
changes in property value, while mortgage REITs*** may be affected by credit
quality and interest rates.
** Equity REITs may own property, generate income from rental and lease
payments, and offer the potential for growth from property appreciation and
periodic capital gains from the sale of property.
*** Mortgage REITs earn interest income and are subject to credit risks, like
the chance that a developer may fail to repay a loan. Mortgage REITs are also
subject to interest rate risk, described above.
* Regulatory Risk. Certain REITs may fail to qualify for pass-through of
income under federal tax law, or to maintain their exemption from the
registration requirements under federal securities laws.
11
<PAGE>
Share Price
The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own gives you the value of your investment.
Each Fund calculates its share price, called its "net asset value" (NAV),
each business day at 4:00 p.m. Eastern Time or at the close of trading on the
New York Stock Exchange, Inc. (NYSE), whichever time is earlier. You may buy,
exchange, and sell your shares on any business day at a price that is based
on the NAV that is calculated after you place your order. A business day is a
day on which the NYSE is open.
The Funds value their investments based on market value. When market
quotations are not readily available, the Funds value their investments based
on fair value methods approved by the Board of Trustees of the Victory
Portfolios. Each Class of each Fund calculates its NAV by adding up the total
value of its investments and other assets, subtracting its liabilities, and
then dividing that figure by the number of outstanding shares of the Class.
Total Assets--Liabilities
NAV = ----------------------------
Number of Shares Outstanding
You can find a Fund's net asset value each day in The Wall Street
Journal and other newspapers. Newspapers do not normally publish fund
information until a Fund reaches a specific number of shareholders or level
of assets.
Dividends, Distributions, and Taxes
Buying a Dividend. You should check a Fund's distribution schedule before you
invest. If you buy shares of a Fund shortly before it makes a distribution,
some of your investment may come back to you as a taxable distribution.
As a shareholder, you are entitled to your share of net income and capital
gains on the Fund's investments. The Funds pass their earnings along to
investors in the form of dividends. Dividend distributions are the net income
earned on investments after expenses. A Fund will distribute short-term
gains, as necessary, and if a Fund makes a long-term capital gain
distribution, it is normally paid once a year. As with any investment, you
should consider the tax consequences of an investment in a Fund.
Ordinarily, the Balanced Fund declares and pays dividends monthly. The
Convertible Securities Fund and the Real Estate Investment Fund declare and
pay dividends quarterly. Each class of shares declares and pays dividends
separately.
12
<PAGE>
Dividends, Distributions, and Taxes (continued)
Distributions can be received in one of the following ways.
Reinvestment Option
You can have distributions automatically reinvested in additional shares of a
Fund. If you do not indicate another choice on your Account Application, you
will be assigned this option automatically.
Cash Option
A check will be mailed to you no later than seven days after the pay date.
Income Earned Option
You can automatically reinvest your dividends in additional shares of a Fund
and have your capital gains paid in cash, or reinvest capital gains and have
your dividends paid in cash.
Directed Dividends Option
In most cases, you can automatically reinvest distributions in shares of
another fund of The Victory Portfolios. If you reinvest your distributions in
a different class of another fund, you may pay a sales charge on the
reinvested distributions.
Directed Bank Account Option
In most cases, you can automatically transfer distributions to your bank
checking or savings account. Under normal circumstances, a Fund will transfer
your distributions within seven days of the dividend payment date. The bank
account must have a registration identical to that of your Fund account.
13
<PAGE>
Dividends, Distributions, and Taxes (continued)
The tax information in this Prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in a Fund.
* Important Information about Taxes
Each Fund pays no federal income tax on the earnings and capital gains it
distributes to shareholders.
* Ordinary dividends from a Fund are taxable as ordinary income; dividends
from a Fund's long-term capital gains are taxable as long-term capital gain.
* Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They also may be
subject to state and local taxes.
* Dividends from a Fund that are attributable to interest on certain U.S.
government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to these U.S.
government obligations will be provided on the tax statements you receive
from a Fund.
* An exchange of a Fund's shares for shares of another fund will be treated
as a sale. When you sell or exchange shares of a Fund, you must recognize any
gain or loss.
* Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
* Tax statements will be mailed from each Fund every January showing the
amounts and tax status of distributions made to you.
* Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
* You should review the more detailed discussion of federal income tax
considerations in the SAI.
14
<PAGE>
Investing with Victory
All you need to do to get started is to fill out an application.
If you are looking for a convenient way to open an account or to add money to
an existing account, Victory can help. The sections that follow will serve as
a guide to your investments with Victory. "Choosing a Share Class" will help
you decide whether it would be more to your advantage to buy Class A or Class
G Shares of a Fund. The following sections will describe how to open an
account, how to access information on your account, and how to buy, exchange,
and sell shares of a Fund. We want to make it simple for you to do business
with us. If you have questions about any of this information, please call
your Investment Professional or one of our customer service representatives
at 800-539-FUND. They will be happy to assist you.
Choosing a Share Class
For historical expense information on Class A shares, see the financial
highlights at the end of this Prospectus.
Each Fund offers Class A and Class G Shares. Each class has its own cost
structure, allowing you to choose the one that best meets your requirements.
Your Investment Professional also can help you decide. An Investment
Professional is an investment consultant, salesperson, financial planner,
investment adviser, or trust officer who provides you with investment
information.
CLASS A
* Front-end sales charge, as described on the next page. There are several
ways to reduce this charge.
CLASS G
* No front-end sales charge. All your money goes to work for you right away.
* No deferred sales charge.
* Class G Shares are sold only by certain broker-dealers.
15
<PAGE>
Choosing a Share Class (continued)
There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.
* Calculation of Sales Charges -- Class A
Class A Shares are sold at their public offering price, which is the NAV plus
the applicable initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current sales
charge rates are as follows:
Sales Charge Sales Charge
as a % of as a % of
Your Investment in the Fund Offering Price Your Investment
Up to $49,999 5.75% 6.10%
$50,000 up to $99,999 4.50% 4.71%
$100,000 up to $249,999 3.50% 3.63%
$250,000 up to $499,999 2.50% 2.56%
$500,000 up to $999,999 2.00% 2.04%
$1,000,000 and above* 0.00% 0.00%
* Except as indicated in the last sentence of this note, there is no initial
sales charge on purchases of $1 million or more. However, a contingent
deferred sales charge (CDSC) of up to 1.00% will be charged to the
shareholder if any shares are redeemed in the first year after purchase, or
at 0.50% within two years of the purchase. This charge will be based on
either the cost of the shares or net asset value at the time of redemption,
whichever is lower. There will be no CDSC on reinvested distributions. The
initial sales charge exemption for investments of $1 million or more does not
apply to tax deferred retirement accounts (except IRA accounts); the sales
charge on investments by such tax deferred retirement accounts of $1 million
or more is the same as for investments between $500,000 and $999,999.
* Sales Charge Reductions and Waivers for Class A Shares
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you buy Class A Shares of a Fund over a 13-month
period and receive the same sales charge as if all shares had been purchased
at one time. You must start with a minimum initial investment of 5% of the
total amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares
you already own to the amount of your next Class A investment for purposes of
calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds, (excluding
money market funds) for purposes of calculating the sales charge. The
combination privilege also allows you to combine the total investments from
the accounts of household members of your immediate family (spouse and
children under 21) for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers,"* and
dealers who have an agreement with the Distributor and any trade organization
to which the Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors in Class A Shares who re-invest a distribution from adeferred
compensation plan, agency, trust, or custody account that was maintained by
KeyBank N.A. and its affiliates, the Victory Group, orinvested in a fund of
the Victory Group.
* Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to the Victory Group.
16
<PAGE>
Choosing a Share Class (continued)
d. Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales charge
for those shares.
e. Investment Professionals who purchased Fund shares for fee-based
investment products or accounts, and selling brokers and their sales
representatives.
f. Purchase of shares in connection with financial institution sponsored
bundled omnibus retirement programs sponsored by financial institutions that
have entered into agreements with the Funds' Distributor in connection with
the operational requirements of such programs.
g. Participants in tax-deferred retirement plans who purchased shares
pursuant to waiver provisions in effect prior to December 15, 1999.
* Shareholder Servicing Plan
The Funds have adopted a Shareholder Servicing Plan for Class A Shares of the
Funds. The shareholder servicing agent performs a number of services for its
customers who are shareholders of the Funds. It establishes and maintains
accounts and records, processes dividend payments, arranges for bank wires,
assists in transactions, and changes account information. For these services
a Fund pays a fee at an annual rate of up to 0.25% of the average daily net
assets of the appropriate class of shares serviced by the agent. The Funds
may enter into agreements with various shareholder servicing agents,
including KeyBank National Association and its affiliates, other financial
institutions, and securities brokers. The Funds may pay a servicing fee to
broker-dealers and others who sponsor "no transaction fee" or similar
programs for the purchase of shares. Shareholder servicing agents may waive
all or a portion of their fee periodically.
17
<PAGE>
Choosing a Share Class (continued)
* Distribution Plan
In accordance with Rule 12b-1 under the Investment Company Act of 1940,
Victory has adopted a Distribution and Service Plan for Class A Shares of the
Convertible Securities Fund and the Real Estate Investment Fund, but these
Funds do not pay expenses under this plan. See the SAI for more details
regarding this plan.
Victory also has adopted a Distribution and Service Plan for Class G
Shares of each Fund, under which these shares will pay to the Distributor a
monthly service fee at an annual rate of 0.25% of the average daily net
assets of each Fund. The service fee is paid to securities broker-dealers or
other financial intermediaries for providing personal services to
shareholders of these Funds, including responding to inquiries, providing
information to shareholders about their fund accounts, establishing and
maintaining accounts and records, processing dividend and distribution
payments, arranging for bank wires, assisting in transactions, and changing
account information. Each Fund may enter into agreements with various
shareholder servicing agents, including KeyCorp and its affiliates, and with
other financial institutions that provide such services.
Under the Class G Rule 12b-1 Distribution and Service Plan, Class G
Shares of each Fund also annually pay the Distributor a monthly distribution
fee in an additional amount of up to 0.25% of each Fund's average daily net
assets. The distribution fee is paid to the Distributor for general
distribution services and for selling Class G Shares of these Funds. The
Distributor makes payments to agents who provide these services.
Because Rule 12b-1 fees are paid out of a Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
How to Buy Shares
You can buy shares in a number of different ways. All you need to do to get
started is to fill out an application. The minimum investment required to
open an account is $500 ($100 for IRAs), with additional investments of at
least $25. You can send in your payment by check, wire transfer, exchange
from another Victory Fund, or through arrangements with your Investment
Professional. Sometimes an Investment Professional will charge you for these
services. This fee will be in addition to, and unrelated to, the fees and
expenses charged by a Fund.
If you buy shares directly from the Funds and your investment is
received and accepted by 4:00 p.m. Eastern Time or the close of trading on
the NYSE (whichever time is earlier), your purchase will be processed the
same day using that day's share price.
Make your check payable to:
The Victory Funds
18
<PAGE>
How to Buy Shares (continued)
Telecommunication Device for the Deaf (TDD):
800-970-5296
Keep the following addresses handy for purchases, exchanges, or redemptions:
By Regular U.S. Mail
Send completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
580 Walnut Street
Cincinnati, OH 45202
or
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
By Overnight Mail
Use the following address
ONLY for overnight packages.
The Victory Funds
580 Walnut Street
Cincinnati, OH 45202
or
The Victory Funds
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
By Wire
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-539-FUND BEFORE wiring
funds to obtain a confirmation number.
The Victory Funds
Firstar Bank
ABA #042000013
For Credit to DDA
Account #821602133
(insert account number, name,
and confirmation number assigned by the Fund)
or
The Victory Funds
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
(insert account number, name,
and confirmation number assigned by the Fund)
By Telephone
800-539-FUND
(800-539-3863)
19
<PAGE>
How to Buy Shares (continued)
If you would like to make additional investments after your account is
established, use the Investment Stub attached to your confirmation statement
and send it with your check to the address indicated.
* ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up an ACH account. Currently, the Funds do not
charge a fee for ACH transfers.
* Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchase, exchange, or redemption. If your account has been set up
by an Investment Professional, account activity will be detailed in your
account statements. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Funds. By January 31 of each year, you
will be mailed an IRS form reporting distributions for the previous year,
which also will be filed with the IRS.
* Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on the
Account Application. We will need your bank information and the amount and
frequency of your investment. You can select monthly, quarterly, semi-annual,
or annual investments. You should attach a voided personal check so the
proper information can be obtained. You must first meet the minimum
investment requirement of $500, then we will make automatic withdrawals of
the amount you indicate ($25 or more) from your bank account and invest it in
shares of a Fund.
* Retirement Plans
You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax-deferred
retirement plans. Please contact your Investment Professional or the Funds
for details regarding an IRA or other retirement plan that works best for
your financial situation.
All purchases must be made in U.S. dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you will be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only buy or
exchange into fund shares legally available in your state. If your account
falls below $500, we may ask you to re-establish the minimum investment. If
you do not do so within 60 days, we may close your account and send you the
value of your account.
20
<PAGE>
How to Exchange Shares
You can obtain a list of funds available for exchange by calling
800-539-FUND.
You can sell shares of one fund of the Victory Portfolios to buy shares of
another. This is considered an exchange. You may exchange shares of one
Victory fund for shares of the same class of any other, generally without
paying any additional sales charges.
You can exchange shares of a Fund by writing the Transfer Agent or calling
800-539-FUND. When you exchange shares of a Fund, you should keep the
following in mind:
* Shares of the Fund selected for exchange must be available for sale in your
state of residence.
* The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
* Shares of a Fund may be exchanged at relative net asset value. This means
that if you own Class A Shares of the Fund, you can only exchange them for
Class A Shares of another fund and not pay a sales charge. The same rules
apply to Class G Shares, except that holders of Class G Shares who acquired
their shares as a result of the reorganization of the Gradison Funds into the
Victory Funds can exchange into Class A Shares of any Victory Fund that does
not offer Class G Shares without paying a sales charge.
* You must meet the minimum purchase requirements for the fund you purchase
by exchange.
* The registration and tax identification numbers of the two accounts must be
identical.
* You must hold the shares you buy when you establish your account for at
least seven days before you can exchange them; after the account is open
seven days, you can exchange shares on any business day.
* Each Fund may refuse any exchange purchase request if the Adviser
determines that the request is associated with a market timing strategy. Each
Fund may terminate or modify the exchange privilege at any time on 30 days'
notice to shareholders.
* Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
21
<PAGE>
How to Sell Shares
There are a number of convenient ways to sell your shares. You can use the
same mailing addresses listed for purchases.
If your request is received in good order by 4:00 p.m. Eastern Time or the
close of trading on the NYSE (whichever time is earlier), your redemption
will be processed the same day.
By Telephone
The easiest way to sell shares is by calling 800-539-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to sell, call and tell us which one
of the following options you would like to use:
* Mail a check to the address of record;
* Wire funds to a domestic financial institution;
* Mail a check to a previously designated alternate address; or
* Electronically transfer your redemption via the Automated Clearing House
(ACH).
The Transfer Agent records all telephone calls for your protection and
takes measures to verify the identity of the caller. If the Transfer Agent
properly acts on telephone instructions and follows reasonable procedures to
ensure against unauthorized transactions, neither Victory, its servicing
agents, the Adviser, nor the Transfer Agent will be responsible for any
losses. If the Transfer Agent does not follow these procedures, it may be
liable to you for losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach
the Transfer Agent or your Investment Professional by telephone, consider
placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send us
a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. A signature guarantee is required
for the following redemption requests:
* Redemptions over $10,000;
* Your account registration has changed within the last 15 days;
* The check is not being mailed to the address on your account;
* The check is not being made payable to the owner of the account; or
* The redemption proceeds are being transferred to another Victory Group
account with a different registration.
You can get a signature guarantee from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
By Wire
If you want to sell shares by wire, you must establish a Fund account that
will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time or
the close of trading on the NYSE (whichever time is earlier), your funds will
be wired on the next business day.
By ACH
Normally, your redemption will be processed on the same day or the next day
if received after 4:00 p.m. Eastern Time or the close of trading on the NYSE
(whichever time is earlier). It will be transferred by ACH as long as the
transfer is to a domestic bank.
22
<PAGE>
How to Sell Shares (continued)
* Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate. The
minimum withdrawal is $25, and you must have a balance of $5,000 or more. We
will need a voided personal check to activate this feature. You should be
aware that your account eventually may be depleted. However, you cannot
automatically close your account using the Systematic Withdrawal Plan. If
your balance falls below $500, we may ask you to bring the account back to
the minimum balance. If you decide not to increase your account to the
minimum balance, your account may be closed and the proceeds mailed to you.
* Additional Information about Redemptions
* Redemption proceeds from the sale of shares purchased by a check may be
held until the purchase check has cleared, which may take up to 15 days.
* A Fund may suspend your right to redeem your shares in the following
circumstances:
o During non-routine closings of the NYSE;
o When the Securities and Exchange Commission (SEC) determines either that
trading on the NYSE is restricted or that an emergency prevents the sale or
valuation of the Fund's securities; or
o When the SEC orders a suspension to protect the Fund's shareholders.
* Each Fund will pay redemptions by any one shareholder during any 90-day
period in cash up to the lesser of $250,000 or 1% of a Fund's net assets.
Each Fund reserves the right to pay the remaining portion "in kind," that is,
in portfolio securities rather than cash.
23
<PAGE>
Organization and Management of the Funds
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
provide services to their shareholders. Each of these organizations is paid a
fee for their services.
* About Victory
Each Fund is a member of the Victory Portfolios, a group of over 30 distinct
investment portfolios. The Board of Trustees of Victory has the overall
responsibility for the management of the Funds.
* The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered
as an investment adviser with the SEC, is the Adviser to each of the Funds.
KAM, a subsidiary of KeyCorp, oversees the operations of the Funds according
to investment policies and procedures adopted by the Board of Trustees.
Affiliates of the Adviser manage approximately $79 billion for a limited
number of individual and institutional clients. KAM's address is 127 Public
Square, Cleveland, Ohio 44114.
For the fiscal year ended October 31, 1998, KAM was paid management fees
based on a percentage of the average daily net assets of each Fund as shown
in the following table.
Balanced Fund * 0.76%
Convertible Securities Fund * 0.75%
Real Estate Investment Fund * 0.11%
Under a Sub-Administration Agreement, BISYS Fund Services Ohio, Inc.
pays KAM a fee at the annual rate of up to 0.05% of each Fund's average daily
net assets to perform some of the administrative duties for the Funds.
* Portfolio Management
Denise Coyne and Richard T. Heine are the Portfolio Managers of the Balanced
Fund, and together are primarily responsible for the day-to-day management of
the Fund's portfolio. Mr. Heine has been the portfolio manager of the
Balanced Fund since its inception in December 1993. He is a Portfolio Manager
and Director of KAM, and has been associated with KAM or its affiliates since
1976. Ms. Coyne has been a portfolio manager of the Balanced Fund since
January 1995. She is a Portfolio Manager and Director for KAM, and has been
associated with KAM or its affiliates since 1985.
Richard A. Janus and James K. Kaesberg are the portfolio managers of the
Convertible Securities Fund, positions they have held since April, 1996, and
together are primarily responsible for the day-to-day management of the
Fund's portfolio. Mr. Janus is a Senior Managing Director of KAM, and has
been associated with KAM or its affiliates since 1977. Mr. Kaesberg is a
Portfolio Manager and Managing Director of Convertible Securities Investments
for KAM, and has been associated with KAM or its affiliates since 1985.
Patrice Derrington and Richard E. Salomon are the Portfolio Managers of
the Real Estate Investment Fund, and together are primarily responsible for
the day-to-day management of the Fund's portfolio. They have been the Fund's
portfolio managers since its inception. Ms. Derrington is a Managing Director
and Portfolio Manager of KAM, and has been associated with KAM or its
affiliates since 1991. Mr. Salomon is a Director of, and a Senior Managing
Director with, KAM and has been associated with KAM or its affiliates since
1982.
24
<PAGE>
Organization and Management of the Funds (continued)
OPERATIONAL STRUCTURE OF THE FUNDS
The Funds are supervised by the Board of Trustees which monitors the services
provided to investors.
Trustees
Adviser
Shareholders
Financial Services Firms and their Investment Professionals
Advise current and prospective shareholders on their Fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy and
sell requests, distribution of dividends, and servicing of shareholder
accounts.
Administrator, Distributor, and Fund Accountant
BISYS Fund Services
and its affiliates
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares through Investment Professionals, and
calculates the value of shares. As Administrator, handles the day-to-day
activities of the Funds.
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles
trades made by the Funds.
Sub-Administrator
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Performs certain sub-administrative services.
25
<PAGE>
Additional Information
Some additional information you should know about the Funds.
If you would like to receive additional copies of any materials, please call
the Funds at 800-539-FUND.
* Share Classes
The Funds currently offer only the classes of shares described in this
Prospectus. At some future date, the Funds may offer additional classes of
shares.
* Banking Laws
The Adviser is a subsidiary of a bank holding company. Banking laws,
including the Glass-Steagall Act, currently prevent a bank holding company or
its affiliates from sponsoring, organizing, or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may
act as an investment adviser, transfer agent, custodian, or shareholder
servicing agent. They also may pay third parties for performing these
functions and buy shares of such an investment company for their customers.
On November 12, 1999, President Clinton signed a bill repealing the
Glass-Steagall Act. As a result, the Adviser or its affiliates may in the
future perform certain functions for the Funds that previously were not
permitted under federal law.
*Performance
The Victory Funds may advertise the performance of each Fund by comparing it
to other mutual funds with similar objectives and policies. Performance
information also may appear in various publications. Any fees charged by
Investment Professionals may not be reflected in these performance
calculations. Advertising information will include the average annual total
return of each Fund calculated on a compounded basis for specified periods of
time. Total return information will be calculated according to rules
established by the SEC. Such information may include performance rankings and
similar information from independent organizations, such as Lipper, Inc., and
industry publications such as Morningstar Inc., Business Week, or Forbes. You
also should see the "Investment Performance" section for the Fund in which
you would like to invest.
* Year 2000 Issues
Like all mutual funds, the Funds could be adversely affected if the computer
systems used by its service providers, including shareholder servicing
agents, are unable to recognize dates after 1999. The risk of such a computer
failure may be greater as it relates to investments in foreign countries. The
Funds' service providers have been actively updating their systems to be able
to process Year 2000 data. There can be no assurance, however, that these
steps will be adequate to avoid a temporary service disruption or other
adverse impact on the Funds. In addition, an issuer's failure to process
accurately Year 2000 data may cause that issuer's securities to decline in
value or delay the payment of interest to the Funds.
* Shareholder Communications
In order to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only one
copy of any financial reports, prospectuses and their supplements.
26
<PAGE>
Financial Highlights Balanced Fund
The Financial Highlights table is intended to help you understand the
Balanced Fund's financial performance for the past five years. Certain
information shows the results of an investment in one share of the Fund. The
total returns in the table represent the rate that an investor would have
earned on an investment in the Fund (assuming reinvestment of all dividends
and distributions).
These financial highlights reflect historical information about Class A
Shares of the Balanced Fund. The financial highlights for the four fiscal
years ended October 31, 1998 and the period from December 10, 1993 through
October 31, 1994 were audited by PricewaterhouseCoopers LLP, whose report,
along with the financial statements of the Balanced Fund, are included in the
Fund's annual report, which is available by calling the Fund at 800-539-FUND.
<TABLE>
<CAPTION>
Prior to designation
Class A Shares as Class A Shares
Six
Months Year Year Year Year Dec. 10,
Ended Ended Ended Ended Ended 1993 to
Apr. 30, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1999 1998 1997 1996<F5> 1995 1994<F2>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.67 $ 13.87 $ 12.33 $ 11.01 $ 9.62 $ 10.00
Investment Activities
Net investment income 0.15 0.37 0.36 0.36 0.41 0.33
Net realized and unrealized
gains (losses) from
investments and
foreign currencies 1.52 1.54 1.90 1.39 1.40 (0.39)
Total from
Investment Activities 1.67 1.91 2.26 1.75 1.81 (0.06)
Distributions
Net investment income (0.16) (0.37) (0.35) (0.36) (0.41) (0.32)
In excess of net
investment income -- -- -- -- (0.01) --
Net realized gains (0.92) (0.74) (0.37) (0.07) -- --
Total Distributions (1.08) (1.11) (0.72) (0.43) (0.42) (0.32)
Net Asset Value, End of Period $ 15.26 $ 14.67 $ 13.87 $ 12.33 $ 11.01 $ 9.62
Total Return (excludes sales charges) 11.75%<F3> 14.55% 19.02% 16.27% 19.24% (0.57)%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $461,710 $418,807 $342,933 $273,553 $201,073 $127,285
Ratio of expenses to
average net assets 1.27%<F4> 1.27% 1.25% 1.27% 0.98% 0.87%<F4>
Ratio of net investment income
to average net assets 2.05%<F4> 2.54% 2.69% 3.14% 4.05% 3.97%<F4>
Ratio of expenses to
average net assets<F1> 1.50%<F4> 1.50% 1.36% 1.43% 1.36% 1.49%<F4>
Ratio of net investment income
to average net assets<F1> 1.82%<F4> 2.31% 2.58% 2.98% 3.67% 3.35%<F4>
Portfolio turnover 99% 231% 109% 80% 69% 118%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary fee
reductions and/or reimbursements had not occurred, the ratios would have been as indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
<F5> Effective March 1, 1996, the Fund designated the existing shares as Class A Shares.
</FN>
</TABLE>
27
<PAGE>
Financial Highlights Convertible Securities Fund
The Financial Highlights table is intended to help you understand the
Convertible Securities Fund's financial performance for the past five years.
Certain information shows the results of an investment in one share of the
Fund. The total returns in the table represent the rate that an investor
would have earned on an investment in the Fund (assuming reinvestment of all
dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Convertible Securities Fund. The financial highlights for the
eleven months ended October 31, 1998 and the five fiscal years ended November
30, 1997 were audited by PricewaterhouseCoopers LLP, whose report, along with
the financial statements of the Convertible Securities Fund, are included in
the Fund's annual report, which is available by calling the Fund at
800-539-FUND.
<TABLE>
<CAPTION>
Six Eleven
Months Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended
Apr. 30, Oct. 31, Nov. 30, Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1999 1998<F2> 1997 1996 1995 1994 1993
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.22 $ 14.33 $ 13.55 $ 12.16 $ 11.05 $ 12.48 $ 10.98
Investment Activities
Net investment income 0.33 0.58 0.62 0.65 0.60 0.61 0.57
Net realized and unrealized
gains (losses) from
investments 1.15 (1.08) 1.43 1.68 1.50 (1.12) 1.79
Total from
Investment Activities 1.48 (0.50) 2.05 2.33 2.10 (0.51) 2.36
Distributions
Net investment income (0.35) (0.54) (0.65) (0.62) (0.61) (0.61) (0.57)
Net realized gains (0.03) (1.07) (0.62) (0.32) (0.38) (0.31) (0.29)
Total Distributions (0.38) (1.61) (1.27) (0.94) (0.99) (0.92) (0.86)
Net Asset Value, End of Period $ 13.32 $ 12.22 $ 14.33 $ 13.55 $ 12.16 $ 11.05 $ 12.48
Total Return (excludes sales charges) 12.30%<F3> (3.69)%<F3> 16.26% 20.28% 20.43% (4.36)% 22.42%
Ratios/Supplementary Data:
Net Assets at end of period (000) $90,151 $108,069 $104,982 $81,478 $68,212 $58,845 $64,537
Ratio of expenses to
average net assets 1.24%<F4> 1.20%<F4> 1.34% 1.31% 1.31% 1.30% 1.24%
Ratio of net investment income
to average net assets 4.93%<F4> 4.60%<F4> 4.75% 5.17% 5.36% 5.20% 4.75%
Ratio of expenses to
average net assets<F1> <F5> <F5> <F5> <F5> <F5> <F5> <F5>
Ratio of net investment income
to average net assets<F1> <F5> <F5> <F5> <F5> <F5> <F5> <F5>
Portfolio turnover 29% 77% 77% 40% 52% 49% 30%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or reimbursed. If such voluntary fee
reductions and/or expense reimbursements had not occurred, the ratios would have been as indicated.
<F2> Effective March 23, 1998, the SBSF Convertible Securities Fund became the Victory Convertible
Securities Fund. Financial highlights prior to March 23, 1998 represent the SBSF Convertible
Securities Fund.
<F3> Not annualized.
<F4> Annualized.
<F5> There were no waivers during the period.
</FN>
</TABLE>
28
<PAGE>
Financial Highlights Real Estate Investment Fund
The Financial Highlights table is intended to help you understand the Real
Estate Investment Fund's financial performance for the past two years.
Certain information shows the results of an investment in one share of the
Real Estate Investment Fund. The total returns in the table represent the
rate that an investor would have earned on an investment in the Real Estate
Investment Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of the Real Estate Investment Fund. The financial highlights for the
fiscal year ended October 31, 1998 and the period from April 30, 1997 to
October 31, 1997 were audited by PricewaterhouseCoopers LLP, whose report,
along with the financial statements of the Real Estate Investment Fund, are
included in the Fund's annual report, which is available by calling the Fund
at 800-539-FUND.
<TABLE>
<CAPTION>
Six
Months Year Apr. 30,
Ended Ended 1997 to
Apr. 30, Oct. 31, Oct. 31,
1999 1998 1997<F2>
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.19 $ 12.07 $10.00
Investment Activities
Net investment income 0.28 0.50 0.23
Net realized and unrealized gains
(losses) from investments 0.50 (1.90) 2.01
Total from Investment Activities 0.78 (1.40) 2.24
Distributions
Net investment income (0.24) (0.44) (0.17)
Net realized gains -- (0.04) --
Total Distributions (0.24) (0.48) (0.17)
Net Asset Value, End of Period $ 10.73 $ 10.19 $12.07
Total Return (excludes sales charges) 7.74%<F3> (11.91)% 22.42%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $16,460 $16,624 $4,376
Ratio of expenses to average net assets 1.13%<F4> 0.83% 0.00%<F4>
Ratio of net investment income to
average net assets 5.36%<F4> 4.95% 5.11%<F4>
Ratio of expenses to average net assets<F1> 1.93%<F4> 1.95% 2.93%<F4>
Ratio of net investment income to
average net assets<F1> 4.56%<F4> 3.83% 2.18%<F4>
Portfolio turnover 13% 53% 21%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or reimbursed. If such
voluntary fee reductions and/or reimbursements had not occurred, the ratios would
have been as indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
</FN>
</TABLE>
29
<PAGE>
Appendix Lower-Rated Securities
The Convertible Securities Fund's investments in securities are not limited
by credit quality. Lower quality or lower-rated debt securities are sometimes
referred to as "junk bonds." Lower-rated securities generally offer higher
yields than higher-rated securities with similar maturities, because the
financial condition of the issuers may not be as strong as issuers of
higher-rated securities. For this reason, lower-rated securities may be
considered "speculative," which means that there is a higher risk that the
Convertible Securities Fund may lose a substantial portion or all of its
investment in a particular lower-rated security.
The Convertible Securities Fund may purchase securities rated Baa, Ba,
B, Caa, or lower by Moody's and BBB, BB, B, CCC, or lower by S&P. The
Convertible Securities Fund also may purchase unrated securities with similar
characteristics. Generally, the Convertible Securities Fund will not purchase
securities rated Ba or lower by Moody's or BB or lower by S&P (or similar
unrated securities) unless KAM believes that the positive qualities of the
security justify the potential risk.
The following summarizes the characteristics of some of the lower
ratings of Moody's and S&P:
* Moody's:
Ba-rated securities have "speculative elements" and "their future cannot be
considered as well-assured." The protection of interest and principal
payments "may be very moderate, and thereby not well safeguarded."
B-rated securities "generally lack characteristics of the desirable
investment," and the likelihood of payment of interest and principal over the
long-term "may be small."
Caa-rated securities are of "poor standing." These securities may be in
default or "there may be present elements of danger" with respect to
principal or interest.
Ca-rated securities "are speculative in a high degree."
* S&P:
BB-rated securities and below are regarded as "predominantly speculative."
BB-rated securities have less near-term potential for default than other
securities, but may face "major ongoing uncertainties" to economic factors
that may result in failure to make interest and principal payments.
B-rated securities have "a greater vulnerability to default" but have
the current ability to make interest and principal payments.
CCC-rated securities have a "currently identifiable vulnerability to
default."
CC-rated securities may be used to cover a situation where "a Bankruptcy
petition has been filed, but debt service payments are continued."
See the SAI for more information about ratings.
30
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32
<PAGE>
If you would like a free copy of any of the following documents or would like
to request other information regarding the Funds, you can call or write the
Funds or your Investment Professional.
* Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has
been filed with the Securities and Exchange Commission (SEC), and is
incorporated by reference in this Prospectus.
* Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected a
Fund's performance during its last fiscal year.
* How to Obtain Information
By telephone: Call Victory Funds at 800-539-FUND (800-539-3863). You also may
obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.)
By mail: The Victory Funds
P. O. Box 8527
Boston, MA 02266-8527
Copies of this information may be obtained, after paying a duplicating fee,
by electronic request at the following e-mail address: [email protected], or
by writing the SEC's Public Reference Section, Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line
or downloaded from the SEC at http://www.sec.gov or from the Victory Funds'
website at http://www.victoryfunds.com.
The securities described in this Prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this Prospectus and the SAI.
If you would like to receive copies of the annual and semi-annual reports
and/or the SAI at no charge, please call the Funds at 800-539-FUND.
(800-539-3863)
(LOGO)(R)
Victory Funds
PRINTED ON RECYCLED PAPER
Investment Company Act File Number 811-4852
VF-SPEC-PRO (12/99)
<PAGE>
Part B
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
<TABLE>
<S> <C> <C>
Balanced Fund International Growth Fund Ohio Municipal Money Market Fund
Convertible Securities Fund Investment Quality Bond Fund Ohio Regional Stock Fund
Diversified Stock Fund Lakefront Fund Prime Obligations Fund
Federal Money Market Fund LifeChoice Conservative Investor Real Estate Investment Fund
Financial Reserves Fund Fund Small Company Opportunity Fund
Fund for Income LifeChoice Moderate Investor Fund Special Value Fund
Government Mortgage Fund LifeChoice Growth Investor Fund Stock Index Fund
Growth Fund Limited Term Income Fund Tax-Free Money Market Fund
Institutional Money Market Fund National Municipal Bond Fund U.S. Government Obligations Fund
Intermediate Income Fund New York Tax-Free Fund Value Fund
Ohio Municipal Bond Fund
</TABLE>
December 15, 1999
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the following prospectuses dated as shown below, as amended
or supplemented from time to time (the "Prospectuses").
<TABLE>
- -------------------- ----------------------------------------------------------------------------
<S> <C>
March 1, 1999 o U.S. Government Obligations Fund, Prime Obligations Fund,
Financial Reserves Fund, Tax-Free Money Market Fund, Ohio Municipal
Money Market Fund
o Federal Money Market Fund, Institutional Money Market Fund
o Lakefront Fund
o The LifeChoice Funds
- -------------------- ----------------------------------------------------------------------------
March 29, 1999 o Fund for Income
o Small Company Opportunity Fund
- -------------------- ----------------------------------------------------------------------------
December 15, 1999 o Limited Term Income Fund, Intermediate Income Fund, Government
Mortgage Fund, Investment Quality Bond Fund
o National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Bond Fund
o Value Fund, Diversified Stock Fund, Stock Index Fund, Growth Fund,
Special Value Fund, Ohio Regional Stock Fund, International Growth Fund
o Balanced Fund, Convertible Securities Fund, Real Estate Investment
Fund
- -------------------- ----------------------------------------------------------------------------
</TABLE>
This Statement of Additional Information is incorporated by reference in its
entirety into the Prospectuses. Copies of the Prospectuses may be obtained by
writing The Victory Portfolios at P.O. Box 8527, Boston, MA 02266-8527, or by
calling toll free 800-539-FUND (800-539-3863).
INVESTMENT ADVISER and SUB-ADMINISTRATOR DIVIDEND DISBURSING AGENT
Key Asset Management Inc. and SERVICING AGENT
Boston Financial Data Services, Inc
ADMINISTRATOR and DISTRIBUTOR
BISYS Fund Services CUSTODIAN
Key Trust Company of Ohio, N.A.
TRANSFER AGENT
State Street Bank and Trust Company INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
COUNSEL
Kramer Levin Naftalis & Frankel LLP
<PAGE>
Table of Contents
INVESTMENT POLICIES AND LIMITATIONS............................................2
FUNDAMENTAL RESTRICTIONS OF THE FUNDS..........................................4
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS.....................................12
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST.....................................15
Secondary Investment Strategies.......................................24
Eligible Securities for Money Market Funds............................26
U.S. Corporate Debt Obligations.......................................26
Temporary Defensive Measures..........................................27
Short-Term Corporate Obligations......................................27
Demand Features.......................................................27
Bankers' Acceptances..................................................27
Bank Deposit Instruments..............................................27
Eurodollar Certificates of Deposit....................................27
Yankee Certificates of Deposit........................................27
Eurodollar Time Deposits..............................................27
Canadian Time Deposits................................................27
Commercial Paper......................................................28
International Bonds...................................................28
Foreign Debt Securities...............................................28
Repurchase Agreements.................................................28
Reverse Repurchase Agreements.........................................29
Short-Term Funding Agreements.........................................29
Variable Amount Master Demand Notes...................................29
Variable Rate Demand Notes............................................29
Variable and Floating Rate Notes......................................29
Extendible Debt Securities............................................30
Receipts..............................................................30
Zero-Coupon Bonds.....................................................30
High-Yield Debt Securities............................................30
Loans and Other Direct Debt Instruments...............................31
Securities of Other Investment Companies..............................31
U.S. Government Obligations...........................................32
Municipal Securities..................................................32
Risk Factors Associated with Certain Issuers of Municipal Securities..34
Ohio Tax-Exempt Obligations...........................................35
Municipal Lease Obligations...........................................36
Lower-Rated Municipal Securities......................................37
Federally Taxable Obligations.........................................37
Refunded Municipal Bonds..............................................37
When-Issued Securities................................................38
Delayed-Delivery Transactions.........................................38
Mortgage-Backed Securities............................................38
In General.....................................................38
U.S. Government Mortgage-Backed Securities.....................38
GNMA Certificates..............................................39
FHLMC Securities...............................................39
FNMA Securities................................................39
Collateralized Mortgage Obligations............................39
Non-Government Mortgage-Backed Securities......................40
Asset-Backed Securities...............................................40
Futures and Options...................................................40
Futures Contracts..............................................40
Restrictions on the Use of Futures Contracts...................41
<PAGE>
Risk Factors in Futures Transactions...........................42
Options........................................................43
Puts...........................................................43
Illiquid Investments...........................................44
Restricted Securities..........................................44
Securities Lending Transactions................................45
Short Sales Against-the-Box...........................................45
Investment-Grade and High Quality Investments.........................45
Participation Interests...............................................45
Warrants..............................................................45
Convertible Securities................................................45
Synthetic Securities..................................................46
Refunding Contracts...................................................46
Standby Commitments...................................................46
Foreign Investments...................................................46
Miscellaneous Securities..............................................47
Additional Information Concerning Ohio Issuers........................48
Additional Information Concerning New York Issuers....................51
DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS........................71
VALUATION OF PORTFOLIO SECURITIES FOR THE MONEY MARKET FUNDS..................72
VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS
AND THE TAX-FREE BOND FUNDS...................................................73
VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS........................73
PERFORMANCE OF THE MONEY MARKET FUNDS.........................................73
PERFORMANCE OF THE NON-MONEY MARKET FUNDS.....................................75
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION.....................83
DIVIDENDS AND DISTRIBUTIONS...................................................87
TAXES.........................................................................88
TRUSTEES AND OFFICERS.........................................................96
ADVISORY AND OTHER CONTRACTS..................................................99
ADDITIONAL INFORMATION.......................................................116
APPENDIX.....................................................................A-1
2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Trust") is an open-end management investment
company. The Trust consists of 36 series (each a "Fund," and collectively, the
"Funds") of units of beneficial interest ("shares"). The outstanding shares
represent interests in the 36 separate investment portfolios. The following
Funds are non-diversified: the Ohio Municipal Bond Fund, Ohio Municipal Money
Market Fund, New York Tax-Free Fund, National Municipal Bond Fund and Real
Estate Investment Fund. All other Funds are diversified mutual funds.
This Statement of Additional Information (the "SAI") relates to the shares of 30
of the 36 Funds and their respective classes, and are listed below. Much of the
information contained in this SAI expands on subjects discussed in the
Prospectuses. Capitalized terms not defined herein are used as defined in the
Prospectuses. No investment in shares of a Fund should be made without first
reading that Fund's Prospectus.
The Victory Portfolios:
<TABLE>
<CAPTION>
- ------------------------------ --------------------------------- --------------------------------
<S> <C> <C>
Balanced Fund International Growth Fund Ohio Municipal Money Market
Class A Shares Class A Shares Fund
Class B Shares Class B Shares Class A Shares
Class G Shares Class G Shares
Ohio Regional Stock Fund
Convertible Securities Fund Investment Quality Bond Fund Class A Shares
Class A Shares Class A Shares Class B Shares
Class G Shares Class G Shares
Prime Obligations Fund
Diversified Stock Fund Lakefront Fund Class A Shares
Class A Shares Class A Shares
Class B Shares Real Estate Investment Fund
Class G Shares LifeChoice Conservative Class A Shares
Investor Fund Class G Shares
Class A Shares
Federal Money Market Fund
Select Shares Small Company Opportunity Fund
Investor Shares LifeChoice Moderate Investor Class A Shares
Fund Class G Shares
Financial Reserves Fund Class A Shares
Class A Shares Special Value Fund
LifeChoice Growth Investor Fund Class A Shares
Fund for Income Class A Shares Class B Shares
Class A Shares Class G Shares
Class G Shares Limited Term Income Fund
Class A Shares Stock Index Fund
Government Mortgage Fund Class A Shares
Class A Shares National Municipal Bond Fund Class G Shares
Class A Shares
Growth Fund Class B Shares Tax-Free Money Market Fund
Class A Shares Class G Shares Class A Shares
Class G Shares
New York Tax-Free Fund U.S. Government Obligations
Institutional Money Market Class A Shares Fund
Fund Class B Shares Select Shares
Select Shares Class G Shares Investor Shares
Investor Shares
Ohio Municipal Bond Fund Value Fund
Intermediate Income Fund Class A Shares Class A Shares
Class A Shares Class G Shares Class G Shares
Class G Shares
- ------------------------------ --------------------------------- --------------------------------
</TABLE>
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding voting securities.
There can be no assurance that a Fund will achieve its investment objective.
The LifeChoice Funds.
The LifeChoice Conservative Investor Fund, LifeChoice Moderate Investor Fund and
LifeChoice Growth Investor Fund (the "LifeChoice Funds") are separately managed,
diversified mutual funds, each with its own investment objective and policies.
Each LifeChoice Fund has been constructed as a "fund of funds," which means that
it pursues its investment objective primarily by allocating its investments
among funds of the Trust (the "Proprietary Portfolios"). The LifeChoice Funds
also may invest a portion of their assets in shares of investment companies that
are not part of the same group of investment companies as the Trust (the "Other
Portfolios"). (Proprietary Portfolios and Other Portfolios are sometimes
referred to herein as "Underlying Portfolios.") From time to time, Key Asset
Management Inc., each Fund's investment adviser ("KAM" or the "Adviser"), may
select other mutual funds that are not listed in the LifeChoice Prospectus.
The Investment Company Act of 1940, as amended (the "1940 Act"), permits the
LifeChoice Funds to invest without limitation in other investment companies that
are part of the same "group of investment companies" (as defined in the 1940
Act) as the Trust, provided that certain limitations are observed. Generally,
these limitations require that a fund of funds (a) limit its investments to
shares of other investment companies that are part of the same "group of
investment companies" (as defined in the 1940 Act) as the fund of funds,
government securities, and short-term paper; (b) observe certain limitations on
the amount of sales loads and distribution-related fees that are borne by
shareholders of the fund of funds; and (c) do not invest in other funds of
funds. Pursuant to an exemptive order issued by the Securities and Exchange
Commission (the "SEC"), the LifeChoice Funds may invest in investment portfolios
of the Proprietary Portfolios and in shares of the Other Portfolios that are not
part of the same group of investment companies as the LifeChoice Funds. A
LifeChoice Fund and its affiliates, collectively, may acquire no more than 3% of
the total outstanding stock of any Other Portfolio.
Because of their investment objectives and policies, the LifeChoice Funds will
concentrate (i.e., invest 25% or more of their total assets) in the mutual fund
industry. In addition, a LifeChoice Fund may invest in a Proprietary Portfolio
or Other Portfolio that concentrates 25% or more of its total assets in any one
industry. Investments by a LifeChoice Fund in securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities or in repurchase
agreements collateralized by the foregoing equaling 25% or more of the Fund's
total assets will not be considered "concentration" by such Fund in the industry
of the issuer(s) of such securities.
The LifeChoice Funds' Prospectus more fully addresses the subject of each Fund's
and each Proprietary Portfolio's investment objectives, as well as the
investment policies that the Funds apply in seeking to meet those objectives.
"Additional Information Regarding Fund Investments," below, will supplement that
information more specifically by detailing the types of securities and other
instruments in which the Proprietary Portfolios may invest, the strategies
behind, and the risks associated with, such investing. Note that there can be no
assurance given that the respective investment objectives of the LifeChoice
Funds or the Proprietary Portfolios will be achieved.
The LifeChoice Funds may invest in the following Proprietary Portfolios, each of
which is described in this SAI: the Convertible Securities Fund, Diversified
Stock Fund, Financial Reserves Fund, Fund for Income, Government Mortgage Fund,
Growth Fund, Intermediate Income Fund, International Growth Fund, Investment
Quality Bond Fund, Limited Term Income Fund, Real Estate Investment Fund, Small
Company Opportunity Fund, Special Value Fund and Value Fund.
Other Portfolios. The LifeChoice Funds do not pay any front end sales loads or
contingent deferred sales charges in connection with the purchase or redemption
of shares of the Other Portfolios. In addition, to the extent required by the
1940 Act or the terms of any exemptive order received by the Funds from the SEC,
the sales charges, distribution related fees and service fees related to shares
of the Funds will not exceed the limits set forth in the Conduct Rules of the
National Association of Securities Dealers, Inc. when aggregated with any sales
charges, distribution related fees and service fees that the Funds pay relating
to Other Portfolio shares.
2
<PAGE>
The LifeChoice Funds may invest in the following Other Portfolios: the
INVESCO Dynamics Fund, the Neuberger Berman Genesis Fund and the Loomis Sayles
Bond Fund.
Other Investments -- Short-Term Obligations. Normally, each of the LifeChoice
Funds will be predominantly invested in shares of other mutual funds. Under
certain circumstances, however, a LifeChoice Fund may invest in short-term
obligations. To the extent that a LifeChoice Fund's assets are so invested, they
will not be invested so as to meet its investment objective. The instruments may
include high-quality liquid debt securities such as commercial paper,
certificates of deposit, bankers' acceptances, repurchase agreements with
maturities of less than seven days, and debt obligations backed by the full
faith and credit of the U.S. Government. These instruments are described below
in the following section of this SAI describing the permissible investments of
the Proprietary Portfolios.
Additional Information Regarding Fund Investments.
The following policies and limitations supplement the Funds' investment policies
set forth in the Prospectuses. The Funds' investments in the following
securities and other financial instruments are subject to the other investment
policies and limitations described in the Prospectuses and this SAI.
Unless otherwise noted in the prospectus or this SAI, a Fund may invest no more
than 5% of its total assets in any of the securities or financial instruments
described below (unless the context requires otherwise).
Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any security or
other asset, or sets forth a policy regarding quality standards, such standard
or percentage limitation will be determined immediately after and as a result of
the Fund's acquisition of such security or other asset except in the case of
borrowing (or other activities that may be deemed to result in the issuance of a
"senior security" under the 1940 Act). Accordingly, any subsequent change in
values, net assets, or other circumstances will not be considered when
determining whether the investment complies with a Fund's investment policies
and limitations. If the value of a Fund's holdings of illiquid securities at any
time exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Trustees will consider
what actions, if any, are appropriate to maintain adequate liquidity.
The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of that Fund's outstanding voting securities unless
(1) a policy expressly is deemed to be a fundamental policy of the Fund or (2) a
policy expressly is deemed to be changeable only by such majority vote. A Fund
may, following notice to its shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Fund or which
currently are not available but which may be developed to the extent such
investment practices are both consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus.
The following sections list each Fund's investment policies, limitations, and
restrictions. The securities in which the Funds can invest and the risks
associated with these securities are discussed in the section "Instruments in
Which the Funds Can Invest."
Defined Terms. All capitalized terms listed in a Fund's Investment Policies
and Limitations section referring to permissible investments are described in
the section "Instruments in Which the Funds Can Invest."
The following terms are used throughout the Investment Policies and Limitations
sections and elsewhere in this SAI.
S&P: Standard & Poor's
Moody's: Moody's Investors Service
NRSRO: Nationally recognized statistical ratings organization
3
<PAGE>
FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. Senior Securities
No Fund (except the Convertible Securities Fund and the Federal Money Market
Fund) may:
Issue any senior security (as defined in the 1940 Act), except that (a) each
Fund may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) each Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
2. Underwriting
The Funds may not:
Underwrite securities issued by others, except to the extent that a Fund (or,
with respect to the LifeChoice Funds, an Underlying Portfolio) may be considered
an underwriter within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), in the disposition of restricted securities.
3. Borrowing
The Balanced Fund, Convertible Securities Fund, Diversified Stock Fund,
Government Mortgage Fund, Growth Fund, Intermediate Income Fund, International
Growth Fund, Investment Quality Bond Fund, Lakefront Fund, Limited Term Income
Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund, Ohio Regional Stock
Fund, Prime Obligations Fund, Real Estate Investment Fund, Small Company
Opportunity Fund, Special Value Fund, Stock Index Fund, Tax-Free Money Market
Fund, U.S. Government Obligations Fund and Value Fund may not:
Borrow money, except that (a) each Fund may enter into commitments to purchase
securities in accordance with its investment program, including delayed-delivery
and when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3% of the Fund's total
assets; and (b) each Fund may borrow money for temporary or emergency purposes
in an amount not exceeding 5% of the value of its total assets at the time when
the loan is made. Any borrowings representing more than 5% of a Fund's total
assets must be repaid before the Fund may make additional investments.
The Financial Reserves Fund, Institutional Money Market Fund and the LifeChoice
Funds may not:
Borrow money, except (a) from a bank for temporary or emergency purposes (not
for leveraging or investment) or (b) by engaging in reverse repurchase
agreements, provided that (a) and (b) in combination ("borrowings") do not
exceed an amount equal to one third of the current value of its total assets
(including the amount borrowed) less liabilities (not including the amount
borrowed) at the time the borrowing is made.
This fundamental limitation is construed in conformity with the 1940 Act, and if
at any time Fund borrowings exceed an amount equal to 33 1/3 of the current
value of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) at the time the borrowing is made due to a
decline in net assets, such borrowings will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the 33
1/3% limitation.
The Fund for Income may not:
Borrow money, except for temporary or emergency purposes and not for investment
purposes, and then only in an amount not exceeding 5% of the value of its total
assets at the time of the borrowing.
4
<PAGE>
The National Municipal Bond Fund may not:
Borrow money, except that the Fund may borrow money from banks for temporary or
emergency purposes (not for leveraging or investment) and engage in reverse
repurchase agreements in an amount not exceeding 33 1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed this amount will be reduced
within three days (exclusive of Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation.
The Ohio Municipal Money Market Fund may:
(a) Borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of the Fund's net assets including the amounts borrowed,
and (b) purchase securities on a when-issued or delayed delivery basis. The Fund
will not borrow money or engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary, or emergency measure or to
facilitate management of the Fund by enabling the Fund to meet redemption
requests when the liquidation of Fund securities would be inconvenient or
disadvantageous. The Fund will not purchase any securities while any such
borrowings (including reverse repurchase agreements) are outstanding.
4. Real Estate
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, the LifeChoice Funds, Limited Term Income Fund, Ohio
Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations Fund, Small
Company Opportunity Fund, Special Value Fund, Stock Index Fund, Tax-Free Money
Market Fund and Value Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by the Funds in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not hereby precluded.
The National Municipal Bond Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business).
The Financial Reserves Fund may not:
Buy or sell real estate, commodities, or commodities (futures) contracts.
The Institutional Money Market Fund may not:
Buy or sell real estate, commodities, or commodity (futures) contracts or invest
in oil, gas or other mineral exploration or development programs.
The Ohio Municipal Money Market Fund will not:
Purchase or sell real estate, although it may invest in Ohio Municipal
Securities secured by real estate or interests in real estate.
The U.S. Government Obligations Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments.
5
<PAGE>
The Real Estate Investment Fund may not:
Purchase or sell real estate, except that the Fund may purchase securities
issued by companies in the real estate industry and will, as a matter of
fundamental policy, concentrate its investments in such securities.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Purchase or hold any real estate, including real estate limited partnerships,
except that the Funds may invest in securities secured by real estate or
interests therein or issued by persons which deal in real estate or interests
therein.
5. Lending
Each of the Balanced Fund, Diversified Stock Fund, Government Mortgage Fund,
Growth Fund, Intermediate Income Fund, International Growth Fund, Investment
Quality Bond Fund, Lakefront Fund, Limited Term Income Fund, National Municipal
Bond Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations
Fund, Real Estate Investment Fund, Small Company Opportunity Fund, Special Value
Fund, Stock Index Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund and Value Fund may not:
Lend any security or make any other loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, but this limitation does not
apply to purchases of publicly issued debt securities or to repurchase
agreements.
The Financial Reserves Fund and Institutional Money Market Fund may not:
Make loans to other persons, except (a) by the purchase of debt obligations in
which the Fund is authorized to invest in accordance with its investment
objective, and (b) by engaging in repurchase agreements. In addition, each Fund
may lend its portfolio securities to broker-dealers or other institutional
investors, provided that the borrower delivers cash or cash equivalents as
collateral to the Fund and agrees to maintain such collateral so that it equals
at least 100% of the value of the securities loaned. Any such securities loan
may not be made if, as a result thereof, the aggregate value of all securities
loaned exceeds 33 1/3% of the total assets of the Fund.
The Fund for Income may not:
Make loans to other persons except through the use of repurchase agreements or
the purchase of commercial paper. For these purposes, the purchase of a portion
of an issue of debt securities which is part of an issue to the public shall not
be considered the making of a loan.
The New York Tax-Free Fund may not:
Make loans to other persons except through the use of repurchase agreements, the
purchase of commercial paper or by lending portfolio securities. For these
purposes, the purchase of a portion of an issue of debt securities which is part
of an issue to the public shall not be considered the making of a loan.
The Ohio Municipal Money Market Fund will not:
Lend any of its assets, except through the purchase of a position of publicly
distributed debt instruments or repurchase agreements and through the lending of
its portfolio securities. The Fund may lend its securities if collateral values
are continuously maintained at no less than 100% of the current market value of
such securities by marking to market daily.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Lend any cash except in connection with the acquisition of a portion of an issue
of publicly distributed bonds, debentures, notes or other evidences of
indebtedness or in connection with the purchase of securities subject to
repurchase agreements, except as outlined under "Additional Information on Fund
Investments" and the sub-section,
6
<PAGE>
"Securities Lending." The Funds will not lend any other assets except as a
special investment method. See "Investment Objectives and Policies" herein and
"Investment Objectives" in the Prospectus.
Each of the Convertible Securities Fund and the Federal Money Market Fund may
not:
Make a loan of its portfolio securities if, immediately thereafter and as a
result thereof, portfolio securities with a market value of 10% or more of its
total assets would be subject to such loans.
The LifeChoice Funds may not:
Lend any security or make any other loan if, as a result, more than 33-1/3% of a
Fund's total assets would be lent to other parties, except that a Fund may
invest in Underlying Portfolios that lend portfolio securities consistent with
their investment objectives and policies, but this limitation does not apply to
purchases of publicly issued debt securities or to repurchase agreements.
6. Commodities
The Diversified Stock Fund, Government Mortgage Fund, Intermediate Income Fund,
International Growth Fund, Investment Quality Bond Fund, Lakefront Fund, the
LifeChoice Funds, Limited Term Income Fund, Ohio Municipal Bond Fund, Ohio
Regional Stock Fund, Prime Obligations Fund, Real Estate Investment Fund, Small
Company Opportunity Fund, Stock Index Fund and Tax-Free Money Market Fund may
not:
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Funds from
purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).
The New York Tax-Free Fund and Ohio Municipal Money Market Fund may not:
Purchase or sell commodities or commodity contracts.
The Balanced Fund, Growth Fund, Special Value Fund, U.S. Government
Obligations Fund and Value Fund may not:
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments.
The Fund for Income may not:
Purchase or sell commodities or commodity contracts, oil, gas or other mineral
exploration or development programs.
The National Municipal Bond Fund may not:
Purchase or sell physical commodities (but this shall not prevent the Fund from
purchasing or selling futures contracts and options on futures contracts or from
investing in securities or other instruments backed by physical commodities).
The Convertible Securities Fund and the Federal Money Market Fund may not:
Deal in commodities or commodity contracts.
7. Joint Trading Accounts
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Limited Term Income Fund, Ohio Municipal
7
<PAGE>
Bond Fund, Ohio Regional Stock Fund, Prime Obligations Fund, Small Company
Opportunity Fund, Special Value Fund, Stock Index Fund, Tax-Free Money Market
Fund and Value Fund may not:
Participate on a joint or joint and several basis in any securities trading
account.
8. Diversification
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, Ohio Regional Stock Fund,
Small Company Opportunity Fund, Special Value Fund, Stock Index Fund, U.S.
Government Obligations Fund and Value Fund may not:
With respect to 75% of a Fund's total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of that issuer, or (b)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer.
The Prime Obligations Fund may not:
With respect to 75% of a Fund's total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of that issuer, or (b)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer. (Note: In accordance with Rule 2a-7 under the 1940 Act, the Fund may
invest up to 25% of its total assets in securities of a single issuer for a
period of up to three days.)
The New York Tax-Free Fund may not:
Purchase the securities of any issuer (except the United States government, its
agencies and instrumentalities, and the State of New York and its
municipalities) if as a result more than 25% of its total assets are invested in
the securities of a single issuer, and with regard to 50% of total assets, if as
a result more than 5% of its total assets would be invested in the securities of
such issuer. In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state and each
multi-state agency, of which such state is a member, is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
With respect to non-municipal bond investments, in addition to the foregoing
limitations, the Fund will not purchase securities (other than securities of the
United States government, its agencies or instrumentalities), if as a result of
such purchase 25% or more of the total Fund's assets would be invested in any
one industry, or enter into a repurchase agreement if, as a result thereof, more
than 10% of its total assets would be subject to repurchase agreements maturing
in more than seven days.
The National Municipal Bond Fund:
To meet federal tax requirements for qualification as a "regulated investment
company," the Fund limits its investments so that at the close of each quarter
of its taxable year: (a) with regard to at least 50% of total assets, no more
than 5% of total assets are invested in the securities of a single issuer, and
(b) no more than 25% of total assets are invested in the securities of a single
issuer. Limitations (a) and (b) do not apply to "Government Securities" as
defined for federal tax purposes. (For such purposes, municipal obligations are
not treated as "Government Securities," and consequently they are subject to
limitations (a) and (b).)
The Ohio Municipal Money Market Fund will limit:
With respect to 75% of the Fund's total assets, investments in one issuer to not
more than 10% of the value of its total assets. The total amount of the
remaining 25% of the value of the Fund's total assets could be invested in a
single issuer if the Adviser believes such a strategy to be prudent. Under Rule
2a-7 under the 1940 Act, the Fund also is subject to certain diversification
requirements.
8
<PAGE>
The Tax-Free Money Market Fund may not:
Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities if,
immediately after such purchase, more than 5% of the value of its total assets
would be invested in such issuer, except that up to 25% of the value of the
Tax-Free Money Market Fund's total assets may be invested without regard to such
5% limitation. For purposes of this limitation, a security is considered to be
issued by the government entity (or entities) whose assets and revenues
guarantee or back the security; with respect to a private activity bond that is
backed only by the assets and revenues of a non-governmental issuer, a security
is considered to be issued by such non-governmental issuer.
The Fund for Income may not:
Purchase the securities of any issuer (except the United States government, its
agencies and instrumentalities), with regard to 75% of total assets, if as a
result more than 5% of its total assets would be invested in the securities of
such issuer. In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state and each
multi-state agency of which such state is a member is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
Each of the Convertible Securities Fund and the Federal Money Market Fund may
not:
As to 75% of its total assets, invest more than 5% in the securities of any one
issuer except securities of the U.S. government, its agencies or its
instrumentalities.
9. Concentration
The Balanced Fund, Diversified Stock Fund, Growth Fund, Intermediate Income
Fund, International Growth Fund, Investment Quality Bond Fund, Lakefront Fund,
Limited Term Income Fund, Ohio Regional Stock Fund, Special Value Fund, Stock
Index Fund and Value Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. In the utilities
category, the industry shall be determined according to the service provided.
For example, gas, electric, water and telephone will be considered as separate
industries.
The Prime Obligations Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. Notwithstanding the
foregoing, there is no limitation with respect to certificates of deposit and
banker's acceptances issued by domestic banks, or repurchase agreements secured
thereby. In the utilities category, the industry shall be determined according
to the service provided. For example, gas, electric, water and telephone will be
considered as separate industries.
The Tax-Free Money Market Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided that this
limitation shall not apply to Municipal Securities or governmental guarantees of
Municipal Securities; but for these purposes only, industrial development bonds
that are backed by the assets and revenues of a non-governmental user shall not
be deemed to be Municipal Securities.
9
<PAGE>
Notwithstanding the foregoing, there is no limitation with respect to
certificates of deposit and banker's acceptances issued by domestic banks, or
repurchase agreements secured thereby. In the utilities category, the industry
shall be determined according to the service provided. For example, gas,
electric, water and telephone will be considered as separate industries.
The Ohio Municipal Bond Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided that this
limitation shall not apply to Municipal Securities or governmental guarantees of
Municipal Securities; but for these purposes only, industrial development bonds
that are backed only by the assets and revenues of a non-governmental user shall
not be deemed to be Municipal Securities. In the utilities category, the
industry shall be determined according to the service provided. For example,
gas, electric, water and telephone will be considered as separate industries.
The National Municipal Bond Fund may not:
Purchase securities (other than those issued or guaranteed by the U.S.
government or any securities of its agencies or instrumentalities or tax-exempt
obligations issued or guaranteed by a U.S. territory or possession or a state or
local government, or a political subdivision of the foregoing) if, as a result,
more than 25% of the Fund's total assets would be invested in securities of
companies whose principal business activities are in the same industry; for the
purpose of this restriction, utility companies will be divided according to
their services, for example, gas, gas transmission, electric and gas and
telephone will each be considered a separate industry. Industrial development
revenue bonds which are issued by non-governmental entities within the same
industry shall be subject to this industry limitation.
The Ohio Municipal Money Market Fund will not:
Purchase securities (other than securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities) if, as a result of such
purchase, 25% or more of the value of the Fund's total assets would be invested
in any one industry. The Fund will not invest 25% or more of its assets in
securities, the interest upon which is paid from revenues of similar type
projects. The Fund may invest 25% or more of its assets in industrial
development bonds.
The Financial Reserves Fund and Institutional Money Market Fund may not:
Purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States government, its
agencies or instrumentalities) if, as a result thereof: (i) more than 5% of its
total assets would be invested in the securities of such issuer, provided,
however, that in the case of certificates of deposit, time deposits and bankers'
acceptances, up to 25% of the Fund's total assets may be invested without regard
to such 5% limitation, but shall instead be subject to a 10% limitation; (ii)
more than 25% of its total assets would be invested in the securities of one or
more issuers having their principal business activities in the same industry,
provided, however, that it may invest more than 25% of its total assets in the
obligations of domestic banks. Neither finance companies as a group nor utility
companies as a group are considered a single industry for purposes of this
policy (i.e., finance companies will be considered a part of the industry they
finance and utilities will be divided according to the types of services they
provide).
The Real Estate Investment Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. In the utilities
category, the industry shall be determined according to the service provided.
For example,
10
<PAGE>
gas, electric, water and telephone will be considered as separate industries.
Notwithstanding the foregoing, the Fund will concentrate its investments in
securities in the real estate industry.
The New York Tax-Free Fund may not:
With respect to non-municipal investments, purchase securities (other than
securities of the United States government, its agencies or instrumentalities),
if as a result of such purchase 25% or more of the Fund's total assets would be
invested in any one industry, or enter into a repurchase agreement if, as a
result thereof, more than 15% of its net assets would be subject to repurchase
agreements maturing in more than seven days.
The Small Company Opportunity Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry.
The Fund for Income and New York Tax-Free Fund may not:
Invest more than 25% of the Fund's total assets in securities whose interest
payments are derived from revenue from similar projects.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Purchase securities if such purchase would cause more than 25% of any of the
Funds' total assets to be invested in the securities of issuers in any one
industry, provided however that the Federal Money Market Fund reserves the right
to concentrate in securities issued or guaranteed as to principal and interest
by the United States Government, its agencies or instrumentalities or U.S. bank
obligations. The Federal Money Market Fund, however, will not exercise its right
to concentrate in U.S. bank obligations.
10. Miscellaneous
a. Tax-exempt income
The Ohio Municipal Money Market Fund may not:
Invest its assets so that less than 80% of its annual interest income is exempt
from the federal income tax and Ohio taxes.
b. Use of assets as security
The Fund for Income may not:
Pledge, mortgage, or hypothecate its assets, except that, to secure borrowings
permitted by its fundamental restriction on borrowing, it may pledge securities
having a market value at the time of pledge not exceeding 10% of the value of
its total assets.
c. Investing to influence management or to exercise control.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Invest in companies for the purpose of influencing management or exercising
control, and will not purchase more than 10% of the voting securities of any one
issuer. This will not preclude the management of the Funds from voting proxies
in their discretion.
11
<PAGE>
The LifeChoice Funds may not:
Make investments for the purpose of exercising control or management (but this
shall not prevent a Fund from purchasing a controlling interest in one or more
Underlying Portfolios consistent with its investment objectives and policies).
d. Margin purchases and short selling.
The Convertible Securities Fund and the Federal Money Market Fund may not
purchase securities on margin or sell securities short.
e. Securities of other investment companies.
The Convertible Securities Fund and the Federal Money Market Fund may not
purchase the securities of other investment companies except in the open market
and at the usual and customary brokerage commissions or except as part of a
merger, consolidation or other acquisition.
f. Restricted Securities.
The Convertible Securities Fund and the Federal Money Market Fund may not:
Invest more than 15% of any of the Convertibles Securities Funds' net assets or
more than 10% of the Federal Money Market Fund's net assets in (i) securities
restricted as to disposition under the Federal securities laws, (ii) securities
as to which there are no readily available market quotations, or (iii)
repurchase agreements with a maturity in excess of 7 days.
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. Illiquid Securities
Each of the Balanced Fund, Diversified Stock Fund, Fund for Income, Government
Mortgage Fund, Growth Fund, Intermediate Income Fund, International Growth Fund,
Investment Quality Bond Fund, Lakefront Fund, the LifeChoice Funds, Limited Term
Income Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Bond Fund, Ohio Regional Stock Fund, Real Estate Investment Fund,
Small Company Opportunity Fund, Special Value Fund, Stock Index Fund and Value
Fund may not:
Invest more than 15% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under the Securities Act
("Restricted Securities") shall not be deemed illiquid solely by reason of being
unregistered. The Adviser determines whether a particular security is deemed to
be liquid based on the trading markets for the specific security and other
factors.
Each of the Financial Reserves Fund, Institutional Money Market Fund, Ohio
Municipal Money Market Fund, Prime Obligations Fund, Tax-Free Money Market
Fund and U.S. Government Obligations Fund may not:
Invest more than 10% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Restricted Securities shall not be deemed
illiquid solely by reason of being unregistered. The Adviser determines whether
a particular security is deemed to be liquid based on the trading markets for
the specific security and other factors.
12
<PAGE>
2. Short Sales and Purchases on Margin
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, the LifeChoice Funds, Limited Term Income Fund, Ohio Municipal Bond
Fund, Ohio Regional Stock Fund, Prime Obligations Fund, Small Company
Opportunity Fund, Special Value Fund, Stock Index Fund, Tax-Free Money Market
Fund, U.S. Government Obligations Fund and Value Fund may not:
Make short sales of securities, other than short sales "against the box," or
purchase securities on margin except for short-term credits necessary for
clearance of portfolio transactions, provided that this restriction will not be
applied to limit the use of options, futures contracts and related options, in
the manner otherwise permitted by the investment restrictions, policies and
investment program of the Fund, and, with respect to the International Growth
Fund, provided that this restriction shall not limit that Fund's ability to make
margin payments in connection with transactions in currency future options.
The Financial Reserves Fund and Institutional Money Market Fund may not:
1. Purchase securities on margin (but the Fund may obtain such credits as may be
necessary for the clearance of purchases and sales of securities).
2. Make short sales of securities.
The Fund for Income and New York Tax-Free Fund may not:
Make short sales of securities or purchase any securities on margin, except for
such short-term credits as are necessary for the clearance of transactions.
The National Municipal Bond Fund may not:
1. Sell securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions.
The Ohio Municipal Money Market Fund may not:
Sell any securities short or purchase any securities on margin but may obtain
such short-term credits as may be necessary for clearance of purchases and sales
of securities.
The LifeChoice Funds and the Small Company Opportunity Fund:
Do not currently intend to purchase securities on margin, except that the Funds
may obtain such short-term credits as are necessary for the clearance of
transactions and provided that margin payments in connection with futures
contracts shall not constitute purchasing securities on margin.
3. Other Investment Companies
Each of the Balanced Fund, Convertible Securities Fund, Diversified Stock Fund,
Financial Reserves Fund, Fund for Income, Government Mortgage Fund, Growth Fund,
Institutional Money Market Fund, Intermediate Income Fund, International Growth
Fund, Investment Quality Bond Fund, Lakefront Fund, Limited Term Income Fund,
National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund,
Ohio Municipal Money Market Fund, Ohio Regional Stock Fund, Prime Obligations
Fund, Real Estate Investment Fund, Small Company Opportunity Fund, Special Value
Fund, Stock Index Fund, Tax-Free Money Market Fund, U.S. Government Obligations
Fund and Value Fund may:
13
<PAGE>
Invest up to 5% of its total assets in the securities of any one investment
company, but may not own more than 3% of the securities of any one investment
company or invest more than 10% of its total assets in the securities of other
investment companies. Pursuant to an exemptive order received by the Trust from
the SEC, the Funds may invest in the other money market funds of the Trust. Each
Fund will waive the portion of its fee attributable to the assets of each Fund
invested in such money market funds to the extent required by the laws of any
jurisdiction in which shares of the Funds are registered for sale.
The Funds (except for the LifeChoice Funds) may not:
Purchase the securities of any registered open-end investment company or
registered unit investment trust in reliance on Section 12(d)(1)(G) or Section
12(d)(1)(F) of the 1940 Act, which permits operation as a "fund of funds."
The National Municipal Bond Fund may not:
Purchase securities of other investment companies, except in the open market
where no commission except the ordinary broker's commission is paid. Such
limitation does not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
The Ohio Municipal Money Market Fund will not:
Invest any of its assets in the securities of other investment companies, except
by purchase in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than the customary broker's commission,
or except when the purchase is part of a plan of merger, consolidation,
reorganization or acquisition.
4. Miscellaneous
a. Investment grade obligations
Each of the National Municipal Bond Fund, New York Tax-Free Fund and Ohio
Municipal Bond Fund may not:
Hold more than 5% of its total assets in securities that have been downgraded
below investment grade.
b. Concentration
The Fund for Income may not:
With respect to non-municipal bond investments, purchase securities (other than
securities of the United States government, its agencies or instrumentalities),
if as a result of such purchase 25% or more of the total Fund's assets would be
invested in any one industry.
c. Diversification.
The Convertible Securities Fund and the Federal Money Market Fund may not:
With respect to 75% of a Fund's total assets, purchase the securities of any one
issuer (except in securities of the United States Government, its agencies or
its instrumentalities) if as a result (a) more than 5% of the Fund's total
assets would be invested in the securities of that issuer, or (b) the Fund would
hold more than 10% of the outstanding voting securities of that issuer. Rule
2a-7 of the 1940 Act permits the Federal Money Market Fund to invest up to 25%
of its total assets in securities of a single issuer for a period of up to three
days.
d. Foreign issuers.
The Convertible Securities Fund may not invest in excess of 10% of its total
assets in the securities of foreign issuers, excluding from such limitation
securities listed on any United States securities exchange.
14
<PAGE>
The Federal Money Market Fund may not invest in foreign securities.
e. Unseasoned issuers.
Each of the Convertible Securities Fund and the Federal Money Market Fund may
not:
Invest in excess of 5% of its total assets in securities of issuers which,
including predecessors, do not have a record of at least three years' operation.
Each of the LifeChoice Funds may not:
Invest more than 5% of its total assets in the securities of issuers which,
together with any predecessors, have a record of less than three years of
continuous operation (except for the Proprietary Portfolios, but a LifeChoice
Fund may invest in Underlying Portfolios that do so invest).
f. Pledge of assets.
Each of the Convertible Securities Fund and the Federal Money Market Fund may
not:
Pledge or hypothecate any of its assets. For the purpose of this limitation,
collateral arrangements with respect to stock options are not deemed to be a
pledge of assets.
g. Federal Money Market Fund.
The Federal Money Market Fund may not (a) lend portfolio securities, (b) borrow
money, or (c) invest in shares of other investment companies.
h. The LifeChoice Funds
The LifeChoice Funds may not participate on a joint or joint and
several basis in any securities trading account.
Investment Restrictions of Certain Underlying Portfolios of the LifeChoice
Funds
Notwithstanding the foregoing restrictions, the Other Portfolios in which the
Funds may invest have adopted certain investment restrictions which may be more
or less restrictive than those listed above, thereby allowing a Fund to
participate in certain investment strategies indirectly that are prohibited
under the fundamental and non-fundamental investment restrictions listed above.
The investment restrictions of the Proprietary Portfolios are set forth in this
SAI and the investment restrictions of the Other Portfolios are set forth in
their respective statements of additional information.
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST
The following tables list some of the types of securities each of the Funds may
choose to purchase under normal market conditions. Unless otherwise stated, the
indicated percentage relates to a Fund's total assets that may be committed to
the stated investment. Permissible investments for the three LifeChoice Funds
will correspond to the Underlying Portfolios comprising the particular
LifeChoice Fund, some of which, the Proprietary Portfolios, are described in
this SAI. For information on the Underlying Portfolios, see the LifeChoice
Funds' Prospectus.
15
<PAGE>
<TABLE>
<CAPTION>
Investments common to all of the Funds
(except the Federal Money Market Fund)
------------------------------------------------------------------------
<S> <C>
Borrowing from Banks o 5%
------------------------------------------------------------------------
Investment Company Securities o 5% in any one mutual fund
(All Funds except the Federal Money o 3% of the assets of any one
Market Fund and the LifeChoice Funds) mutual fund
10% in combined mutual fund
holdings
------------------------------------------------------------------------
Reverse Repurchase Agreements o 33 1/3%
------------------------------------------------------------------------
When-Issued and Delayed Delivery o 33 1/3%
------------------------------------------------------------------------
Money Market Funds(1)
- -----------------------------------------------------------------------------------------------
Commercial o No limit: Financial Short-Term o 10% of net assets:
Paper Reserves, Institutional Funding Financial Reserves,
Money Market, Prime Agreements Institutional Money
Obligations Market, Prime Obligations
o No limit/up to 20%
taxable: Ohio Municipal
Money Market, Tax-Free Money
Market
- -----------------------------------------------------------------------------------------------
Repurchase o No limit: Federal Money U.S. o No limit: Federal
Agreements Market, Financial Reserves, Government Money Market, Financial
Institutional Money Market, Securities Reserves, Institutional
Prime Obligations Money Market, Prime
Obligations
o No limit, collateralized
by U.S. Treasurys: U.S. o Only direct U.S.
Government Obligations Treasury Obligations:
U.S. Government
o 20%: Ohio Municipal Obligations
Money Market
o 20%: Ohio Municipal
Money Market, Tax-Free
Money Market
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------
1 The Federal Money Market Fund, Financial Reserves Fund, Institutional
Money Market Fund, Ohio Municipal Money Market Fund, Prime Obligations
Fund, Tax-Free Money Market Fund and U.S. Government Obligations Fund.
16
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank Deposit o No limit: Financial Restricted o No limit: Financial
Instruments Reserves, Institutional Securities Reserves, Institutional
Money Market, Prime Money Market, Prime
Obligations Obligations
o 20%: Ohio Municipal o No limit/20%
Money Market, Tax-Free Money taxable: Ohio Municipal
Market Money Market, Tax-Free
Money Market
- ---------------------------------------------------------------------------------------------
Master Demand o No limit: Financial Time Deposits o No limit: Financial
Notes Reserves, Institutional Reserves, Institutional
Money Market, Prime Money Market, Prime
Obligations Obligations
o 20%: Ohio Municipal o 20%: Ohio Municipal
Money Market, Tax-Free Money Money Market, Tax-Free
Market Money Market
- ---------------------------------------------------------------------------------------------
Tax and Bond o No limit: Ohio Variable and o No limit: All Money
Anticipation Municipal Money Market, Floating Rate Market Funds
Notes Tax-Free Money Market Securities
- ---------------------------------------------------------------------------------------------
Tax-Exempt o No limit: Financial Eurodollar o 25%: Financial
Commercial Reserves, Ohio Municipal Obligations Reserves, Institutional
Paper Money Market, Prime Money Market, Prime
Obligations, Tax-Free Money Obligations
Market, Institutional Money
Market o 20%: Ohio Municipal
Money Market, Tax-Free
Money Market
- ---------------------------------------------------------------------------------------------
Zero Coupon o No limit: Financial Mortgage-Backed o No limit: Financial
Bonds Reserves, Institutional Securities Reserves, Institutional
Money Market, Prime Money Market, Prime
Obligations Obligations
o No limit/only U.S. o No limit/only U.S.
Treasurys: U.S. Government Treasurys: U.S.
Obligations Government Obligations
o No limit/tax-exempt: o No limit/tax-exempt: Ohio
Ohio Municipal Money Market, Municipal Money Market,
Tax-Free Money Market Tax-Free Money Market
- ---------------------------------------------------------------------------------------------
Illiquid o 10% of net assets: Securities of o With respect to 75%,
Securities Financial Reserves, Any One Issuer no more than 5%: Ohio
Institutional Money Market, Municipal Money Market
Ohio Municipal Money Market,
Prime Obligations, Tax-Free o 5%: Financial
Money Market Reserves, Institutional
Money Market Prime
Obligations, Tax-Free
Money Market, U.S.
Government Obligations
- ---------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C>
o Securities o 33 1/3%: Financial Reserves, Institutional Money Market, Prime
Lending Obligations, U.S. Government Obligations
o None: Federal Money Market, Ohio Municipal Money Market, even
though Fundamental Restriction No. 7 permits the Fund to lend
portfolio securities.
- ---------------------------------------------------------------------------------------------
Investments common to all of the Municipal Bond Funds(2)
- ---------------------------------------------------------------------------------------------------------
Revenue Bonds o No Resource o No Illiquid o 15% General o No
limit Recovery limit Securities of net Obligation Limit
Bonds assets Bonds
- ---------------------------------------------------------------------------------------------------------
Zero Coupon o No Refunding o No Municipal o 30% Tax-Exempt o No
Bonds limit Contracts Limit Lease Commercial limit
Obligations Paper
- ---------------------------------------------------------------------------------------------------------
Tax, Revenue o No Lower-Rated o 5% U.S. o 20% Variable o No
and Bond limit Municipal Government and limit
Anticipation Securities Securities Floating
Notes Rate
Securities
- ---------------------------------------------------------------------------------------------------------
Asset-Backed o 35% Taxable o 20% Tax o 20% Repurchase o 20%
Securities Obligations Preference Agreements
Items
- ---------------------------------------------------------------------------------------------------------
Demand o No Mortgage- o 35% Restricted o No Certificates o 20%
Features or limit Backed Securities limit of
"Puts" Securities, Participation
Tax-Exempt
- ---------------------------------------------------------------------------------------------------------
Collateralized Mortgage o 25% Industrial Development o 25%
Obligations, Tax-Exempt Bonds and Private
Activity Bonds
- ---------------------------------------------------------------------------------------------------------
Dollar Weighted o 5 to 11 Maturity at the Time o 20 to 30
Effective Average years: National of Purchase years: New York
Maturity Municipal Bond Tax-Free
o 5 to 15
years: Ohio
Municipal Bond
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
2 The National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal
Bond Fund.
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Futures Contracts and o 5% in When-Issued and Delayed o 33 1/3%
Options on Futures margins and Delivery Securities
Contracts premiums;
33-1/3% subject
to futures or
options on
futures
- ---------------------------------------------------------------------------------------------------------
Investments common to all of the Taxable Bond Funds(3)
----------------------------------------------------------------------------------
Illiquid Securities o 15% of net Securities Lending o 33 1/3%
assets
----------------------------------------------------------------------------------
Futures Contracts o 5% in
and Options on margins and
Futures Contracts premiums;
33-1/3% subject
to futures or
options on
futures
----------------------------------------------------------------------------------
Taxable Bond Funds
- -------------------------------------------------------------------------------------------------
U.S. o No limit: Fund for Corporate Debt o No limit:
Government Income, Intermediate Obligations Intermediate Income,
Securities Income, Investment Quality Investment Quality
Bond, Limited Term Income Bond, Limited Term
Income
o 20%: Government
Mortgage o 20%: Government
Mortgage
- -------------------------------------------------------------------------------------------------
Convertible or o No limit: Investment Preferred and o 20%: Intermediate
Exchangeable Quality Bond, Limited Term Convertible Income, Investment
Corporate Debt Income Preferred Stock Quality Bond, Limited
Obligations of U.S. Term Income
o 20%: Government Corporations
Mortgage, Intermediate
Income
- -------------------------------------------------------------------------------------------------
Mortgage-Backed o No limit: Intermediate Short-Term Debt o No limit: Limited
Securities and Income, Investment Quality Obligations Term Income
Collateralized Bond, Limited Term Income
Mortgage o 35%: Fund for
Obligations o 80 to 100% (U.S. Income (U.S. Gov't
Gov't): Government only) Intermediate
Mortgage Income, Investment
Quality Bond
o 65 to 100%: Fund for
Income o 20%: Government
Mortgage
- -------------------------------------------------------------------------------------------------
</TABLE>
- ----------
3 The Fund for Income, Government Mortgage Fund, Intermediate Income Fund,
Investment Quality Bond Fund and Limited Term Income Fund.
19
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zero Coupon o 20%: Intermediate Variable and o No limit:
Bonds Income, Investment Quality Floating Rate Intermediate Income,
Bond, Limited Term Income Securities Investment Quality
Bond, Limited Term
o 20% (U.S. Gov't): Fund Income
for Income, Government
Mortgage o 35% (U.S. Gov't):
Fund for Income
o 20% (U.S. Gov't):
Government Mortgage
- -------------------------------------------------------------------------------------------------
Yankee o 20%: Intermediate Foreign Debt o 20%: Intermediate
Securities Income Fund, Investment Securities Income, Investment
Quality Bond, Limited Term Quality Bond, Limited
Income Term Income
- -------------------------------------------------------------------------------------------------
Receipts o 20%: Intermediate Repurchase o 35%: Fund for
Income, Investment Quality Agreements Income, Intermediate
Bond, Limited Term Income, Income, Investment
Government Mortgage Quality Bond, Limited
Term Income
o 20% (U.S. Gov't):
Fund for Income o 20%: Government
Mortgage
- -------------------------------------------------------------------------------------------------
Tax, Revenue o No limit: Restricted o No limit:
and Bond Intermediate Income, Securities Intermediate Income,
Anticipation Investment Quality Bond, Investment Quality
Notes Limited Term Income Bond, Limited Term
Income
o 20%: Government
Mortgage o 20%: Government
Mortgage
- -------------------------------------------------------------------------------------------------
Options o 25% to write covered Asset-Backed o 35%: Fund for
calls, 5% to purchase Securities Income, Intermediate
options to close out open Income, Investment
options transactions: Quality Bond, Limited
Fund for Income Term Income
o 20%: Government
Mortgage
- -------------------------------------------------------------------------------------------------
Dollar Weighted Effective Average Maturity o 2 to 30 years: Fund for Income
o 5 to 15 years: Investment Quality Bond
o Up to 12 years: Government Mortgage
o 3 to 10 years: Intermediate Income
o 1 to 5 years: Limited Term Income
- -------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Investments common to all of the Equity Funds(4)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Illiquid Securities. o 15% of net Securities Lending o 33 1/3%: All
assets Equity Funds (except
Convertible
Securities)
o 10%: Convertible
Securities
- -------------------------------------------------------------------------------------------------
Futures Contracts and o 5% in margins When-Issued and o 33 1/3%
Options on Futures and premiums; Delayed-Delivery
Contracts 33-1/3% subject Securities
to futures or
options on futures
- -------------------------------------------------------------------------------------------------
Warrants. o 10%: All Equity Funds (except Convertible Securities)
o 5%: Convertible Securities
- -------------------------------------------------------------------------------------------------
</TABLE>
- ----------
4 The Balanced Fund, Convertible Securities Fund, Diversified Stock Fund,
Growth Fund, International Growth Fund, Lakefront Fund, Ohio Regional
Stock Fund, Real Estate Investment Fund, Small Company Opportunity Fund,
Special Value Fund, Stock Index Fund and Value Fund.
21
<PAGE>
Equity Funds
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Equity o 80 to 100%: Diversified Repurchase o 35%: Balanced,
Securities Stock, Growth, Lakefront, Agreements Convertible Securities,
Ohio Regional Stock, Real International Growth
Estate Investment, Small
Company Opportunity, Special o 20%: Diversified
Value, Stock Index, Value Stock, Growth,
Lakefront, Ohio Regional
o 40 to 75%: Balanced Stock, Real Estate
Investment, Small
Company Opportunity,
o 35%: Convertible Special Value, Stock
Securities Index, Value
- -------------------------------------------------------------------------------------------------
Foreign Equity o 65 to 100%: Foreign o 20%: International
Securities International Growth Debt Growth
Traded on a Securities
Foreign Exchange o 20%: Real Estate o 10%: Balanced,
Investment Convertible Securities
o 10%: Balanced,
Convertible Securities,
Lakefront
- -------------------------------------------------------------------------------------------------
Foreign Equity o No limit: Stock Index Options o 25% in covered calls
Securities and puts: Real Estate
Traded on U.S. o 65 to 100%: Investment
Exchanges International Growth
o 25% in covered calls
o 20%: Real Estate and 5% in call or put
Investment options: Small Company
Opportunity
o 10%: Balanced,
Convertible Securities, o 25% in covered
Diversified Stock, Growth, calls: Balanced,
Lakefront, Small Company Diversified Stock,
Opportunity, Special Value, Growth, International
Value Growth, Lakefront, Ohio
Regional Stock, Special
Value, Stock Index, Value
o 5% in calls:
Convertible Securities
- -------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stock o 35%: Convertible Short-Term o 35%: Balanced,
Securities, International Debt Convertible Securities,
Growth Obligations International Growth
o 25%: Balanced o 33 1/3%: Stock Index
o 20%: Diversified Stock, o 20%: Diversified
Growth, Real Estate Stock, Growth,
Investment, Lakefront, Small Lakefront, Ohio Regional
Company Opportunity, Special Stock, Real Estate
Value, Ohio Regional Stock, Investment, Small
Value Company Opportunity,
Special Value, Value,
U.S. Corporate o 60%: Balanced* Restricted o 35%: Balanced,
Debt Obligations Securities International Growth,
o 35%: Convertible Small Company Opportunity
Securities, International
Growth o 20%: Diversified
Stock, Growth,
o 20%: Diversified Stock, Lakefront, Ohio Regional
Growth, Lakefront, Small Stock, Special Value,
Company Opportunity, Ohio Stock Index, Value
Regional Stock, Special
Value, Value o 15%: Convertible
Securities, Real Estate
Investment
- -------------------------------------------------------------------------------------------------
Real Estate o No limit: Real Estate Receipts o 20%: Diversified
Investment Investment Stock, Growth,
Trusts International Growth,
o 25%: Balanced, Lakefront, Ohio Regional
Convertible Securities, Stock, Real Estate
Diversified Stock, Investment, Small
International Growth, Ohio Company Opportunity,
Regional Stock, Small Special Value, Stock
Company Opportunity, Special Index, Value
Value, Value
o 10%: Balanced
o 20%: Growth, Stock Index
- -------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* The Balanced Fund may invest up to 20% of its total assets in asset-backed
securities, including securities backed by commercial mortgages,
automobile loan receivables, credit card receivables, and rate reduction
bonds.
23
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C>
Convertible o 65 to 100%: Convertible U.S. o 60%: Balanced
Securities Securities Government
Securities o 35%: Convertible
o 80%: Ohio Regional Securities,
Stock Fund International Growth
o 40%: Balanced o 20%: Diversified
Stock, Growth,
o 35%: International Growth Lakefront, Ohio Regional
Stock, Real Estate
Investment, Small
Company Opportunity,
Special Value, Stock
Index**, Value
- -------------------------------------------------------------------------------------------------
Variable and o 35%: Convertible
Floating Rate Securities
Securities
o 20%: Lakefront
- ----------------- ----------------------------------
Secondary Investment Strategies. In addition to the principal strategies
described in the Prospectuses, certain Funds may engage in the secondary
investment strategies outlined below.
- ------------------------- -----------------------------------------------------------------------
Balanced Fund o The Fund may, but is not required to, use derivative
contracts.
- -------------------------------------------------------------------------------------------------
Convertible Securities o The Fund may invest up to 35% of its total assets in
Fund corporate debt securities, common stock, U.S. Government
securities and high-quality short-term debt obligations,
preferred stock and repurchase agreements.
o The Fund may invest up to 10% of its total assets
in foreign debt and equity securities.
- -------------------------------------------------------------------------------------------------
Diversified Stock Fund o The Fund may invest up to 20% of its
total assets in preferred stocks, investment grade
corporate debt securities, short-term debt
obligations and U.S. Government obligations.
o The Fund may, but is not required to, use derivative
instruments.
- -------------------------------------------------------------------------------------------------
Government Mortgage Fund o The Fund may invest in receipts and separately traded
registered interest and principal securities (STRIPS), which are
sold as zero coupon; collateralized mortgage obligations; futures
contracts and put and call options on futures contracts; Treasury
notes and agencies and interest only (IO), and principal only
(PO) securities. IOs and POs are derivatives of bonds.
Securities dealers separate the interest or principal payments
from a bond or mortgage-backed security and sell only that
portion as one of the above securities.
o The Fund may, but is not required to, use derivative
contracts.
- -------------------------------------------------------------------------------------------------
Growth Fund o The Fund may invest up to 20% of its total
assets in preferred stocks, investment-grade
corporate debt securities, short-term debt
obligations and U.S. Government obligations.
o The Fund may, but is not required to, use derivative
instruments.
- -------------------------------------------------------------------------------------------------
</TABLE>
** Only U.S. Treasury obligations. The Stock Index Fund may hold short-term
debt obligations and may enter into Repurchase Agreements for liquidity.
24
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C>
Intermediate Income Fund o The Fund may invest up to 35% of its
total assets in high-quality, short-term debt.
o The Fund may invest up to 20% of its total assets in
preferred and convertible preferred securities and separately
traded interest and principal component parts of U.S. Treasury
obligations.
o The Fund may invest in international bonds, foreign
securities, and derivative instruments, such as futures
contracts, options and securities that may have warrants or
options attached.
- -------------------------------------------------------------------------------------------------
International Growth o The Fund may invest up to 35% of its total assets in cash
Fund equivalents and fixed income securities, including U.S.
Government obligations.
o The Fund may, but is not required to, use derivative
contracts.
- -------------------------------------------------------------------------------------------------
Investment Quality Bond o The Fund may invest up to 20% of its total assets in
Fund preferred and convertible preferred securities, and separately
traded interest and principal component parts of U.S. Treasury
obligations.
o The Fund may invest up to 35% of its total assets
in high quality, short-term debt.
o The Fund may, but is not required to, use derivative
contracts.
- -------------------------------------------------------------------------------------------------
Limited Term Income Fund o The Fund may invest up to 20% of its total assets in
preferred and convertible preferred securities, and separately
traded interest and principal component parts of U.S. Treasury
obligations.
o The Fund may invest in international bonds,
foreign securities, and derivative instruments,
such as futures contracts and securities that may
have warrants or options attached.
- -------------------------------------------------------------------------------------------------
National Municipal Bond o The Fund may, but is not required to, use derivative
Fund instruments.
- -------------------------------------------------------------------------------------------------
New York Tax-Free Fund o The Fund may, but is not required to, use derivative
instruments.
- -------------------------------------------------------------------------------------------------
Ohio Municipal Bond Fund o The Fund may, but is not required to, use derivative
instruments.
- -------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund o The Fund may invest up to
20% of its total assets in short-term debt
obligations, investment-grade corporate debt
securities and U.S. Government obligations.
o The Fund may, but is not required to, use derivative
instruments.
- -------------------------------------------------------------------------------------------------
Real Estate Investment o The Fund may invest up to 20% of its total assets In
Fund securities of foreign real estate companies and American
Depositary Receipts (ADRs).
o The Fund may, but is not required to, use derivative
contracts.
- -------------------------------------------------------------------------------------------------
Special Value Fund o The Fund may invest up to 20% of its
total assets in investment-grade debt securities
and preferred stocks.
o The Fund may, but is not required to, use derivative
instruments.
- -------------------------------------------------------------------------------------------------
Value Fund o The Fund may invest up to 20% of its total
assets in investment-grade corporate debt
securities, short-term debt obligations and U.S.
Government obligations.
o The Fund may, but is not required to, use derivative
instruments.
- -------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
The instruments in which the Funds can invest, according to their investment
policies and limitations are described below.
The following paragraphs provide a brief description of some of the types of
securities in which the Funds may invest in accordance with their investment
objective, policies, and limitations, including certain transactions the Funds
may make and strategies they may adopt. The following also contains a brief
description of the risk factors related to these securities. The Funds may,
following notice to their shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Funds or which
currently are not available but which may be developed, to the extent such
investment practices are both consistent with a Fund's investment objective and
are legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus and this SAI.
Eligible Securities for Money Market Funds. High-quality investments are those
obligations which, at the time of purchase, (i) possess one of the two highest
short-term ratings from an NRSRO or (ii) possess, in the case of multiple-rated
securities, one of the two highest short-term ratings by at least two NRSROs; or
(iii) do not possess a rating (i.e. are unrated) but are determined by the
Adviser to be of comparable quality to the rated instruments described in (i)
and (ii). For purposes of these investment limitations, a security that has not
received a rating will be deemed to possess the rating assigned to an
outstanding class of the issuer's short-term debt obligations if determined by
the Adviser to be comparable in priority and security to the obligation selected
for purchase by a Fund. (The above described securities which may be purchased
by the money market Funds are hereinafter referred to as "Eligible Securities.")
A security subject to a tender or demand feature will be considered an Eligible
Security only if both the demand feature and the underlying security possess a
high quality rating, or, if such do not possess a rating, are determined by the
Adviser to be of comparable quality; provided, however, that where the demand
feature would be readily exercisable in the event of a default in payment of
principal or interest on the underlying security, this obligation may be
acquired based on the rating possessed by the demand feature or, if the demand
feature does not possess a rating, a determination of comparable quality by the
Adviser. A security which at the time of issuance had a maturity exceeding 397
days but, at the time of purchase, has remaining maturity of 397 days or less,
is not considered an Eligible Security if it does not possess a high quality
rating and the long-term rating, if any, is not within the two highest rating
categories.
Pursuant to Rule 2a-7 under the 1940 Act, the Money Market Funds maintain a
dollar-weighted average portfolio maturity which does not exceed 90 days.
The weighted average maturity of the U.S. Government Obligations Fund will
usually be 60 days or less since rating agencies normally require shorter
maturities. However, the permitted weighted average maturity for the U.S.
Government Obligations Fund is 90 days.
The Appendix of this SAI identifies each NRSRO which may be utilized by the
Adviser with regard to portfolio investments for the Funds and provides a
description of relevant ratings assigned by each such NRSRO. A rating by an
NRSRO may be utilized only where the NRSRO is neither controlling, controlled
by, or under common control with the issuer of, or any issuer, guarantor, or
provider of credit support for, the instrument.
U.S. Corporate Debt Obligations. U.S. Corporate Debt Obligations include bonds,
debentures, and notes. Debentures represent unsecured promises to pay, while
notes and bonds may be secured by mortgages on real property or security
interests in personal property. Bonds include, but are not limited to, debt
instruments with maturities of approximately one year or more, debentures,
mortgage-related securities, stripped government securities, and zero coupon
obligations. Bonds, notes, and debentures in which the Funds may invest may
differ in interest rates, maturities, and times of issuance. The market value of
a Fund's fixed income investments will change in response to interest rate
changes and other factors. During periods of falling interest rates, the values
of outstanding fixed income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Moreover, while securities with longer maturities tend to produce
higher yields, the price of longer maturity securities also are subject to
greater market fluctuations as a result of changes in interest rates.
26
<PAGE>
Changes by NRSROs in the rating of any fixed income security and in the ability
of an issuer to make payments of interest and principal also affect the value of
these investments. Except under conditions of default, changes in the value of a
Fund's securities will not affect cash income derived from these securities but
will affect the Fund's net asset value per share ("NAV").
Temporary Defensive Measures. For temporary defensive purposes in response to
market conditions, each Fund may hold up to 100% of its assets in cash or high
quality, short-term obligations such as domestic and foreign commercial paper
(including variable-amount master demand notes), bankers' acceptances,
certificates of deposit and demand and time deposits of domestic and foreign
branches of U.S. banks and foreign banks, and repurchase agreements. (See
"Foreign Securities" for a description of risks associated with investments in
foreign securities.) These temporary defensive measures may result in
performance that is inconsistent with a Fund's investment objective.
Short-Term Corporate Obligations. Corporate obligations are bonds issued by
corporations and other business organizations in order to finance their
long-term credit needs. Corporate bonds in which a Fund may invest generally
consist of those rated in the two highest rating categories of an NRSRO that
possess many favorable investment attributes. In the lower end of this category,
credit quality may be more susceptible to potential future changes in
circumstances.
Demand Features. A Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. A Fund uses these arrangements to obtain liquidity and not to protect
against changes in the market value of the underlying securities. The
bankruptcy, receivership or default by the issuer of the demand feature, or a
default on the underlying security or other event that terminates the demand
feature before its exercise, will adversely affect the liquidity of the
underlying security. Demand features that are exercisable even after a payment
default on the underlying security may be treated as a form of credit
enhancement.
Bankers' Acceptances. Bankers' Acceptances are negotiable drafts or bills of
exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' Acceptances will be those guaranteed by domestic and foreign banks, if
at the time of purchase such banks have capital, surplus, and undivided profits
in excess of $100,000,000 (as of the date of their most recently published
financial statements).
Bank Deposit Instruments. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Certificates of Deposit and demand and time deposits invested in by a Fund will
be those of domestic and foreign banks and savings and loan associations, if (a)
at the time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation (the
"FDIC") or the Savings Association Insurance Fund.
Eurodollar Certificates of Deposit ("ECDs") are U.S. dollar-denominated
certificates of deposit issued by branches of foreign and domestic banks located
outside the United States.
Yankee Certificates of Deposit ("Yankee CDs") are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States.
Eurodollar Time Deposits ("ETDs") are U.S. dollar-denominated deposits in a
foreign branch of a U.S. bank or a foreign bank.
Canadian Time Deposits ("CTDs") are U.S. dollar-denominated certificates of
deposit issued by Canadian offices of major Canadian Banks.
27
<PAGE>
Commercial Paper. Commercial paper is comprised of unsecured promissory notes,
usually issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return. In addition to corporate
issuers, tax-exempt commercial paper also may be issued by borrowers that issue
municipal securities. See "Municipal Securities" below.
The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by an NRSRO or, if not rated, found by the
Trustees to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by an NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments. For a description of the rating symbols of
each NRSRO see the Appendix to this SAI.
International Bonds. International Bonds include Euro and Yankee obligations,
which are U.S. dollar-denominated international bonds for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Eurodollar Bonds"). International Bonds also
include Canadian and Supranational Agency Bonds (e.g., International Monetary
Fund). (See "Foreign Debt Securities" for a description of risks associated with
investments in foreign securities.)
Foreign Debt Securities. Investments in securities of foreign companies
generally involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there generally is less publicly available
information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards, practices, and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of a Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation, or
confiscatory taxation; limitations on the removal of securities, property, or
other assets of a Fund; there may be political or social instability; there may
be increased difficulty in obtaining legal judgments; or diplomatic developments
which could affect U.S. investments in those countries. The Adviser will take
such factors into consideration in managing a Fund's investments. A Fund will
not hold foreign currency in amounts exceeding 5% of its assets as a result of
such investments.
Repurchase Agreements.
General. Securities held by a Fund may be subject to Repurchase Agreements.
Under the terms of a Repurchase Agreement, a Fund would acquire securities from
financial institutions or registered broker-dealers deemed creditworthy by the
Adviser pursuant to guidelines adopted by the Trustees, subject to the seller's
agreement to repurchase such securities at a mutually agreed upon date and
price. The seller is required to maintain the value of collateral held pursuant
to the agreement at not less than the repurchase price (including accrued
interest).
If the seller were to default on its repurchase obligation or become insolvent,
a Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.
Convertible Securities Fund and Federal Money Market Fund. With respect to
repurchase agreement transactions entered into by the Convertible Securities
Fund, the underlying securities are ordinarily U.S. Treasury or other
governmental obligations or high quality money market instruments. With respect
to repurchase agreement transactions entered into by the Federal Money Market
Fund, the underlying securities are bonds, notes or other obligations of or
guaranteed by the United States, or those for which the faith of the United
States is pledged for the payment of principal and interest thereon, and bonds,
notes, debentures or any other obligations or securities in which the Fund may
invest.
The Funds will not enter into repurchase agreements with maturities of more than
7 days if, taken together with illiquid securities and other securities for
which there are no readily available quotations, more than 10% of their
respective total assets would be so invested. Repurchase agreements are
considered to be loans by the Funds collateralized by the underlying securities.
28
<PAGE>
Reverse Repurchase Agreements. A Fund may borrow funds for temporary purposes
by entering into reverse Repurchase Agreements. Reverse Repurchase Agreements
are considered to be borrowings under the 1940 Act.
Pursuant to such agreement, a Fund would sell a portfolio security to a
financial institution, such as a bank or a broker-dealer, and agree to
repurchase such security at a mutually agreed-upon date and price. At the time a
Fund enters into a Reverse Repurchase Agreement, it will place in a segregated
custodial account assets (such as cash or liquid securities) consistent with the
Fund's investment restrictions having a value equal to the repurchase price
(including accrued interest). The collateral will be marked-to-market on a daily
basis, and will be monitored continuously to ensure that such equivalent value
is maintained. Reverse Repurchase Agreements involve the risk that the market
value of the securities sold by a Fund may decline below the price at which the
Fund is obligated to repurchase the securities.
Short-Term Funding Agreements. A Fund may invest in Short-Term Funding
Agreements (sometimes referred to as guaranteed interest contracts or "GICs")
issued by insurance companies. Pursuant to such agreements, a Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits the Fund, on a monthly basis, guaranteed interest
which is based on an index. The Short-Term Funding Agreement provides that this
guaranteed interest will not be less than a certain minimum rate. Because the
principal amount of a Short-Term Funding Agreement may not be received from the
insurance company on seven days notice or less, the agreement is considered to
be an illiquid investment and, together with other instruments in a Fund which
are not readily marketable, will not exceed, for Money Market Funds, 10% of the
Fund's net assets and for all other Funds, 15% of the Fund's net assets. In
determining dollar-weighted average portfolio maturity, a Short-Term Funding
Agreement will be deemed to have a maturity equal to the period of time
remaining until the next readjustment of the guaranteed interest rate.
Variable Amount Master Demand Notes. Variable Amount Master Demand Notes are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Although there is no secondary market for these notes, a Fund
may demand payment of principal and accrued interest at any time and may resell
the notes at any time to a third party. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of a Variable
Amount Master Demand Note if the issuer defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. While the notes typically are not rated by credit rating agencies,
issuers of Variable Amount Master Demand Notes must satisfy the same criteria as
set forth above for unrated commercial paper, and the Adviser will monitor
continuously the issuer's financial status and ability to make payments due
under the instrument. Where necessary to ensure that a note is of "high
quality," a Fund will require that the issuer's obligation to pay the principal
of the note be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. For purposes of a Fund's investment policies, a
Variable Amount Master Demand Note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand.
Variable Rate Demand Notes. Variable Rate Demand Notes are tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Funds also may invest in participation Variable Rate
Demand Notes, which provide a Fund with an undivided interest in underlying
Variable Rate Demand Notes held by major investment banking institutions. Any
purchase of Variable Rate Demand Notes will meet applicable diversification and
concentration requirements.
Variable and Floating Rate Notes. A Variable Rate Note is one whose terms
provide for the readjustment of its interest rate on set dates and which, upon
such readjustment, reasonably can be expected to have a market value that
approximates its par value. A Floating Rate Note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, reasonably can be expected to have a market value that
approximates its par value. Such notes frequently are not rated by credit rating
agencies; however, unrated Variable and Floating Rate Notes purchased by the
Fund will only be those determined by the Adviser, under guidelines established
by the Trustees, to pose minimal credit risks and to be of comparable quality,
at the time of purchase, to rated instruments eligible for purchase under the
Fund's investment policies. In making such determinations, the Adviser will
consider the earning power, cash flow and other liquidity ratios of the issuers
of
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such notes (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
Although there may be no active secondary market with respect to a particular
Variable or Floating Rate Note purchased by a Fund, the Fund may resell the note
at any time to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of a Variable or Floating
Rate Note in the event that the issuer of the note defaulted on its payment
obligations and a Fund could, for this or other reasons, suffer a loss to the
extent of the default. Variable or Floating Rate Notes may be secured by bank
letters of credit.
The maturities of Variable or Floating Rate Notes are determined as follows:
1. A Variable or Floating Rate Note that is issued or guaranteed by the United
States government or any agency thereof and which has a variable rate of
interest readjusted no less frequently than annually will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A Variable or Floating Rate Note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A Variable or Floating Rate Note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A Variable or Floating Rate Note that is subject to a demand feature will be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where a Fund is entitled
to receive the principal amount of the note either at any time on no more than
30 days' notice or at specified intervals not exceeding one year and upon no
more than 30 days' notice.
Extendible Debt Securities. Extendible Debt Securities are securities that can
be retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, a Fund may treat Extendible Debt
Securities as maturing on the next optional retirement date.
Receipts. Receipts are separately traded interest and principal component parts
of bills, notes, and bonds issued by the U.S. Treasury that are transferable
through the Federal book entry system, known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry
Safekeeping ("CUBES"). These instruments are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank; the custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates or
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and
Certificates of Accrual on Treasury Securities ("CATS").
Zero-Coupon Bonds. Zero-Coupon Bonds are purchased at a discount from the face
amount because the buyer receives only the right to a fixed payment on a certain
date in the future and does not receive any periodic interest payments. The
effect of owning instruments which do not make current interest payments is that
a fixed yield is earned not only on the original investment but also, in effect,
on accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yields on the Zero-Coupon Bond,
but at the same time eliminates the holder's ability to reinvest at higher
rates. For this reason, Zero-Coupon Bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently. This fluctuation increases
in accordance with the length of the period to maturity.
High-Yield Debt Securities. High-Yield Debt Securities are lower-rated debt
securities, commonly referred to as "junk bonds" (those rated Ba to C by Moody's
or BB to C by S&P), that have poor protection with respect to the
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payment of interest and repayment of principal, or may be in default. These
securities are often considered to be speculative and involve greater risk of
loss or price changes due to changes in the issuer's capacity to pay. The market
prices of High-Yield Debt Securities may fluctuate more than those of
higher-rated debt securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates.
While the market for High-Yield Debt Securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly-leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of future performance of the high yield bond market,
especially during periods of economic recession. In fact, from 1989 to 1991, the
percentage of High-Yield Debt Securities that defaulted rose significantly above
prior levels, although the default rate decreased in 1992.
The market for High-Yield Debt Securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, High-Yield
Debt Securities will be valued in accordance with procedures established by the
Trust's Board of Trustees, including the use of outside pricing services.
Judgment plays a greater role in valuing High-Yield Debt Securities than is the
case for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value High-Yield Debt
Securities and a Fund's ability to sell these securities.
Since the risk of default is higher for High-Yield Debt Securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by a Fund. In considering investments for
a Fund, the Adviser will attempt to identify those issuers of high-yielding debt
securities whose financial condition is adequate to meet future obligations, has
improved, or is expected to improve in the future. Analysis by the Adviser
focuses on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.
The Convertible Securities Fund. The Convertible Securities Fund will purchase
convertible securities that may or may not be rated by an NRSRO. When purchasing
rated securities, the Convertible Securities Fund may make substantial
investments in securities rated Baa, Ba B or Caa by Moody's and BB, BB, B or CCC
by S&P.
The Convertible Securities Fund is not restricted from investing in the
lower-rated categories of securities. However, the Fund will not invest in
securities rated Ba or lower by Moody's or BB or lower by S&P or unrated
securities, unless the Adviser believes that positive factors mitigate or reduce
the investment risks and that the investment is expected to provide a return
commensurate with such risks. Positive factors would include operating strengths
or improvements, such as growing market share or improved cost structure or
margins, that would enable a company to service its debt with a wider margin of
comfort than anticipated by rating agencies.
Loans and Other Direct Debt Instruments. Loans and Other Direct Debt Instruments
are interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent amounts owed to lenders or lending syndicates
(loans and loan participations), to suppliers of goods or services (trade claims
or other receivables), or to other parties. Direct Debt Instruments involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to a Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct Debt Instruments also may include
standby financing commitments that obligate a Fund to supply additional cash to
the borrower on demand.
Securities of Other Investment Companies. A Fund (other than the LifeChoice
Funds) may invest up to 5% of its total assets in the securities of any one
investment company, but may not own more than 3% of the securities of any
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one investment company or invest more than 10% of its total assets in the
securities of other investment companies. Pursuant to an exemptive order
received by the Trust from the SEC, a Fund may invest in the money market funds
of the Trust. The Adviser will waive its investment advisory fee with respect to
assets of a Fund invested in any of the Money Market Funds of the Trust, and, to
the extent required by the laws of any state in which a Fund's shares are sold,
the Adviser will waive its investment advisory fee as to all assets invested in
other investment companies. The LifeChoice Funds may invest in the Proprietary
Portfolios without limitation. See "Investment Policies and Limitations -- The
LifeChoice Funds" in this SAI.
U.S. Government Obligations. U.S. Government Obligations are obligations
issued or guaranteed by the U.S. Government, its agencies, and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others are
supported only by the credit of the agency or instrumentality. No assurance
can be given that the U.S. Government will provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to
do so by law.
Municipal Securities. Municipal Securities are obligations, typically bonds and
notes, issued by or on behalf of states, territories, and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities, and instrumentalities, the interest on which, in the
opinion of the issuer's bond counsel at the time of issuance, is both exempt
from federal income tax and not treated as a preference item for individuals for
purposes of the federal alternative minimum tax.
Two specific types of Municipal Securities are "Ohio Tax-Exempt Obligations" and
"New York Tax-Exempt Obligations." Ohio Tax-Exempt Obligations are Municipal
Securities issued by the State of Ohio and its political subdivisions, the
interest on which is, in the opinion of the issuer's bond counsel at the time of
issuance, excluded from gross income for purposes of both regular federal income
taxation and Ohio personal income tax. New York Tax-Exempt Obligations are
Municipal Securities issued by the State of New York and its political
subdivisions, the interest on which is, in the opinion of the issuer's bond
counsel at the time of issuance, excluded from gross income for purposes of both
regular federal income taxation and New York personal income tax.
Generally, Municipal Securities are issued by governmental entities to obtain
funds for various public purposes, such as the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to other public
institutions and facilities. Municipal Securities may include fixed, variable,
or floating rate obligations. Municipal Securities may be purchased on a
when-issued or delayed-delivery basis (including refunding contracts).
The two principal categories of Municipal Securities are "general obligation"
issues and "revenue" issues. Other categories of Municipal Securities are "moral
obligation" issues, private activity bonds, and industrial development bonds.
The prices and yields on Municipal Securities are subject to change from time to
time and depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer (or other entities whose
financial resources are supporting the Municipal Security), general conditions
in the market for tax-exempt obligations, the size of a particular offering, the
maturity of the obligation, and the rating(s) of the issue. There are variations
in the quality of Municipal Securities, both within a particular category of
Municipal Securities and between categories. Current information about the
financial condition of an issuer of tax-exempt bonds or notes usually is not as
extensive as that which is made available by corporations whose securities are
publicly traded.
The term Municipal Securities, as used in this SAI, includes private activity
bonds issued and industrial development bonds by or on behalf of public
authorities to finance various privately-operated facilities if the interest
paid thereon is both exempt from federal income tax and not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax. The term Municipal Securities also includes short-term instruments issued
in anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues, such as short-term general obligation notes, tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax-exempt
commercial paper, construction loan notes, and other forms of short-term
tax-exempt loans. Additionally, the term
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Municipal Securities includes project notes, which are issued by a state or
local housing agency and are sold by the Department of Housing and Urban
Development.
An issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code. Congress or state
legislatures may enact laws extending the time for payment of principal or
interest, or both, or imposing other constraints upon the enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Securities may be materially adversely affected by
litigation or other conditions. There also is the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay interest on and principal of their tax-exempt
bonds or notes may be materially impaired or their obligations may be found to
be invalid or unenforceable. Such litigation or conditions may, from time to
time, have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the credit
risk with respect to particular bonds or notes. Adverse economic, business,
legal, or political developments might affect all or a substantial portion of
the Fund's tax-exempt bonds and notes in the same manner.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. The U.S. Supreme Court has held that Congress has the constitutional
authority to enact such legislation. It is not possible to determine what effect
the adoption of such proposals could have on the availability of tax-exempt
bonds for investment by the Fund and the value of its portfolio. Proposals also
may be introduced before state legislatures that would affect the state tax
treatment of Municipal Securities. If such proposals were enacted, the
availability of Municipal Securities and their value would be affected.
The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
continuing requirements on issuers of tax-exempt bonds regarding the use,
expenditure and investment of bond proceeds and the payment of rebate to the
United States of America. Failure by the issuer to comply with certain of these
requirements subsequent to the issuance of tax-exempt bonds could cause interest
on the bonds to become includable in gross income retroactive to the date of
issuance.
General obligation issues are backed by the full taxing power of a state or
municipality and are payable from the issuer's general unrestricted revenues and
not from any particular fund or source. The characteristics and method of
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue issues or special obligation issues are backed
only by the revenues from a specific tax, project, or facility. "Moral
obligation" issues are normally issued by special purpose authorities.
Private activity bonds and industrial development bonds generally are revenue
bonds and not payable from the resources or unrestricted revenues of the issuer.
The credit and quality of industrial development revenue bonds is usually
directly related to the credit of the corporate user of the facilities. Payment
of principal of and interest on industrial development revenue bonds is the
responsibility of the corporate user (and any guarantor).
Private activity bonds, as discussed above, may constitute Municipal Securities
depending on their tax treatment. The source of payment and security for such
bonds is the financial resources of the private entity involved; the full faith
and credit and the taxing power of the issuer normally will not be pledged. The
payment obligations of the private entity also will be subject to bankruptcy as
well as other exceptions similar to those described above. Certain debt
obligations known as "industrial development bonds" under prior federal tax law
may have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, sewage or
solid waste disposal facilities, and certain local facilities for water supply
or other heating or cooling facilities. Other private activity bonds and
industrial development bonds issued to fund the construction, improvement or
equipment of privately-operated industrial, distribution, research or commercial
facilities also may be Municipal Securities, but the size of such issues is
limited under current and prior federal tax law. The aggregate amount of most
private activity bonds and industrial development bonds is limited (except in
the case of certain types of facilities) under federal tax law by an annual
"volume cap." The volume cap limits the annual aggregate principal amount of
such obligations issued by or on behalf of all government instrumentalities in
the state. Such obligations are included within the term Municipal Securities if
the interest paid
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thereon is, in the opinion of bond counsel, at the time of issuance, excluded
from gross income for purposes of both federal income taxation (including any
alternative minimum tax) and state personal income tax. Funds that invest in
private activity bonds may not be a desirable investment for "substantial users"
of facilities financed by private activity bonds or industrial development bonds
or for "related persons" of substantial users.
Project notes are secured by the full faith and credit of the United States
through agreements with the issuing authority which provide that, if required,
the U.S. government will lend the issuer an amount equal to the principal of and
interest on the project notes, although the issuing agency has the primary
obligation with respect to its project notes.
Some municipal securities are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. Insured investments are covered by an insurance policy applicable to a
specific security, either obtained by the issuer of the security or by a third
party from a private insurer. Insurance premiums for the municipal bonds are
paid in advance by the issuer or the third party obtaining such insurance. Such
policies are noncancellable and continue in force as long as the municipal bonds
are outstanding and the respective insurers remain in business.
The insurer generally unconditionally guarantees the timely payment of the
principal of and interest on the insured municipal bonds when and as such
payments become due but shall not be paid by the issuer, except that in the
event of any acceleration of the due date of the principal by reason of
mandatory or optional redemption (other than acceleration by reason of a
mandatory sinking fund payment), default, or otherwise, the payments guaranteed
will be made in such amounts and at such times as payments of principal would
have been due had there not been such acceleration. The insurer will be
responsible for such payments less any amounts received by the bondholder from
any trustee for the municipal bond issuers or from any other source. The
insurance does not guarantee the payment of any redemption premium, the value of
the shares of a Fund, or payments of any tender purchase price upon the tender
of the municipal bonds. With respect to small issue industrial development
municipal bonds and pollution control revenue municipal bonds, the insurer
guarantees the full and complete payments required to be made by or on behalf of
an issuer of such municipal bonds if there occurs any change in the tax-exempt
status of interest on such municipal bonds, including principal, interest, or
premium payments, if any, as and when required to be made by or on behalf of the
issuer pursuant to the terms of such municipal bonds. This insurance is intended
to reduce financial risk, but the cost thereof will reduce the yield available
to shareholders of a Fund.
The ratings of NRSROs represent their opinions as to the quality of Municipal
Securities. In this regard, it should be emphasized that the ratings of any
NRSRO are general and are not absolute standards of quality, and Municipal
Securities with the same maturity, interest rate, and rating may have different
yields, while Municipal Securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to purchase by a Fund, an
issue of Municipal Securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Fund. The Adviser will
consider such an event in determining whether the Fund should continue to hold
the obligation.
The Adviser believes that it is likely that sufficient Municipal Securities will
be available to satisfy investment objective and policies of each Fund that
invests in Municipal Securities ("Municipal Funds"). In meeting its investment
policies, a Municipal Fund may invest part of its total assets in Municipal
Securities which are private activity bonds. Moreover, although no Municipal
Fund currently intends to do so on a regular basis, each such Fund may invest
more than 25% of its total assets in Municipal Securities which are related in
such a way that an economic, business or political development or change
affecting one such security would likewise affect the other Municipal
Securities. Examples of such securities are obligations, the repayment of which
is dependent upon similar types of projects or projects located in the same
state. Such investments would be made only if deemed necessary or appropriate by
the Adviser.
Risk Factors Associated with Certain Issuers of Municipal Securities. A number
of factors could impair a municipal issuer's ability to service its debt.
General Obligation. The following may negatively affect a general
obligation issuer's debt service ability: reduced voter support for taxes;
statutory tax limits; a reduction in state and/or federal support; adverse
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economic, demographic and social trends; and loss of a significant taxpayer,
such as the closing of a major manufacturing plant in a municipality that is
heavily dependent on that facility.
Hospital and Health Care Facilities. The following may negatively affect
hospital and health care facilities that issue Municipal Securities: changes in
federal and state statutes, regulations, and policies affecting the health care
industry; changes in policies and practices of major managed care providers,
private insurers, third party payors and private purchasers of health care
services; reductions in federal Medicare and Medicaid payments; insufficient
occupancy; large malpractice lawsuits.
Housing. The following may diminish these issuers' ability to service
debt: accelerated prepayment of underlying mortgages; insufficient mortgage
origination due to inadequate supply of housing or qualified buyers; higher than
expected default rates on the underlying mortgages; losses from receiving less
interest from escrowed new project funds than is payable to bondholders
Utilities. The following may impair the debt service ability of
utilities: deregulation; environmental regulations; and adverse population
trends, weather conditions and economic developments.
Mass Transportation. The following could negatively affect airport
facilities: a sharp rise in fuel prices; reduced air traffic; closing of
smaller, money-losing airports; adverse local economic and social trends;
changes in environmental, Federal Aviation Administration and other regulations.
The following could affect ports: natural hazards, such as drought and flood
conditions; reliance on a limited number of products or trading partners;
changes in federal policies on trade, currency and agriculture. The debt service
ability of toll roads is affected by: changes in traffic demand resulting from
adverse economic and employment trends, fuel shortages, and sharp fuel price
increases; dependence on tourist-oriented economies; and declines in motor fuel
taxes, vehicle registration fees, license fees, and penalties and fines.
Higher Education. The following could diminish a higher education
issuer's debt service ability: legislative or regulatory actions; local economic
conditions; reduced enrollment; increased competition with other universities or
colleges; reductions in state financial support and the level of private grants.
Ohio Tax-Exempt Obligations. As used in the Prospectuses and this SAI, the term
"Ohio Tax-Exempt Obligations" refers to debt obligations issued by or on behalf
of the State of Ohio and its political subdivisions, the interest on which is,
in the opinion of the issuer's bond counsel, rendered on the date of issuance,
excluded from gross income for purposes of both federal income taxation and Ohio
personal income tax (as used herein the terms "income tax" and "taxation" do not
include any possible incidence of any alternative minimum tax). Ohio Tax-Exempt
Obligations are issued to obtain funds for various public purposes, including
the construction of a wide range of public facilities such as bridges, highways,
roads, schools, water and sewer works, and other utilities. Other public
purposes for which Ohio Tax-Exempt Obligations may be issued include refunding
outstanding obligations and obtaining funds to lend to other public institutions
and facilities. In addition, certain debt obligations known as "private activity
bonds" may be issued by or on behalf of municipalities and public authorities to
obtain funds to provide certain water, sewage and solid waste facilities,
qualified residential rental projects, certain local electric, gas and other
heating or cooling facilities, qualified hazardous waste facilities, high-speed
inter-city rail facilities, government-owned airports, docks and wharves and
mass commuting facilities, certain qualified mortgages, student loan and
redevelopment bonds and bonds used for certain organizations exempt from federal
income taxation. Certain debt obligations known as "industrial development
bonds" under prior federal tax law may have been issued by or on behalf of
public authorities to obtain funds to provide certain privately operated housing
facilities, sports facilities, industrial parks, convention or trade show
facilities, airport, mass transit, port or parking facilities, air or water
pollution control facilities, sewage or solid waste disposal facilities, and
certain local facilities for water supply or other heating or cooling
facilities. Other private activity bonds and industrial development bonds issued
to fund the construction, improvement or equipment of privately-operated
industrial, distribution, research or commercial facilities also may be Ohio
Tax-Exempt Obligations, but the size of such issues is limited under current and
prior federal tax law. The aggregate amount of most private activity bonds and
industrial development bonds is limited (except in the case of certain types of
facilities) under federal tax law by an annual "volume cap." The volume cap
limits the annual aggregate principal amount of such obligations issued by or on
behalf of all government instrumentalities in the state. Such obligations are
included within the term Ohio Tax-Exempt Obligations if the interest paid
thereon is, in the opinion of bond counsel, rendered on the date of issuance,
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excluded from gross income for purposes of both federal income taxation
(including, in certain cases, any alternative minimum tax) and Ohio personal
income tax. A Fund which invests in Ohio Tax-Exempt Obligations may not be a
desirable investment for "substantial users" of facilities financed by private
activity bonds or industrial development bonds or for "related persons" of
substantial users. See "Dividends, Distributions, and Taxes" in the
Prospectuses.
Prices and yields on Ohio Tax-Exempt Obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the market for tax-exempt obligations, the
size of a particular offering, the maturity of the obligation and ratings of
particular issues, and are subject to change from time to time. Current
information about the financial condition of an issuer of tax-exempt bonds or
notes is usually not as extensive as that which is made available by
corporations whose securities are publicly traded.
Obligations of subdivision issuers of tax-exempt bonds and notes may be subject
to the provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, as amended, affecting the rights and remedies of
creditors. Congress or state legislatures may seek to extend the time for
payment of principal or interest, or both, or to impose other constraints upon
enforcement of such obligations. There also is the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay interest on and principal of their tax-exempt
bonds or notes may be materially impaired or their obligations may be found to
be invalid or unenforceable. Such litigation or conditions may, from time to
time, have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the credit
risk with respect to particular bonds or notes. Adverse economic, business,
legal or political developments might affect all or a substantial portion of the
Funds' tax-exempt bonds and notes in the same manner.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. A 1988 decision of the U.S. Supreme Court held that Congress has the
constitutional authority to enact such legislation. It is not possible to
determine what effect the adoption of such proposals could have on the
availability of tax-exempt bonds for investment by a Fund and the value of its
portfolio.
The Code imposes certain continuing requirements on issuers of tax-exempt bonds
regarding the use, expenditure and investment of bond proceeds and the payment
of rebate to the United States of America. Failure by the issuer to comply
subsequent to the issuance of tax-exempt bonds with certain of these
requirements could cause interest on the bonds to become includable in gross
income, including retroactively to the date of issuance.
A Fund may invest in Ohio Tax-Exempt Obligations either by purchasing them
directly or by purchasing certificates of accrual or similar instruments
evidencing direct ownership of interest payments or principal payments, or both,
on Ohio Tax-Exempt Obligations, provided that, in the opinion of counsel to the
initial seller of each such certificate or instrument, any original issue
discount accruing on such certificate or instrument that is purchased at a yield
not greater than the coupon rate of interest on the related Ohio Tax-Exempt
Obligations will be exempt from federal income tax and Ohio personal income tax
to the same extent as interest on such Ohio Tax-Exempt Obligations. A Fund also
may invest in Ohio Tax-Exempt Obligations by purchasing from banks participation
interests in all or part of specific holdings of Ohio Tax-Exempt Obligations.
Such participations may be backed in whole or in part by an irrevocable letter
of credit or guarantee of the selling bank. The selling bank may receive a fee
from the Fund in connection with the arrangement. A Fund will not purchase
participation interests unless it receives an opinion of counsel or a ruling of
the Internal Revenue Service that interest earned by it on Ohio Tax-Exempt
Obligations in which it holds such a participation interest is exempt from
federal income tax and Ohio personal income tax.
Municipal Lease Obligations. A Fund may invest a portion of its assets in
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, Funds will not
hold such obligations directly as a lessor of the property, but will purchase a
participation interest in a municipal obligation from a bank or other third
party. A participation interest gives a Fund a specified, undivided interest in
the obligation in proportion to its purchased interest in the total amount of
the obligation.
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Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses" providing
that the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance limitations.
Lower-Rated Municipal Securities. No Municipal Fund currently intends to invest
in lower-rated municipal securities. However, each Municipal Fund may hold up to
5% of its assets in municipal securities that have been downgraded below
investment grade. While the market for municipal securities is considered to be
substantial, adverse publicity and changing investor perceptions may affect the
ability of outside pricing services used by the Fund to value portfolio
securities, and the Fund's ability to dispose of lower-rated securities. Outside
pricing services are consistently monitored to assure that securities are valued
by a method that the Board of Trustees believes accurately reflects fair value.
The impact of changing investor perceptions may be especially pronounced in
markets where municipal securities are thinly traded.
A Municipal Fund may choose, at its expense, or in conjunction with others, to
pursue litigation seeking to protect the interests of security holders if it
determines this to be in the best interest of shareholders.
Federally Taxable Obligations. No Municipal Fund intends to invest in securities
whose interest is federally taxable; however, from time to time, a Municipal
Fund may invest a portion of its assets on a temporary basis in fixed-income
obligations whose interest is subject to federal income tax. For example, a
Municipal Fund may invest in obligations whose interest is federally taxable
pending the investment or reinvestment in municipal securities of proceeds from
the sale of its shares of portfolio securities.
Should a Municipal Fund invest in federally taxable obligations, it would
purchase securities which in the Adviser's judgment are of high quality. This
would include obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; obligations of domestic banks; and repurchase
agreements. The Municipal Funds' standards for high quality taxable obligations
are essentially the same as those described by Moody's in rating corporate
obligations within its two highest ratings of Prime-1 and Prime-2, and those
described by S&P in rating corporate obligations within its two highest ratings
of A-1 and A-2. In making high quality determinations a Municipal Fund also may
consider the comparable ratings of other NRSROs.
The Supreme Court has held that Congress may subject the interest on municipal
obligations to federal income tax. Proposals to restrict or eliminate the
federal income tax exemption for interest on municipal obligations are
introduced before Congress from time to time. Proposals also may be introduced
before the New York legislature that would affect the state tax treatment of the
Municipal Funds' distributions. If such proposals were enacted, the availability
of municipal obligations and the value of the Municipal Funds' holdings would be
affected and the Trustees would reevaluate the Funds' investment objective and
policies.
The Municipal Funds anticipate being as fully invested as practicable in
municipal securities; however, there may be occasions when, as a result of
maturities of portfolio securities, sales of Fund shares, or in order to meet
redemption requests, a Municipal Fund may hold cash that is not earning income.
In addition, there may be occasions when, in order to raise cash to meet
redemptions, a Municipal Fund may be required to sell securities at a loss.
Refunded Municipal Bonds. Investments by a Fund in refunded municipal bonds that
are secured by escrowed obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities are considered to be investments in U.S.
Government obligations for purposes of the diversification requirements to which
the Funds is subject under the 1940 Act. As a result, more than 5% of a Fund's
total assets may be invested in such refunded bonds issued by a particular
municipal issuer. The escrowed securities securing such refunded municipal bonds
will consist exclusively of U.S. Government obligations, and will be held by an
independent escrow agent or be subject to an irrevocable pledge of the escrow
account to the debt service on the original bonds.
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When-Issued Securities. A Fund may purchase securities on a when-issued basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase securities on a when issued basis, the
custodian will set aside cash or liquid securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When a Fund
engages in when-issued transactions, it relies on the seller to consummate the
trade. Failure of the seller to do so may result in the Fund incurring a loss or
missing the opportunity to obtain a price considered to be advantageous. The
Funds do not intend to purchase when-issued securities for speculative purposes,
but only in furtherance of their investment objectives.
Delayed-Delivery Transactions. A Fund may buy and sell securities on a
delayed-delivery basis. These transactions involve a commitment by the Fund to
purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security (and more than seven days in the future). Typically, no
interest accrues to the purchaser until the security is delivered. The Fund may
receive fees for entering into delayed delivery transactions.
When purchasing securities on a delayed-delivery basis, a Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because a Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When a Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.
A Fund may renegotiate delayed-delivery transactions after they are entered into
or may sell underlying securities before they are delivered, either of which may
result in capital gains or losses.
Mortgage-Backed Securities--In General. Mortgage-Backed Securities are backed by
mortgage obligations including, among others, conventional 30-year fixed rate
mortgage obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, Mortgage-Backed Securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. A Fund may purchase Mortgage-Backed Securities at a
premium or at a discount. Among the U.S. Government securities in which a Fund
may invest are Government Mortgage-Backed Securities (or government guaranteed
mortgage-related securities). Such guarantees do not extend to the value of
yield of the Mortgage-Backed Securities themselves or of the Fund's shares.
U.S. Government Mortgage-Backed Securities. Certain obligations of certain
agencies and instrumentalities of the U.S. Government are Mortgage-Backed
Securities. Some such obligations, such as those issued by GNMA are supported by
the full faith and credit of the U.S. Treasury; others, such as those of FNMA,
are supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Federal Farm Credit
Banks or FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S.
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Government would provide financial support to U.S. Government-sponsored agencies
and instrumentalities if it is not obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit of the
U.S. Government) guarantor of Mortgage-Backed Securities is GNMA. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed as
to timely payment of principal and interest, but are not backed by the full
faith and credit of the U.S. Government.
GNMA Certificates. GNMA Certificates are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that a Fund may purchase are the "modified pass-through" type,
which entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely payment of
principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and credit
of the U.S. Government. GNMA also is empowered to borrow without limitation from
the U.S. Treasury if necessary to make any payments required under its
guarantee.
The estimated average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the underlying mortgages. Prepayments of
principal by mortgagors and mortgage foreclosures usually will result in the
return of the greater part of principal investment long before the maturity of
the mortgages in the pool. Foreclosures impose no risk to principal investment
because of the GNMA guarantee, except to the extent that a Fund has purchased
the certificates above par in the secondary market.
FHLMC Securities. FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. FHLMC issues
two types of mortgage pass-through securities ("FHLMC Certificates"), mortgage
participation certificates, and collateralized mortgage obligations ("CMOs").
Participation Certificates resemble GNMA Certificates in that each Participation
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FHLMC guarantees timely monthly payment of
interest on PCs and the ultimate payment of principal. FHLMC Gold Participation
Certificates guarantee the timely payment of both principal and interest.
FHLMC CMOs are backed by pools of agency mortgage-backed securities and the
timely payment of principal and interest of each tranche is guaranteed by the
FHLMC. The FHLMC guarantee is not backed by the full faith and credit of the
U.S. Government.
FNMA Securities. FNMA was established in 1938 to create a secondary market in
mortgages insured by the FHA, but has expanded its activity to the secondary
market for conventional residential mortgages. FNMA primarily issues two types
of mortgage-backed securities, guaranteed mortgage pass-through certificates
("FNMA Certificates") and CMOs. FNMA Certificates resemble GNMA Certificates in
that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest and principal on FNMA Certificates and CMOs. The FNMA
guarantee is not backed by the full faith and credit of the U.S. Government.
Collateralized Mortgage Obligations. Mortgage-Backed Securities in which a Fund
may invest also may include CMOs. CMOs are securities backed by a pool of
mortgages in which the principal and interest cash flows of the pool are
channeled on a prioritized basis into two or more classes, or tranches, of
bonds.
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Non-Government Mortgage-Backed Securities. A Fund may invest in mortgage-related
securities issued by non-government entities. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. Such issuers also may be the originators of the
underlying mortgage loans as well as the guarantors of the mortgage-related
securities. Pools created by such non-government issuers generally offer a
higher rate of interest than government and government-related pools because
there are not direct or indirect government guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools is
supported by various forms of insurance or guarantees, including individual
loan, title, pool, and hazard insurance. The insurance and guarantees are issued
by government entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers, thereof will
be considered in determining whether a Non-Government Mortgage-Backed Security
meets a Fund's investment quality standards. There can be no assurance that the
private insurers can meet their obligations under the policies. A Fund may buy
Non-Government Mortgage-Backed Related Securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the poolers, the Adviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the opinion of the Adviser are illiquid if, as a result, more
than 15% of the value of the Fund's net assets will be invested in illiquid
securities.
A Fund may purchase mortgage-related securities with stated maturities in excess
of 10 years. Mortgage-related securities include CMOs and participation
certificates in pools of mortgages. The average life of mortgage-related
securities varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments. The rate of such
prepayments, and hence the average life of the certificates, will be a function
of current market interest rates and current conditions in the relevant housing
markets. The impact of prepayment of mortgages is described under "Government
Mortgage-Backed Securities." Estimated average life will be determined by the
Adviser. Various independent mortgage-related securities dealers publish
estimated average life data using proprietary models, and in making such
determinations, the Adviser will rely on such data except to the extent such
data are deemed unreliable by the Adviser. The Adviser might deem data
unreliable which appeared to present a significantly different estimated average
life for a security than data relating to the estimated average life of
comparable securities as provided by other independent mortgage-related
securities dealers.
Asset-Backed Securities. Asset-backed securities are debt securities backed by
pools of automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon. These
issues are normally traded over-the-counter and typically have a short to
intermediate maturity structure, depending on the paydown characteristics of the
underlying financial assets which are passed through to the security holder.
Futures and Options
Futures Contracts. A Fund may enter into futures contracts, options on futures
contracts, and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (the "CFTC"), a U.S. Government agency.
A Fund may enter into contracts for the future delivery of securities and
futures contracts based on a specific security, class of securities or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and
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entitling the other party to receive, while the contract is outstanding, cash
payments based on the level of a specified securities index.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. The acquisition
of put and call options on futures contracts will, respectively, give a Fund the
right (but not the obligation), for a specified price, to sell or to purchase
the underlying futures contract, upon exercise of the option, at any time during
the option period. Brokerage commissions are incurred when a futures contract is
bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Initial margin deposits on futures contracts are customarily set at
levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on their margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for a Fund than might later be available in the market when it effects
anticipated purchases.
A Fund will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase. A Fund also may enter into futures
contracts as a temporary substitute to maintain exposure to a particular market
or security pending the purchase or sale of that security.
A Fund's ability to use futures trading effectively depends on several factors.
First, it is possible that there will not be a perfect price correlation between
a futures contract and its underlying stock index. Second, it is possible that a
lack of liquidity for futures contracts could exist in the secondary market,
resulting in an inability to close a futures position prior to its maturity
date. Third, the purchase of a futures contract involves the risk that a Fund
could lose more than the original margin deposit required to initiate a futures
transaction.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes also may result in poorer overall performance
than if a Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities, limiting a Fund's ability
to hedge effectively against interest rate and/or market risk and giving rise to
additional risks. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
Restrictions on the Use of Futures Contracts. A Fund will not enter into futures
contract transactions for purposes other than bona fide hedging purposes to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of a Fund's total assets. In
addition, a Fund will
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not enter into futures contracts to the extent that the value of the futures
contracts held would exceed 1/3 of the Fund's total assets. Futures transactions
will be limited to the extent necessary to maintain a Fund's qualification as a
regulated investment company.
The Trust has undertaken to restrict their futures contract trading as follows:
first, the Trust will not engage in transactions in futures contracts for
speculative purposes; second, the Trust will not market its Funds to the public
as commodity pools or otherwise as vehicles for trading in the commodities
futures or commodity options markets; third, the Trust will disclose to all
prospective shareholders the purpose of and limitations on its Funds' commodity
futures trading; fourth, the Trust will submit to the CFTC special calls for
information. Accordingly, registration as a Commodities Pool Operator with the
CFTC is not required.
In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the SEC. Under those requirements, where a Fund has a long position in a
futures contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or liquid securities
equal to the purchase price of the contract (less any margin on deposit). For a
short position in futures or forward contracts held by the Fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or liquid securities that, when
added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established). However, segregation of assets is
not required if a Fund "covers" a long position. For example, instead of
segregating assets, a Fund, when holding a long position in a futures contract,
could purchase a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by a Fund. In addition, where
a Fund takes short positions, or engages in sales of call options, it need not
segregate assets if it "covers" these positions. For example, where a Fund holds
a short position in a futures contract, it may cover by owning the instruments
underlying the contract. A Fund also may cover such a position by holding a call
option permitting it to purchase the same futures contract at a price no higher
than the price at which the short position was established. Where a Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. A Fund
also could cover this position by holding a separate call option permitting it
to purchase the same futures contract at a price no higher than the strike price
of the call option sold by a Fund.
In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Code's requirements for qualification as
a registered investment company and a Fund's intention to qualify as such.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying the futures contracts
that it holds. The inability to close options and futures positions also could
have an adverse impact on the ability to effectively hedge them. A Fund will
minimize the risk that it will be unable to close out a futures contract by only
entering into futures contracts which are traded on national futures exchanges
and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities markets, there may be increased participation by speculators in
the futures market which also may cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures
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strategies engaged in by the Funds are only for hedging purposes, the Adviser
does not believe that the Funds are subject to the risks of loss frequently
associated with futures transactions. The Funds would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Use of futures transactions by the Funds involves the risk of imperfect or no
correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It also is possible that
the Funds could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There also is the risk of loss by
the Funds of margin deposits in the event of bankruptcy of a broker with whom
the Funds have open positions in a futures contract or related option.
Options. Each Equity Fund may sell (write) call options that are traded on
national securities exchanges with respect to common stock in its portfolio. The
Fund for Income also may write covered call options on securities in its
portfolio. A Fund must at all times have in its portfolio the securities which
it may be obligated to deliver if the option is exercised, except that the Small
Company Opportunity Fund may write uncovered calls, that is, call options on
securities that it does not own. The risk of writing uncovered call options is
that the writer of the option may be forced to acquire the underlying security
at a price in excess of the exercise price of the option, that is, the price at
which the writer has agreed to sell the underlying security to the purchaser of
the option. A Fund may write call options in an attempt to realize a greater
level of current income than would be realized on the securities alone. A Fund
also may write call options as a partial hedge against a possible stock market
decline. In view of its investment objective, a Fund generally would write call
options only in circumstances where the Adviser does not anticipate significant
appreciation of the underlying security in the near future or has otherwise
determined to dispose of the security. As the writer of a call option, a Fund
receives a premium for undertaking the obligation to sell the underlying
security at a fixed price during the option period, if the option is exercised.
So long as a Fund remains obligated as a writer of a call option, it forgoes the
opportunity to profit from increases in the market price of the underlying
security above the exercise price of the option, except insofar as the premium
represents such a profit. A Fund retains the risk of loss should the value of
the underlying security decline. A Fund also may enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call option
prior to the expiration of the option. Although the writing of call options only
on national securities exchanges increases the likelihood of a Fund's ability to
make closing purchase transactions, there is no assurance that a Fund will be
able to effect such transactions at any particular time or at any acceptable
price. The writing of call options could result in increases in a Fund's
portfolio turnover rate, especially during periods when market prices of the
underlying securities appreciate.
The Convertible Securities Fund. The Convertible Securities Fund may purchase
and write (i.e., sell) call options that are traded on U.S. securities
exchanges, such as the Chicago Board Options Exchange, the American Stock
Exchange, the Philadelphia Stock Exchange and the Pacific Stock Exchange. The
Convertible Securities Fund may write call options only if they are covered, and
the options must remain covered so long as the Fund is obligated as a writer.
Puts. A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. A Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to a
Fund upon its exercise of a "put" is normally (i) a Fund's acquisition cost of
the securities (excluding any accrued interest which a Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period a Fund owned the securities, plus (ii)
all interest accrued on the securities since the last interest payment date
during that period.
Puts may be acquired by a Fund to facilitate the liquidity of its portfolio
assets. Puts also may be used to facilitate the reinvestment of a Fund's assets
at a rate of return more favorable than that of the underlying security. Puts
may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of a Fund's assets. See "Variable and Floating Rate Notes"
and "Valuation" in this SAI.
A Fund generally will acquire puts only where the puts are available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for puts either separately in cash or by paying a
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higher price for portfolio securities which are acquired subject to the puts
(thus reducing the yield to maturity otherwise available for the same
securities). The Funds intends to enter into puts only with dealers, banks, and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.
The Special Value Fund may write put options from time to time. Such options may
be listed on a national securities exchange and issued by the Options Clearing
Corporation or traded over-the-counter. The Small Company Opportunity Fund may
seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option the Small Company Opportunity
Fund has written, however, the Small Company Opportunity Fund must continue to
be prepared to pay the strike price while the option is outstanding, regardless
of price changes, and must continue to set aside assets to cover its position.
Upon the exercise of an option, the Fund is not entitled to the gains, if any,
on securities underlying the options. The Small Company Opportunity Fund also
may purchase index put and call options and write index options. Through the
writing or purchase of index options, the Small Company Opportunity Fund can
achieve many of the same objectives as through the use of options on individual
securities. Utilizing options is a specialized investment technique that entails
a substantial risk of a complete loss of the amounts paid as premiums to writers
of options.
Illiquid Investments. Illiquid investments are investments that cannot be sold
or disposed of, within seven business days, in the ordinary course of business
at approximately the prices at which they are valued.
Under the supervision of the Trust's Board of Trustees, the Adviser determines
the liquidity of the Funds' investments and, through reports from the Adviser,
the Trustees monitor investments in illiquid instruments. In determining the
liquidity of a Fund's investments, the Adviser may consider various factors,
including (1) the frequency of trades and quotations, (2) the number of dealers
and prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the Funds' rights and obligations relating to the
investment).
Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over the counter options, non-government stripped fixed-rate
mortgage-backed securities, and Restricted Securities.
Also, the Adviser may determine some securities to be illiquid.
However, with respect to over-the-counter options a Fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending on
the assets held to cover the option and the nature and terms of any agreement a
Fund may have to close out the option before expiration.
In the absence of market quotations, illiquid investments are priced at fair
value as determined in good faith by a committee appointed by the Trustees.
If through a change in values, net assets, or other circumstances, a Fund were
in a position where more than 15% of its net assets were invested in illiquid
securities, the Fund would seek to take appropriate steps to protect liquidity.
Each of the Money Market Funds may invest up to 10% of its net assets in
illiquid securities.
Restricted Securities. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act, or in a registered public offering. The Convertible Securities
Fund may invest up to 15% of its net assets in restricted securities.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
it decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than prevailed when it decided to seek
registration of the shares.
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Securities Lending Transactions. The Funds (with the exception of the tax-exempt
funds) may from time to time lend securities from their portfolio to
broker-dealers, banks, financial institutions and institutional borrowers of
securities and receive collateral in the form of cash or U.S. Government
Obligations. Key Trust Company of Ohio, N.A., an affiliate of the Adviser,
serves as lending agent for the Funds, except the tax-exempt funds, pursuant to
a Securities Lending Agency Agreement that was adopted by the Trustees of the
Funds. Under the Funds' current practices (which are subject to change), a Fund
must receive initial collateral equal to 102% of the market value of the loaned
securities, plus any interest due in the form of cash or U.S. Government
Obligations. The Funds will not lend portfolio securities to: (a) any
"affiliated person" (as that term is defined in the 1940 Act) of any Fund; (b)
any affiliated person of the Adviser; or (c) any affiliated person of such an
affiliated person. This collateral must be valued daily and should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to a Fund sufficient to maintain the value of the collateral equal to
at least 100% of the value of the loaned securities. During the time portfolio
securities are on loan, the borrower will pay the Fund any dividends or interest
paid on such securities plus any interest negotiated between the parties to the
lending agreement. Loans will be subject to termination by the Funds or the
borrower at any time. While a Fund will not have the right to vote securities on
loan, they intend to terminate loans and regain the right to vote if that is
considered important with respect to the investment. A Fund will only enter into
loan arrangements with broker-dealers, banks or other institutions that the
Adviser has determined are creditworthy under guidelines established by the
Trustees. The Funds will limit their securities lending to 33 1/3% of total
assets.
Short Sales Against-the-Box. The Funds will not make short sales of securities,
other than short sales "against-the-box." In a short sale against-the-box, a
Fund sells a security that it owns, or a security equivalent in kind and amount
to the security sold short that the Fund has the right to obtain, for delivery
at a specified date in the future. A Fund will enter into short sales
against-the-box to hedge against unanticipated declines in the market price of
portfolio securities. If the value of the securities sold short increases prior
to the scheduled delivery date, a Fund loses the opportunity to participate in
the gain.
Investment Grade and High Quality Securities. The Funds may invest in
"investment grade" obligations, which are those rated at the time of purchase
within the four highest rating categories assigned by an NRSRO or, if unrated,
are obligations that the Adviser determines to be of comparable quality. The
applicable securities ratings are described in the Appendix. "High-quality"
short-term obligations are those obligations which, at the time of purchase, (1)
possess a rating in one of the two highest ratings categories from at least one
NRSRO (for example, commercial paper rated "A-1" or "A-2" by S&P or "P-1" or
"P-2" by Moody's) or (2) are unrated by an NRSRO but are determined by the
Adviser to present minimal credit risks and to be of comparable quality to rated
instruments eligible for purchase by the Funds under guidelines adopted by the
Board of Trustees.
Participation Interests. The Funds may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participation, beneficial interests in a trust, partnership interests or any
other form of indirect ownership. The Funds invest in these participation
interests, in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying securities.
Warrants. Warrants are securities that give a Fund the right to purchase equity
securities from the issuer at a specific price (the strike price) for a limited
period of time. The strike price of warrants typically is much lower than the
current market price of the underlying securities, yet they are subject to
greater price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater potential for
capital appreciation as well as capital loss. The Convertible Securities Fund
will use only warrants that are attached to the underlying securities.
Convertible Securities. A convertible security is typically a bond or preferred
stock that may be converted at a stated price within a specified period of time
into a specified number of shares of common stock of the same or a different
issuer. Convertible securities are usually senior to common stock in a
corporation's capital structure, but usually are subordinate to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar non-convertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the common stock into which it is
convertible.
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In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed income security) or its
"conversion value" (i.e., the value of the underlying share of common stock if
the security is converted). As a fixed-income security, a convertible security
tends to increase in market value when interest rates decline and tends to
decrease in value when interest rates rise. However, the price of a convertible
security also is influenced by the market value of the security's underlying
common stock. Thus, the price of a convertible security tends to increase as the
market value of the underlying stock increases, and tends to decrease as the
market value of the underlying stock declines. While no securities investment is
without some risk, investments in convertible securities generally entail less
risk than investments in the common stock of the same issuer.
Securities received upon conversion of convertible securities or upon exercise
of call options or warrants forming elements of synthetic convertibles
(described below) may be retained temporarily to permit orderly disposition or
to defer realization of gain or loss for federal tax purposes, and will be
included in calculating the amount of the Fund's total assets invested in true
and synthetic convertibles.
Synthetic Securities. The Convertible Securities Fund also may invest in
"synthetic convertibles". A synthetic convertible is create by combining
separate securities which possess the two principal characteristics of a true
convertible security, i.e., fixed income ("fixed-income component") and the
right to acquire equity securities ("convertibility component"). The
fixed-income component is achieved by investing in non-convertible bonds,
preferred stocks and money market instruments. The convertibility component is
achieved by investing in warrants or exchange listed call options or stock index
call options granting the holder the right to purchase a specified quantity of
securities within a specified period of time at a specified price or to receive
cash in the case of stock index options.
A holder of a synthetic convertible faces the risk of a decline in the price of
the stock or the level of the index involved in the convertibility component,
causing a decline in the value of the option or warrant. Should the price of the
stock fall below the exercise price and remain there throughout the exercise
period, the entire amount paid for the call option or warrant would be lost.
Since a synthetic convertible includes the fixed-income component as well, the
holder of a synthetic convertible also faces the risk that interest rates will
rise, causing a decline in the value of the fixed-income instrument.
Refunding Contracts. A Fund generally will not be obligated to pay the full
purchase price if it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated damages to the
issuer (currently 15-20% of the purchase price). A Fund may secure its
obligations under a refunding contract by depositing collateral or a letter of
credit equal to the liquidated damages provisions of the refunding contract.
When required by SEC guidelines, a Fund will place liquid assets in a segregated
custodial account equal in amount to its obligations under refunding contracts.
Standby Commitments. A Fund may enter into standby commitments, which are puts
that entitle holders to same-day settlement at an exercise price equal to the
amortized cost of the underlying security plus accrued interest, if any, at the
time of exercise. The Funds may acquire standby commitments to enhance the
liquidity of portfolio securities.
Ordinarily, the Funds may not transfer a standby commitment to a third party,
although they could sell the underlying municipal security to a third party at
any time. The Funds may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In the
latter case, the Funds would pay a higher price for the securities acquired,
thus reducing their yield to maturity.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the
Funds; and the possibility that the maturities of the underlying securities may
be different from those of the commitments.
Foreign Investments. A Fund may invest in securities issued by foreign
branches of U.S. banks, foreign banks, or other foreign issuers, including
sponsored and unsponsored American Depositary Receipts ("ADRs") and securities
purchased on foreign securities exchanges. Such investment may subject a Fund
to significant investment risks that
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are different from, and additional to, those related to investments in
obligations of U.S. domestic issuers or in U.S. securities markets. Unsponsored
ADRs may involve additional risks.
The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar.
Foreign securities markets generally have less trading volume and less liquidity
than U.S. markets, and prices on some foreign markets can be highly volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those applicable to U.S. companies, and it may be more difficult
to obtain reliable information regarding an issuer's financial condition and
operations. In addition, the costs of foreign investing, including withholding
taxes, brokerage commissions, and custodial costs, are generally higher than for
U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, which
may result in substantial delays. It also may be difficult to enforce legal
rights in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that the Advisers will be able to
anticipate these potential events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
A Fund may invest in foreign securities that impose restrictions on transfer
within the U.S. or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The International Growth Fund currently invests in the securities of issuers
based in a number of foreign countries. The Adviser and IIIS, the sub-adviser of
the International Growth Fund, continuously evaluate issuers based in countries
all over the world. Accordingly, the Fund may invest in the securities of
issuers based in any country, subject to approval by the Trustees, when such
securities meet the investment criteria of the Adviser and IIIS and are
consistent with the investment objective and policies of the Fund.
Miscellaneous Securities. The Funds can invest in various securities issued by
domestic and foreign corporations, including preferred stocks and investment
grade corporate bonds, notes, and warrants. Bonds are long-term corporate debt
instruments secured by some or all of the issuer's assets, debentures are
general corporate debt obligations backed only by the integrity of the borrower,
and warrants are instruments that entitle the holder to purchase a certain
amount of common stock at a specified price, which price is usually higher than
the current market price at the time of issuance. Preferred stocks are
instruments that combine qualities both of equity and debt securities.
Individual issues of preferred stock will have those rights and liabilities that
are spelled out in the governing document. Preferred stocks usually pay a fixed
dividend per quarter (or annum) and are senior to common stock in terms of
liquidation and dividends rights, and preferred stocks typically do not have
voting rights.
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Additional Information Concerning Ohio Issuers
The Ohio Municipal Bond Fund and Ohio Municipal Money Market Fund will each
invest most of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease - purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions ("Ohio Obligations"). The Ohio Municipal
Bond Fund and Ohio Municipal Money Market Fund are therefore susceptible to
general or particular economic, political or regulatory factors that may affect
issuers of Ohio Obligations. The following information constitutes only a brief
summary of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived from
official statements of certain Ohio issuers published in connection with their
issuance of securities and from other publicly available information, and is
believed to be accurate. No independent verification has been made of any of the
following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection with
investment in particular Ohio Obligations or in those obligations of particular
Ohio issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors apply.
However, the information below is intended only as a general summary, and is not
intended as a discussion of any specific factors that may affect any particular
obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1998 is
11,209,000.
While diversifying more into the service and other non-manufacturing areas, the
Ohio economy continues to rely in part on durable goods manufacturing largely
concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, in recent
years, the State rates were below the national rates (4.3% versus 4.5% in 1998).
The unemployment rate and its effects vary among geographic areas of the State.
There can be no assurance that future national, regional or state-wide economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the Ohio Municipal Bond Fund and Ohio Municipal Money Market Fund or the
ability of particular obligors to make timely payments of debt service on (or
lease payments relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations and
expenditures, and is precluded by law from ending its July 1 to June 30 fiscal
year ("FY") or fiscal biennium in a deficit position. Most State operations are
financed through the General Revenue Fund ("GRF"), for which the personal income
and sales-use taxes are the major sources. Growth and depletion of GRF ending
fund balances show a consistent pattern related to national economic conditions,
with the ending FY balance reduced during less favorable and increased during
more favorable economic periods. The State has well-established procedures for,
and has timely taken, necessary actions to ensure resource/expenditure balances
during less favorable economic periods. Those procedures included general and
selected reductions in appropriations spending.
The 1992-93 biennium presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences an
interim appropriations act was enacted effective July 1, 1991; it included GRF
debt service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million
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was transferred from the Budget Stabilization Fund ("BSF," a cash and budgetary
management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in light
of a continuing uncertain nationwide economic situation, there was projected and
then timely addressed an FY 1992 imbalance in GRF resources and expenditures. In
response, the Governor ordered most State agencies to reduce GRF spending in the
last six months of FY 1992 by a total of approximately $184 million; the $100.4
million BSF balance and additional amounts from certain other funds were
transferred late in the FY to the GRF, and adjustments were made in the timing
of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected for
FY 1993. It was addressed by appropriate legislative and administrative actions,
including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for debt
service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF. The
biennium ended June 30, 1995 with a GRF ending fund balance of $928 million, of
which $535.2 million was transferred into the BSF. The significant GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF and other funds including school assistance
funds and, in anticipation of possible federal program changes, a human services
stabilization fund.
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100 million
was transferred for elementary and secondary school computer network purposes
and $30 million to a new State transportation infrastructure fund. Approximately
$400.8 million served as a basis for temporary 1996 personal income tax
reductions aggregating that amount. The 1996-97 biennium-ending GRF fund balance
was $834.9 million. Of that, $250 million went to school building construction
and renovation, $94 million to the school computer network, $44.2 million for
school textbooks and instructional materials and a distance learning program,
and $34 million to the BSF, and the $263 million balance to a State income tax
reduction fund.
The 1998-99 biennium ending GRF balances were $1.5 billion (cash) and $976
million (fund). Of that fund balance, $325.7 million has been transferred to
school building assistance, $46.3 million to the BSF, $90 million to supply
classroom computers and for interactive video distance learning, and the
remaining amount to the State income tax reduction fund.
The BSF had a September 30, 1999 balance of over $953 million.
The GRF appropriations acts for the current 2000-01 biennium (one for all
education purposes, and one for general GRF purposes) passed on June 24 and June
28, 1999, respectively, and promptly signed (after selective vetoes) by the
Governor. Those acts provided for total GRF biennial expenditures of over $39.8
billion. Necessary GRF debt service and lease-rental appropriations for the
entire biennium were requested in the Governor's proposed budget and
incorporated in the appropriations bills as introduced, and were included in the
bills versions as passed by the House and the Senate and in the acts as passed
and signed.
The State's incurrence or assumption of debt without a vote of the people is,
with exceptions noted below, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
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By 16 constitutional amendments approved from 1921 to date (the latest adopted
in 1999) Ohio voters authorized the incurrence of State debt and the pledge of
taxes or excises to its payment. At September 30, 1999 over $1.2 billion
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding or awaiting delivery. The only such State debt at that
date still authorized to be incurred were portions of the highway bonds, and the
following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($22.3 million outstanding); (b)
$240 million of obligations previously authorized for local infrastructure
improvements, no more than $120 million of which may be issued in any calendar
year (over $1.06 billion outstanding or awaiting delivery) and (c) up to $200
million in general obligation bonds for parks, recreation and natural resources
purposes which may be outstanding at any one time ($112.7 million outstanding,
with no more than $50 million to be issued in any one year).
The electors in 1995 approved a constitutional amendment extending the local
infrastructure bond program (authorizing an additional $1.2 billion of State
full faith and credit obligations to be issued over 10 years for the purpose),
and authorizing additional highway bonds (expected to be payable primarily from
highway use receipts). The latter supersedes the prior $500 million outstanding
authorization, and authorizes not more than $1.2 billion to be outstanding at
any time and not more than $220 million to be issued in a fiscal year.
A constitutional amendment approved by the voters at the November 1999 general
election authorizes State general obligation debt to pay costs of facilities for
a system of common schools throughout the State and facilities for state
supported and assisted institutions of higher education. That, and other debt
represented by direct obligations of the State (such as that authorized by the
Ohio Public Facilities Commission and Ohio Building Authority, and some
authorized by the Treasurer), may not be issued if future FY total debt service
on those direct obligations to be paid from the GRF or net lottery proceeds
exceeds 5% of total estimated revenues of the State for the GRF and from net
State lottery proceeds during the FY of issuance.
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations issued
by the Ohio Public Facilities Commission and the Ohio Building Authority, and
certain obligations issued by the State Treasurer, over $5.5 billion of which
were outstanding at September 30, 1999.
In recent years, State agencies have participated in transportation and office
building projects that may have some local as well as State use and benefit, in
connection with which the State enters into lease purchase agreements with terms
ranging from 7 to 20 years. Certificates of participation, or special obligation
bonds of the State or a local agency, are issued that represent fractionalized
interests in or are payable from the State's anticipated payments. The State
estimates highest future FY payments under those agreements (as of September 30,
1999) to be approximately $31.9 million (of which $27 million is payable from
sources other than the GRF, such as federal highway money distributions). State
payments under all those agreements are subject to biennial appropriations, with
the lease terms being two years subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund " approach funded essentially
from program revenues.)
State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease -purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
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Local school districts in Ohio receive a major portion (state - wide aggregate
approximately 46% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 126 districts (as
of November 3, 1999) on voter-authorized income taxes, for significant portions
of their budgets. Litigation, similar to that in other states, has been pending
questioning the constitutionality of Ohio's system of school funding. The Ohio
Supreme Court has concluded that aspects of the system (including basic
operating assistance and the loan program referred to below) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution, staying its order to permit time for
responsive corrective actions. After a further hearing, the trial court has
decided that steps taken to date by the State to enhance school funding have not
met the requirements of the Supreme Court decision. The State has appealed to
the Supreme Court, before which oral arguments were heard on November 16, 1999.
That Court has issued a stay, pending appeal, of the implementation of the trial
court's order. A small number of the State's 612 local school districts have in
any year required special assistance to avoid year-end deficits. A now
superseded program provided for school district cash need borrowing directly
from commercial lenders, with diversion of State subsidy distributions to
repayment if needed. Recent borrowings under this program totaled $87.2 million
for 20 districts in FY 1996 (including $42.1 million for one), $113.2 million
for 12 districts in FY 1997 (including $90 million to one for restructuring its
prior loans), and $23.4 million for 10 districts in FY 1998.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State.
For those few municipalities and school districts that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
26 cities and villages; for 20 of them the fiscal situation was resolved and the
procedures terminated (no municipality is currently in preliminary "fiscal
watch" status). As of September 24, 1999, a school district "fiscal emergency"
provision was applied to eight districts, and 10 were on preliminary "fiscal
watch" status.
At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts. The Constitution has since 1934 limited to 1% of true
value in money the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions, without
a vote of the electors or a municipal charmer provision, and statutes limit the
amount of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes that are unlimited as to amount or
rate.
Additional Information Concerning New York Issuers
The New York Tax-Free Fund will invest substantially all of its assets in New
York municipal securities. In addition, the specific New York municipal
securities in which the New York Tax-Free Fund will invest will change from time
to time. The New York Tax-Free Fund is therefore susceptible to political,
economic, regulatory or other factors affecting issuers of New York municipal
securities. The following information constitutes only a brief summary of a
number of the complex factors which may affect issuers of New York municipal
securities and does not purport to be a complete or exhaustive description of
all adverse conditions to which issuers of New York municipal securities may be
subject. Such information is derived from official statements utilized in
connection with the issuance of New York municipal securities, as well as from
other publicly available documents. Such information has not been independently
verified by the New York Tax-Free Fund, and the New York Tax-Free Fund assumes
no responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have a material adverse impact on the financial condition of such
issuers. The New York Tax-Free Fund cannot predict whether or to what extent
such factors or other factors may affect the issuers of New York municipal
securities, the market value or marketability of such securities or the ability
of the respective issuers of such securities acquired by the Fund to pay
interest on or principal of such securities. The creditworthiness of obligations
issued by local New York issuers may be unrelated to the creditworthiness of
obligations issued by the State of New York, and there is no responsibility on
the part of the State of New York to make payments on such
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local obligations. There may be specific factors that are applicable in
connection with investment in the obligations of particular issuers located
within New York, and it is possible the Fund will invest in obligations of
particular issuers as to which such specific factors are applicable. However,
the information set forth below is intended only as a general summary and not as
a discussion of any specific factors that may affect any particular issuer of
New York municipal securities.
The New York Tax-Free Fund may invest in municipal securities issued by New York
State (the "State"), by its various public bodies (the "Agencies") and/or by
other entities located within the State, including the city of New York (the
"City") and political subdivisions thereof and/or their agencies.
New York State. The State's current fiscal year commenced on April 1, 1999, and
ends on March 31, 2000 and is referred to herein as the State's 1999-2000 fiscal
year. The Legislature adopted the debt service component of the State budget for
the 1999-2000 fiscal year on March 31, 1999 and the remainder of the budget on
August 4, 1999. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes. The State Financial Plan for the 1999-2000 fiscal year was
released on August 20, 1999 and is based on the State's budget as enacted by the
Legislature and signed into law by the Governor. The update to the State's
financial projections based upon General Accepted Accounting Principles was
dated November 5, 1999.
1999-2000 Fiscal Year State Financial Plan. The 1999-2000 State Financial Plan
is projected to be balanced on a cash basis. General Fund disbursements,
including transfers to support capital projects, debt service and other funds,
are estimated at $37.35 billion. Projected spending under the 1999-2000 budget
is $215 million above the Governor's Executive Budget recommendations, including
30-day amendments. This change is the net result of spending actions that
occurred during negotiations on the Budget. The increase in General Fund
spending is comprised of $1.1 billion in legislative additions to the Executive
budget (primarily in education), offset by various actions, including
reestimates of required spending based on year-to-date results and the
identification of certain other resources that offset spending, such as $250
million from commencing the process of privatizing the Medical Malpractice
Insurance Association (MMIA), $250 million from the retention of the Debt
Reduction Reserve Fund within the General Fund and about $100 million in excess
fund balances. The State's enacted budget provides for $831 million in new
funding for private schools, the largest year-to-year increase in State history.
The budget also enacts several new tax cuts valued at $375 million when fully
phased in by 2003-04. None of the $1.82 billion cash surplus from 1998-99 is
assumed to support spending in 1999-2000, but instead is reserved to help offset
the costs of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 State Financial Plan projects a closing balance in the General
Fund of $2.87 billion that is comprised of the $1.82 billion surplus from
1998-99 that has been set aside to finance already-enacted tax cuts, $473
million in the Tax Stabilization Reserve Fund (TSRF), $250 million in the Debt
Reduction Reserve Fund (DRRF), $132 million in the Contingency Reserve Fund (CRF
) (after the proposed deposit of $25 million) and $200 million in the Community
Projects Fund (CPF), which finances legislative initiatives. The State expects
to close 1999-2000 with cash balances in these funds at their highest level
ever.
The State ended the first six months of the 1999-2000 fiscal year with a General
Fund cash balance of $5.42 billion. Total receipts, including transfers from
other funds, were approximately $11 million less than expected, with the
decrease comprised of lower tax revenues ($25 million) and transfers from other
funds ($8 million) offset in part by $22 million in higher miscellaneous
receipts. Total disbursements through the first six months of the fiscal year
were $16.88 billion. The Division of the Budget expects that most of these
variances are timing-related and are not likely to affect total disbursements
for the fiscal year.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the federal government, that are not under the
control of the State. In addition, the State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. The Division of Budget believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on
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which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth in this SAI and those
projections may be changed materially and adversely from time to time.
The four governmental fund types that comprise the State Financial Plan are the
General Fund, the Special Revenue Funds, the Capital Projects Funds, and the
Debt Service Funds. This fund structure adheres to accounting standards of the
Governmental Accounting Standards Board. This section discusses first the
General Fund and then the other governmental funds.
General Fund. The General Fund is the principal operating fund of the State and
is used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1999-2000 fiscal year, the General Fund is expected to account
for approximately 47.1% of total Governmental Funds disbursements and 69.3% of
total State Funds disbursements. General Fund moneys are also transferred to
other funds, primarily to support certain capital projects and debt service
payments in other fund types. The following are the projected shares of General
Fund receipts and disbursements: Receipts: Personal Income Tax - 58.4%; User
Taxes and Fees - 18.7%; Business Taxes - 11.8%; Other Taxes - 2.5%;
Miscellaneous Receipts/Transfers- 8.6%; Disbursements: Local Assistance - 68.5%;
State Operations - 18.4%; Debt Service - 6.1%; General State Charges - 5.5%;
Capital/Other - 1.5%.
State Fiscal Year 1999-2000. The General Fund is projected to be balanced on a
cash basis for the 1999-2000 fiscal year. Total receipts and transfers from
other funds are projected to reach $39.32 billion in 1999-2000. This total
includes $35.94 billion in tax receipts, $1.36 billion in miscellaneous
receipts, and over $2.02 billion in transfers from other funds. Total General
Fund disbursements are projected to be $37.35 billion.
Projected General Fund Receipts
The discussion below summarizes the State's projections of General Fund tax
revenues and other revenues for the 1999-2000 fiscal year.
The Personal Income Tax is imposed on the income of individuals, estates and
trusts and is based on federal definitions of income and deductions with certain
modifications. The projected yield of the tax for the 1999-2000 fiscal year is
$23 billion, more than $2.9 billion above the amount reported for 1998-99. The
current estimate reflects continued modest growth in financial sector bonuses
with the resultant impact on withholding.
While gross collections of the personal income tax are expected to grow 8.7%
from 1998-99, the exceptional year-to-year change in the estimate of receipts
from this sources is still significantly attributable to the movement into the
current fiscal year of the General Fund surplus available at the end of 1998-99
(through a tax refund reserve transaction). The approximately $1.7 billion
impact on the year-over-year change that results from the movement of the
surplus is only partially offset by the planned diversion of almost $700 million
in additional receipts to the School Tax Relief Fund (STAR) Fund in the current
year. In its second year, STAR now provides statewide school property tax relief
to all homeowners for their primary residence.
User taxes and fees are comprised of three-quarters of the State's four percent
sales and use tax, cigarette, alcoholic beverage, container, and auto rental
taxes, and a portion of the motor fuel excise levies. Also included in this
category are receipts from the motor vehicle registration fees and alcoholic
beverage license fees. A portion of the motor fuel tax and motor vehicle
registration fees and all of the highway use taxes are earmarked for dedicated
transportation funds.
Receipts in this category in the State's 1999-2000 fiscal year are expected to
total $7.35 billion, an increase of $105 million from reported results in the
prior year. The sales tax component of this category accounts for virtually all
of the 1999-2000 growth, as receipts from user taxes and fees are estimated to
decline $177 million. The growth in yield of the sales tax in 1999-2000, after
adjusting for tax law and other changes, is projected at 5.6%. The yield of
other excise taxes in this category show a long-term declining trend,
particularly cigarette and alcoholic beverage taxes. General Fund declines in
1999-2000 motor vehicle fee receipts, in contrast, reflect statutory fee
reductions and an increased amount of collections earmarked to the Dedicated
Highway and Bridge Trust Fund.
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Business taxes include franchise taxes based generally on net income of general
business, bank and insurance corporations, as well as gross-receipts-based taxes
on utilities and gallonage-based petroleum business taxes. Beginning in 1994,
the surcharge rate has been phased out and, for most taxpayers, there will be no
surcharge liability for taxable periods ending in 1997 and thereafter.
Total business tax collections in the State's 1998-99 fiscal year are projected
at $4.60 billion, a decline of almost $260 million since the prior fiscal year.
The year-over-year decline in projected receipts in this category is largely
attributable to statutory changes. These include the first year of a scheduled
corporation franchise tax rate reduction, the alternative minimum tax rate
reduction, the fixed dollar minimum rate reduction, and the expansion of the
investment tax credit to financial service companies. Ongoing tax reductions
include the second year of the "Power of Jobs" utility tax credit program, the
gross receipts tax rate reduction, and scheduled additional diversion of General
Fund petroleum business and utility tax receipts to dedicated transportation
funds.
Other taxes include estate, gift and real estate transfer taxes, a tax on gains
from the sale or transfer of certain real estate, a pari-mutuel tax and other
minor levies. They are now projected to total $1.0 billion, $137 million below
last year's amount. The primary factors accounting for most of the expected
decline include: an adverse tax tribunal decision resulting in significant
refunds of the now repealed real property gains tax; pari-mutuel tax reductions
enacted with the 1999-2000 budget; and the effects of the already enacted
reductions in the estate and gift taxes.
Significant legislation passed with the 1999-2000 enacted budget affecting these
sources include both the extension of and an increase in certain temporary tax
reductions at the State's race tracks and conformity with new federal estate tax
provisions.
Miscellaneous receipts include investment income, abandoned property receipts,
medical provider assessments, minor federal grants, receipts from public
authorities, and certain other license and fee revenues. Receipts in this
category in the State's 1999-2000 fiscal year are expected to total $1.36
billion, down $142 million from the prior year, reflecting the loss of
non-recurring receipts in 1998-99 and the growing effects of the phase-out of
the medical provider assessments, now scheduled to be eliminated in January
2000.
Transfer from other funds to the General Fund consist primarily of tax revenues
in excess of debt service requirements, particularly the one percent sales tax
used to support payments to Local Government Assistance Corporation (LGAC).
Transfers from other funds are expected to total $2.02 billion, or $99 million
more than total receipts from this category during 1998-99. Total transfers of
sales taxes in excess of LGAC debt service requirements are expected to increase
by approximately $93 million, while transfers from all other funds are expected
to increase by $6 million.
Projected General Fund Disbursements
The State projects General Fund disbursements and transfers to other fund to
total $37.35 billion. Following the pattern of the last two fiscal years,
education programs receive the largest share of new funding contained the
1999-2000 Financial Plan. School aid is expected to grow by $831 million or
8.58% over 1998-99 levels (on a State fiscal year basis). Outside of education,
the largest growth in spending is for Debt Services ($183 million); State
Operations ($181 million); and mental hygiene programs, including funding for a
cost of living increase for care providers ($114 million). These increases were
offset, in part, by spending reductions or actions in health and social welfare
($280 million), and in general State charges ($222 million).
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to individuals. The
largest areas of spending in this category are for aid to elementary and
secondary schools ($10.52 billion) and for the State's share of Medicaid
payments to providers ($5.53 billion). Grants to Local Governments are projected
at $25.62 billion in 1999-2000, an increase of $926 million over 1998-99.
The budget provides additional funding for operating aid, building aid, and
several other targeted aid programs. It also funds the balance of aid payable
for the 1998-99 school year that is due primarily in the first quarter of the
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1999-2000 fiscal year. For all other educational programs, disbursements are
projected to grow by $78 million to $2.99 billion.
State Operations pays for the costs of operating the Executive, Legislative, and
Judicial branches of government, including the prison system, mental hygiene
institutions, and the State University system (SUNY). The State estimates that
disbursements for State Operations in 1999-2000 will total $6.85 billion, an
increase of $181 million since the prior fiscal year. The growth reflects $100
million in projected spending for new collective bargaining agreements that the
State expects to be ratified in the current year. Funding for this expense will
come from the Collective Bargaining Reserve. The annualized costs of current
collective bargaining agreements, growth in the Legislative and Judiciary
budgets, and staffing costs for the State's Year 2000 compliance programs also
contribute to the year-to-year growth in spending. The State's overall workforce
is expected to remain stable at around 191,300 employees.
General State Charges account for the costs of providing fringe benefits to
State employees and retirees of the Executive, Legislature, and Judiciary. These
payments, many of which are mandated by statute and collective bargaining
agreements, include employer contributions for pensions, social security, health
insurance, workers' compensation, and unemployment insurance. General State
charges also cover State payments-in-lieu-of-taxes to local governments for
certain State-owned lands, and the costs of defending lawsuits against the State
and its public officers.
Disbursements in this category are estimated at $2.04 billion, a decrease of
$222 million from the prior year. The change primarily reflects projected growth
of $28 million in a variety of programs offset by the use of proceeds from the
privatization of the Medical Malpractice Insurance Association, which is
expected to offset certain General Fund fringe benefit costs over the next two
fiscal years by approximately $250 million annually.
Debt Service, including short and long-term debt service, is projected at $2.28
billion in 1999-2000, an increase of $185 million over 1998-99. The growth
reflects debt service costs from bond sales in prior years and certain sales
planned for 1999-2000.
Transfers to Other Funds from the General Fund are made primarily to finance
certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources.
Transfers for capital projects provide General Fund support for projects that
are not financed with bond proceeds, dedicated taxes, other revenues, or federal
grants. Transfers in this category are projected to total $168 million in
1999-2000. The decline of $78 million from the prior year is primarily due the
delay of the receipt of payment of certain reimbursements in 1998-99.
Receipts of $50 million transferred to DRRF in 1998-99 will be used in the
Capital Projects Fund in 1999-2000 to provide pay-as-you-go funding for five
capital programs that were previously funded with bond proceeds. The 1999-2000
enacted budget also reserves $250 million in new resources for DRRF.
All other transfers (excluding DRRF), which reflect the remaining transfers from
the General Fund to other funds, are estimated to total $385 million in
1999-2000, a decline of $84 million from 1998-99, primarily because of certain
non-recurring transfers that occurred last year.
Non-recurring Resources. The DOB estimates that the 1999-2000 State Financial
Plan contains actions that provide non-recurring resources or savings totaling
approximately $500 million, or 1.3% of General Fund resources, the largest of
which is the first phase of the privatization of MMIA. To the greatest extent
possible, one-time resources are expected to be utilized to finance one-time
costs, including Year 2000 compliance costs and certain capital spending.
General Fund Closing Balance. The 1999-2000 Financial Plan projects a closing
balance of $2.87 billion in the General Fund. The balance is comprised of the
$1.82 billion cash surplus from 1998-99 that is planned to be reserved for
financing already-enacted tax cuts, $473 million in the TSRF, $250 million in
the DRRF, $132 million in the CRF, and $200 million in the CPF, which finances
legislative initiatives.
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Other Governmental Funds. In addition to the General Fund, the State Financial
Plan includes Special Revenue Funds, Capital Projects Funds and Debt Service
Funds which are discussed below. Total spending from all governmental funds is
projected at $73.28 billion in 1999-2000. Amounts below do not include other
sources and uses of funds transferred to or from other fund types.
Special Revenue Funds. Total disbursements for programs supported by Special
Revenue Funds are projected at $30.94 billion, an increase of $1.29 billion or
4.35% over the prior year. Special Revenue Funds include Federal grants and
State special revenue funds.
Federal grants are projected to comprise 72% of all Special Revenue spending in
1999-2000, comparable to prior years. Disbursements from federal funds are
estimated at $22.17 billion, an increase of $741 million or 3.46%. Medicaid is
the largest program within federal funds, accounting for 56% of total spending
in this category. In 1999-2000, Medicaid spending is projected at $14.32
billion, an increase of $711 million over 1998-99. The remaining growth in
federal funds is primarily for the Child Health Plus program, which is estimated
at $117 million in 1999-2000. This growth is offset by decreased spending in
certain social services programs resulting from more recent spending
reestimates.
State special revenue spending is projected to be $8.77 billion, an increase of
$550 million or 6.69% from last year. The spending growth is primarily due to
$661 million for the next phrase of the STAR program and $250 million in
additional general State charges funded by proceeds from the MMIA transaction,
offset by a decrease of $185 million in projected educational spending as a
result of lower projected Lottery proceeds and a decline of $112 million in
transportation disbursements. The remainder reflects the net impact of spending
reestimates.
Capital Projects Funds. Spending from Capital Project Funds in 1999-2000 is
projected at $4.18 billion, an increase of $114 million or 2.80% from last year.
Transportation, environmental, education and mental hygiene programs are the
major sources of year-to-year spending growth in this category.
Debt Service Fund. Spending from Debt Service Funds are estimated at $3.64
billion in 1999-2000, up $370 million or 11.31% from 1998-99. Transportation
purposes, including debt service on bonds issued for State and local highway and
bridge programs financed through the New York Thruway Authority and supported by
the Dedicated Highway and Bridge Trust Fund, account for $124 million of the
year-to year growth. Debt service for educational purposes, including State and
City University programs financed through the Dormitory Authority, will increase
by $80 million. The remaining growth is for a variety of programs in mental
health and corrections, and for general obligation financings.
1999-2000 GAAP-Basis Financial Plan. Statutory reporting requirements provide
for updates to the State's projected financial results when presented on a GAAP
basis on or before September first of each year.
The GAAP-basis results for the 1998-99 fiscal year produced an increase in the
accumulated GAAP-basis surplus in the General Fund from $567 million to $1.65
billion, reflecting continued improvement in the State's fiscal health over the
last several years. At March 31, 1995, the accumulated deficit in the State's
General Fund was $3.3 billion.
In 1999-2000, the General Fund GAAP-basis Financial Plan shows total revenues of
$37.47 billion, total expenditures of $37.59 billion and net other financing
sources of $27 million. The projected accumulated General Fund GAAP-basis
surplus at the close of 1999-2000 is $1.55 billion.
Special Considerations. Many complex political, social and economic forces
influence the State's economy and finances, which may in turn affect the State's
Financial Plan. These forces may affect the State unpredictably from fiscal year
to fiscal year and are influenced by governments, institutions, and events that
are not subject to the State's control. The Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and State economies.
The State Financial Plan is based upon forecasts of national and State economic
activity developed through both internal analysis and review of national and
State economic forecasts prepared by commercial forecasting services
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and other public and private forecasters. Economic forecasts have frequently
failed to predict accurately the timing and magnitude of changes in the national
and State economies. Mary uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, the condition of the financial sector,
federal fiscal and monetary policies, the level of interest rates, and the
condition of the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not experience results in
the current fiscal year that are worse than predicted, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
Projections of total State receipts in the Financial Plan are based on the State
tax structure in effect during the fiscal year and on assumptions relating to
basic economic factors and their historical relationships to State tax receipts.
In preparing projections of State receipts, economic forecasts relating to
personal income, wages, consumption, profits and employment have been
particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions relating to
economic and demographic factors, potential collective bargaining agreements,
levels of disbursements for various services provided by local governments
(where the cost is partially reimbursed by the State), and the results of
various administrative and statutory mechanisms in controlling disbursements for
State operations. Factors that may affect the level of disbursements in the
fiscal year include uncertainties relating to the economy of the nation and the
State, the policies of the federal government, collective bargaining
negotiations and changes in the demand for and use of State services.
An additional risk to the State Financial Plan arises from the potential impact
of certain litigation and of federal disallowances now pending against the
State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
Additional risks to the Financial Plan arise out of potential actions at the
federal level. Potential changes to federal tax law currently under discussion
as part of the federal government's efforts to enact a multi-year tax reduction
package could alter the federal definitions of income on which certain State
taxes rely. Certain proposals, if enacted, could have a significant impact on
State revenues in the future.
The Health Care Reform Act (HCRA), effective as of January 1, 1997, moved the
hospital industry into a competitive market system by allowing most
non-governmental payors to negotiate reimbursement directly with hospitals. HCRA
continued the New York Prospective Hospital Reimbursement Methodology rate
setting system for Medicaid. HCRA legislation is scheduled to expire on December
31, 1999. It is anticipated that the State Legislature will convene a special
session prior to that date to enact successor HCRA legislation.
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996
created a new Temporary Assistance to Needy Families program (TANF) partially
funded with a fixed federal block grant to states. This law also imposes (with
certain exceptions) a five-year durational limit on TANF recipients, requires
that virtually all recipients be engaged in work or community service activities
within two years of receiving benefits, and limits assistance provided to
certain immigrants and other classes of individuals. States are required to meet
work activity participation targets for their TANF caseload and conform with
certain other federal standards or face potential sanctions in the form of a
reduced federal block grant and increased State/local funding requirements. Any
future reduction could have an adverse impact on the State's Financial Plan.
However, the State has been able to demonstrate compliance with TANF work
requirements to date and does not now expect to be subject to associated federal
fiscal penalties.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from these projections. In the past, the State has
taken management actions to address
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potential Financial Plan shortfalls, and DOB believes it could take similar
actions should adverse variances occur in its projections for the current fiscal
year.
Despite recent budgetary surpluses recorded by the State, actions affecting the
level of receipts and disbursements, the relative strength of the State and
regional economy, and actions by the federal government could impact projected
budget gaps for the State. These gaps would result from a disparity between
recurring revenues and the costs of increasing the level of support for State
programs. For example, the fiscal effects of tax reductions adopted in the last
several fiscal years are projected to grow more substantially in the forecast
period, continuing to restrain receipts levels and placing pressure on future
spending levels. To address a potential imbalance in any given fiscal year, the
State would be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and, under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
The State has projected reserves of $2.4 billion in 1999-2000 to help guard
against these risks.
Year 2000 Compliance. New York State is currently addressing Year 2000 ("Y2K")
data processing compliance issues. Since its inception, the computer industry
has used a two-digit date convention to represent the year. In the year 2000,
the date field will contain "00" and, as a result, many computer systems and
equipment may not be able to process dates properly or may fail since they may
not be able to distinguish between the years 1900 aid 2000. The Year 2000 issue
not only affects computer programs, but also the hardware, software and networks
on which they operate. In addition, any system or equipment that is dependent on
an embedded chip, such as telecommunication equipment and security systems, may
also be adversely affected.
In April 1999 the State Comptroller released an audit on the State's Year 2000
compliance. The audit which reviewed the State's Y2K compliance activities
through October 1998, found that the State had made progress in achieving Y2K
compliance, but needed to improve its activities in several areas, including
data interchanges and contingency planning.
The Office for Technology (OFT) will continue to monitor compliance progress for
the States mission-critical and high-priority systems. OFT submitted a final
quarterly compliance progress report to the Governor's Office for the quarter
ending September 30, 1999. The 1999-2000 enacted budget allocates $19 million
for priority embedded systems and $20 million for unanticipated expenses related
to bringing technology into Y2K compliance. OFT reports that as of September
1999, the State's mission-critical systems are 100% compliant; 93% of the
overall compliance effort on the high-priority systems has been completed with
269 systems now Year 2000 compliant. The State has also procured independent
validation and verification services from a qualified vendor to perform an
automated review of code for all mission-critical system which was completed in
October 1999. Overall, the vendor noted that New York State agencies had
followed and implemented several best practices.
The State is also addressing a number of issues related to bringing its mission
critical systems into compliance, including: testing throughout 1999 of over 800
data exchange interfaces with federal, state, local and private data partners;
completion of an inventory of priority equipment and systems that may depend on
embedded chips and may therefore need remediation in 1999; and contacting
critical vendors and supply partners to obtain Year 2000 compliance status
information and assurances. Since problems could be identified during the
compliance testing phase that could produce compliance delays, the State
agencies were required to complete contingency plans for priority systems and
business processes by the first quarter of calendar year 1999. As of June 1999,
these plans have been completed and tested and are being integrated into the
State Emergency Response Plan under the direction of the State Emergency
Management Office. As of September 1999, 46 agencies have filed their
contingency plans with the State Emergency Management Office. In addition, State
agencies that regulate industries, such as the Public Service Commission, the
Banking Department and others are closely monitoring the few regulated companies
that are not yet compliant. The Public Service Commission reports that as of
September 1999, all State-regulated utilities, with the exception of a few small
water and cable companies, are ready for the Year 2000, including the existence
of comprehensive contingency plans.
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The State has also been working with local governments since December 1996 to
raise awareness, promote action and provide assistance with Year 2000
compliance. This has included assisting local governments in addressing their
local Y2K issues, guiding local governments in holding Citizen Forums to inform
citizens of compliance and contingency activities in their community, and
guiding citizens in their individual preparations for the Year 2000.
Presentations, teleconferences, written guidance materials, videotapes, a
comprehensive web site and brochures have been made available and widely
distributed.
While the State is taking what it believes to be appropriate action to address
Year 2000 compliance, there can be no guarantee that all of the State's systems
and equipment will be Year 2000 compliant and that there will not be an adverse
impact upon State operations or finances as a result. Since Year 2000 compliance
by outside parties is beyond the State's control to remediate, the failure of
outside parties to achieve Year 2000 compliance could have an adverse impact on
State operations and finances.
Tax Refund Reserve Account. Personal income tax net collections in recent years
have been affected by the pattern of refund payments made and reflect
transactions in the tax refund reserve account. The tax refund reserve account
is used to hold moneys available to pay tax refunds. The Comptroller deposits
into this account tax moneys in the amounts and at the times determined in the
discretion of the Commissioner of Taxation and Finance. The deposit of moneys in
the account during a fiscal year reduces receipts for such fiscal year, and the
withdrawal of moneys from the account increases receipts in the fiscal year of
withdrawal. The tax refund reserve account also includes amounts made available
as a result of the LGAC financing program that are required to be on deposit in
this account. Beginning in 1998-99, a portion of personal income tax collections
was deposited directly in the School Tax Reduction (STAR) Fund to be used to
make payments to reimburse local governments for their revenue decreases due to
the STAR program.
Cash-Basis Results for Prior Fiscal Years. The State reports its financial
results on two bases of accounting: the cash basis, showing receipts and
disbursements and the modified accrual basis, prescribed by Generally Accepted
Accounting Principles (GAAP), showing revenues and expenditures.
General Fund 1996-97 through 1998-99. The General Fund is the principal
operating fund of the State and is used to account for all financial
transactions, except those required to be accounted for in another fund. It is
the State's largest fund and receives most State taxes and other resources not
dedicated to particular purposes. General Fund moneys are also transferred to
other funds, primarily to support certain capital projects and debt service
payments in other fund types.
New York State's financial operations have improved during recent fiscal years.
During its last seven fiscal years, the State has recorded balanced budgets on a
cash basis, with positive year-end fund balances.
1998-99 Fiscal Year. The State ended its 1998-99 fiscal year on March 31, 1999
in balance on a cash basis, with a General Fund cash surplus as reported by the
DOB of $1.82 billion. The cash surplus was derived primarily from
higher-than-projected tax collections as a result of continued economic growth,
particularly in the financial markets and the securities industries.
The State reported a General Fund closing cash balance of $892 million, an
increase of $254 million from the prior fiscal year. The balance is held in
three accounts within the General Fund: the TSRF, the CRF and the CPF. The TSRF
closing balance was $473 million, following an additional deposit of $73 million
in 1998-99. The CRF closing balance was $107 million, following a deposit of $39
million in 1998-99. The CPF, which finance legislative initiatives, closed the
fiscal year with a balance of $312 million.
The closing fund balance excludes $2.31 billion that the State deposited into
the tax refund reserve account at the close of 1998-99 to pay for tax refunds in
1999-2000 of which $521 million was made available as a result of the Local
Government Assistance Corporation (LGAC) financing program and was required to
be on deposit as of March 31, 1999. The tax refund reserve account transaction
has the effect of decreasing reported personal income tax receipts in 1998-99,
while increasing reported receipts in 1999-2000
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General Fund receipts and transfers from other funds (net of tax refund reserve
account activity) for the 1998-99 fiscal year totaled $36.74 billion, an
increase of 6.34% from 1997-98 levels. General Fund disbursements and transfers
to other funds totaled $36.49 billion for the 1998-99 fiscal year, an increase
of 6.23% from 1997-98 levels.
1997-98 Fiscal Year. The State ended its 1997-98 fiscal year in balance on a
cash basis, with a General Fund cash surplus as reported by DOB of approximately
$2.04 billion. The cash surplus was derived primarily from
higher-than-anticipated receipts and lower spending on welfare, Medicaid, and
other entitlement programs.
The General Fund had a closing balance of $638 million, an increase of $205
million from the prior fiscal year. The TSRF closing balance was $400 million,
following a required deposit of $15 million (repaying a transfer made in
1991-92) and an additional deposit of $68 million made from the 1997-98 surplus.
The CRF closing balance was $68 million, following a $27 million deposit from
the surplus. The CPF closed the fiscal year with a balance of $170 million. The
General Fund closing balance did not include $2.39 billion in the tax refund
reserve account, of which $521 million was made available as a result of the
LGAC financing program and was required to be on deposit on March 31, 1998.
General Fund receipts and transfers from other funds (net of tax refund reserve
account activity) for the 1997-98 fiscal year totaled $34.55 billion, an annual
increase of 4.57% over 1996-97. General Fund disbursements and transfers to
other funds were $34.35 billion, an annual increase of 4.41%.
1996-97 Fiscal Year. The State ended its 1996-97 fiscal year on March 31, 1997
in balance on a cash basis, with a General Fund cash surplus as reported by DOB
of approximately $1.42 billion. The cash surplus was derived primarily from
higher-than-expected receipts and lower-than-expected spending for social
services programs.
The General Fund closing balance was $433 million, an increase of $146 million
from the 1995-96 fiscal year. The balance included $317 million in the TSRF,
after a required deposit of $15 million (repaying a transfer made in 1991-92)
and an additional deposit of $65 million in 1996-97. 1n addition, $41 million
remained on deposit in the CRF. The remaining $75 million reflected amounts then
on deposit in the CPF. The General Fund closing balance did not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1997.
General Fund receipts and transfers from other funds (net of tax refund reserve
account activity) for the 1996-97 fiscal year totaled $33.04 billion, an
increase of 0.7% from the previous fiscal year. General Fund disbursements and
transfers to other funds totaled $32.90 billion for the 1996-97 fiscal year, an
increase of 0.7% from the 1995-96 fiscal year.
Other Governmental Funds (1996-97 through 1998-99). Activity in the three other
governmental funds has remained relatively stable over the last three fiscal
years, with federally-funded programs comprising approximately two-thirds of
these funds. The most significant change in the structure of these funds has
been the direction of a portion of transportation-related revenues from the
General Fund to two dedicated funds in the Special Revenue and Capital Projects
fund types. These revenues are used to support the capital programs of the
Department of Transportation, the Metropolitan Transportation Authority (MTA)
and other transit entities.
In the Special Revenue Funds, disbursements increased from $26.02 billion to
$29.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid and the initial costs of the STAR
program. Other activity reflected dedication of taxes for mass transportation
purposes, new lottery games, and new fees for criminal justice programs.
Disbursements in the Capital Projects Funds increased over the three-year period
from $3.54 billion to $4.06 billion, primarily for education, environment,
public protection and transportation programs. The composition of this fund
type's receipts has also changed as dedicated taxes, federal grants and
reimbursements from public authority bonds increased, while general obligation
bond proceeds declined.
Activity in the Debt Service Funds reflected increased use of bonds during the
three-year period for improvements to the State's capital facilities and the
ongoing costs of the LGAC fiscal reform program. The increases were
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moderated by the refunding savings achieved by the State over the last several
years using strict present value savings criteria. Disbursements in this fund
type increased from $2.53 billion to $3.27 billion over the three-year period.
GAAP-Basis Results for Prior Fiscal Years. The Comptroller prepares a
comprehensive annual financial report on a GAAP basis for governments as
promulgated by the Governmental Accounting Standards Board. The report,
generally released in July each year, contains general purpose financial
statements with a Combined Balance Sheet and its Combined Statement of Revenues,
Expenditures and Changes in Fund Balances. These statements are audited by
independent certified public accountants
1998-99 Fiscal Year. The State completed its 1998-99 fiscal year with a combined
governmental funds operating surplus of $1.32 billion, which included operating
surpluses in the General Fund of $1.078 billion, in Debt Service Funds $209
million, and in Capital Projects Funds $154 million offset, in part, by an
operating deficit in Special Revenue Funds of $117 million.
General Fund. The State reported a General Fund operating surplus of $1.078
billion for the 1998-99 fiscal year, as compared to an operating surplus of
$1.562 billion for the 1997-98 fiscal year. As a result, the State reported an
accumulated fund balance of $1.645 billion in the General Fund. The 1998-99
fiscal year operating surplus resulted, in part, from an increase in taxes
receivable of $516 million, a decrease in payables to local government of $262
million, a decrease in accrued liabilities of $129 million and a decrease in
deferred revenues of $69 million. These gains were partially offset by a
decrease in other assets of $117 million and an increase in tax refunds payable
of $102 million.
Revenues increased $1.969 billion (5.7%) over the prior fiscal year with
increases in personal income, consumption and use and other taxes, and
miscellaneous revenues. Business tax revenues fell from the prior fiscal year.
Personal income taxes grew $1.733 billion, an increase of nearly 9.3%. The
increase in personal income taxes was caused by strong employment and wage
growth and the continued strong performance by the financial markets during
1998. Consumption and use taxes increased $269 million, or 3.8%, due to
increased consumer confidence. Other taxes increased $73 million, or 6.9%.
Miscellaneous revenues increased $145 million, a 5.6% increase, primarily
because of an increase in reimbursements from regulated industries (e.g.,
banking and insurance) to fund the State's administrative costs. Business taxes
decreased nearly $252 million, or 4.9%, because of prior year refunds and carry
forwards which were applied against the current year (1998) liabilities.
Expenditures increased $1.826 billion (5.5 percent) from the prior fiscal year,
with the largest increases occurring in State aid for education and general
purpose aid spending. Education expenditures grew $1.014 billion (9.1%) due
mainly to an increase in spending for support for public schools, handicapped
pupil education and municipal and community colleges. General purpose aid
increased nearly $329 million (56.5%) due to statutory changes in the payment
schedule. Personal service and fringe benefit costs increased due to increases
in wages and continuing fringe benefits required by collective bargaining
agreements.
Net other financing sources decreased $626 million (159.3%) primarily because
appropriated transfers from the Special Revenue Funds declined by over $230
million with increases of $265 million in appropriated transfers to Special
Revenue, Debt Service and College and University Funds. In addition, transfers
to public benefit corporations increased over $170 million primarily because of
a change in reporting for Roswell Park Cancer Institute.
Special Revenue, Debt Service and Capital Projects Fund Types. An operating
deficit of $117 million was reported for the Special Revenue Funds for the
1998-99 fiscal year which decreased the accumulated fund balance to $464
million. Revenues increased $1.108 billion over the prior fiscal year (4.0%) as
a result of increases in tax and federal grants revenues. Expenditures increased
$1.308 billion (5.3%) as a result of increased costs for local assistance
grants. Net other financing uses increased $34 million (1.0%).
Debt Service Funds ended the 1998-99 fiscal year with an operating surplus of
$209 million and, as a result, the accumulated fund balance increased to $2.07
billion. Revenues increased $160 million (6.3%) primarily because of increases
in dedicated taxes. Debt service expenditures increased $162 million (6.0%). Net
other financing sources
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increased $253 million (227.4%) due primarily to increases in transfers from the
General Fund, patient revenue transfers and the establishment of the Debt
Reduction Reserve Fund.
An operating surplus of $154 million was reported in the Capital Projects Funds
for the State's 1998-99 fiscal year and, as a result, the accumulated deficit
fund balance decreased to $228 million. Revenues increased $242 million (10.6%)
primarily because tax revenues increased $101 million and federal grant revenues
increased $94 million for transportation projects. Expenditures increased $355
million (10.5%) primarily because of increased capital construction spending for
transportation and correctional services projects. Net other financing sources
increased by $35 million.
1997-98 Fiscal Year. The State completed its 1997-98 fiscal year with a combined
Governmental Funds operating surplus of $1.80 billion, which included an
operating surplus in the General Fund of $1.56 billion, in Capital Projects
Funds of $232 million and in Special Revenue Funds of $49 million, offset in
part by an operating deficit of $43 million in Debt Service Funds.
General Fund. The State reported a General Fund operating surplus of $1.56
billion for the 1997-98 fiscal year as compared to an operating surplus of $1.93
billion for the 1996-97 fiscal year. As a result, the State reported an
accumulated surplus of $567 million in the General Fund for the first time since
it began reporting its operations on a GAAP-basis. The 1997-98 fiscal year
operating surplus reflects several major factors including the cash-basis
operating surplus resulting from the higher-than-anticipated personal income tax
receipts, an increase in taxes receivable of $681 million, an increase in other
assets of $195 million and a decrease in pension liabilities of $144 million.
This was partially offset by an increase in payables to local governments of
$270 million and tax refunds payable of $147 million.
Revenues increased $617 million (1.8%) over the prior fiscal year, with
increases in personal income, consumption and use, and business taxes, and
decreases reported for other taxes, federal grants and miscellaneous revenues.
Personal income taxes grew $746 million, an increase of nearly 4.2%. The
increase in personal income taxes resulted from strong employment and wage
growth and the strong performance by the financial markets during 1997.
Consumption and use taxes increased $334 million or 50% as a result of increased
consumer confidence. Business taxes grew $28 million, an increase of 0.5%. Other
taxes fell primarily because revenues for estate and gift taxes decreased.
Miscellaneous revenues decreased $380 million, or a 12.7% decrease, due to a
decline in receipts from the Medical Malpractice Insurance Association and
medical provider assessments.
Expenditures increased $137 million (0.4%) from the prior fiscal year, with the
largest increases occurring in State aid for education and social services
spending. Education expenditures grew $391 million (3.6%) due mainly to an
increase in spending for support for public schools. This growth was offset in
part, by a reduction in spending for municipal and community colleges. Social
services expenditures increased $233 million (2.6%) due mainly to program
growth. Increases in other State aid spending were offset by a decline in
general purpose aid of $235 million (27.8%) due to statutory changes in the
payment schedule. Increases in personal and non-personal service costs were
offset by a decrease in pension contributions of $660 million, a result of the
refinancing of the State's pension amortization that occurred in 1997.
Net other financing sources decreased $841 million (68.2%) due to the
non-recurring use of bond proceeds ($769 million) provided by the Dormitory
Authority of the State of New York (DASNY) to pay the outstanding pension
amortization liability incurred in 1997.
Special Revenue, Debt Service and Capital Projects Fund Types. An operating
surplus of $49 million was reported for the Special Revenue Funds for the
1997-98 fiscal year, which increased the accumulated fund balance to $581
million. Revenues rose by $884 million over the prior fiscal year (3.3%) as a
result of increases in tax and federal grant revenues. Expenditures increased
$795 million (3.3%) as a result of increased costs for local assistance grants.
Net other financing uses decreased $105 million (3.3%).
Debt Service Funds ended the 1997-98 fiscal year with an operating deficit of
$43 million and, as a result the accumulated fund balance declined to $1.86
billion. Revenues increased $246 million (10.6%) as a result of increases in
dedicated taxes. Debt service expenditures increased $341 million (14.4%). Net
other financing sources increased $89 million (401.3%) due primarily to savings
achieved through advance refundings of outstanding bonds.
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An operating surplus of $232 million was reported in the Capital Projects Funds
for the State's 1997-98 fiscal year and, as a result, the accumulated deficit in
this fund type decreased to $381 million. Revenues increased $180 million (8.6%)
primarily as a result of a $54 million increase in dedicated tax revenues and an
increase of $101 million in federal grants for transportation and local waste
water treatment projects. Expenditures increased $146 million (4.5%) primarily
as a result of increased capital construction spending for transportation and
local waste water treatment projects. Net other financing sources increased by
$100 million primarily as a result of a decrease in transfers to certain public
benefit corporations engaged in housing programs.
1996-97 Fiscal Year. The State completed its 1996-97 fiscal year with a combined
Governmental Funds operating surplus of $2.1 billion, which included an
operating surplus in the General Fund of $1.9 billion, in the Capital Projects
Funds of $98 million and in the Special Revenue Funds of $65 million, offset in
part by an operating deficit of $37 million in the Debt Service Funds.
General Fund. The State reported a General Fund operating surplus of $1.93
billion for the 1996-97 fiscal year, as compared to an operating surplus of $380
million for the prior fiscal year. The 1996-97 fiscal year GAAP operating
surplus reflects several major factors, including the cash basis operating
surplus, the benefit of bond proceeds which reduced the State's pension
liability, an increase in taxes receivable of $493 million, and a reduction in
tax refund liabilities of $196 million. This was offset by an increased payable
to local government of $244 million.
Revenues increased S 1.91 billion (nearly 6.0%) over the prior fiscal year with
increases in all revenue categories. Personal income taxes grew $620 million, an
increase of nearly 3.6%, despite implementation of scheduled tax cuts. The
increase in personal income taxes was caused by moderate employment and wage
growth and the strong financial markets during 1996. Consumption and use taxes
increased $179 million or 2.7% as a result of increased consumer confidence.
Business taxes grew $268 million, an increase of 5.6%, primarily as a result of
the strong financial markets during 1996. Other taxes increased primarily
because revenues from estate and gift taxes increased. Miscellaneous revenues
increased $743 million, a 33.1% increase, because of legislated increases in
receipts from the Medical Malpractice Insurance Association and from medical
provider assessments.
Expenditures increased $830 million (2.6%) from the prior fiscal year, with the
largest increase occurring in pension contributions and State aid for education
spending. Pension contribution expenditures increased $514 million (198.2%)
primarily because the State paid off its 1984-85 and 1985-86 pension
amortization liability. Education expenditures grew $351 million (3.4%) due
mainly to an increase in spending for support for public schools and physically
handicapped children offset by a reduction in spending for municipal and
community colleges. Modest increases in other State aid spending was offset by a
decline in social services expenditures of $157 million (1.7%). Social services
spending continues to decline because of cost containment strategies and
declining caseloads.
Net other financing sources increased $475 million (62.6%) due mainly to bond
proceeds provided by DASNY to pay the outstanding pension amortization, offset
by elimination of prior year LGAC proceeds.
Special Revenue, Debt Service and Capital Projects Fund Types. An operating
surplus of $65 million was reported for the Special Revenue Funds for the
1996-97 fiscal year, increasing the accumulated fund balance to $532 million.
Revenues increased $583 million over the prior fiscal year (2.2%) as a result of
increases in tax and lottery revenues. Expenditures increased $384 million
(1.6%) as a result of increased costs for departmental operations. Net other
financing uses decreased $275 million (8.0%) primarily because of declines in
amounts transferred to other funds.
Debt Service Funds ended the 1996-97 fiscal year with an operating deficit of
$37 million and, as a result the accumulated fund balance declined to $1.90
billion. Revenues increased $102 million (4.6%) because of increases in both
dedicated taxes and mental hygiene patient fees. Debt service expenditures
increased $47 million (2.0%). Net other financing sources decreased $277 million
(92.6%) due primarily to an increase in payments on advance refundings.
An operating surplus of $98 million was reported in the Capital Projects Funds
for the State's 1996-97 fiscal year and, as a result, the accumulated fund
deficit decreased to $614 million. Revenues increased $100 million (5.0%)
primarily because a larger share of the real estate transfer tax was shifted to
the Environmental Protection Fund and federal grant revenues increased for
transportation and local waste water treatment projects. Expenditures decreased
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$359 million (10.0%) because of declines in capital grant for education, housing
and regional development programs and capital construction spending. Net other
financing sources decreased by $637 million as a result of a decrease in
proceeds from financing arrangements.
Economics and Demographics. This section presents economic information about the
State which may be relevant in evaluating the future prospects of the State.
However, the demographic information and statistical data, which have been
obtained from the sources indicated, do not present all factors which may have a
bearing on the State's fiscal and economic affairs. Further, such information
requires economic and demographic analysis in order to assess the import of the
data presented. The data and analysis may be interpreted differently, according
to the economist or other expert consulted.
Current Economic Outlook. Many uncertainties exist in any forecast of the
national and State economies, particularly in light of the recent volatility in
the international economy and domestic financial markets. The timing and impact
of changes in economic conditions are difficult to estimate with a high degree
of accuracy. Unforeseeable events occur. The actual rate of change in any, or
all, of the concepts that are forecasted may differ substantially and adversely
from the outlook described below.
U.S. Economy. Economic growth during both 1999 and 2000 is expected to be slower
than in 1998. Growth in domestic consumption, which as been a major driving
force behind the nation's strong economic performance in recent years, is
expected to slow in 2000 as consumer confidence retreats from historic highs and
the stock market ceases to provide large amounts of extra discretionary income.
The forecast projects real GDP growth of 3.8% in 1999, slightly below the 1998
growth rate. In 2000, the rate of growth in real GDP growth is expected to fall
further to 3.1%. The growth of nominal GDP is projected to increase from 4.9% in
1998 to 5.2% in 1999 and fall to 4.7% in 2000. The inflation rate as measured by
the Consumer Price Index is expected to increase to 2.3% in 1999 and rise to
2.8% in 2000. The annual rate of job growth is expected to be 2.2% in 1999,
lower than the strong growth rate experienced in 1998. In 2000, employment
growth is forecast to slow further, to 2.0%. Growth in personal income and wages
is expected to remain fairly strong in 1999 and 2000.
The New York Economy. New York is the third most populous state in the nation
and has a relatively high level of personal wealth The State's economy is
diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing and an increasing proportion engaged
in service industries.
The growth of personal income is projected to decrease from 5.2% in 1998 to 4.8%
in 1999, and then grow 4.9% in 2000. The growth in average wages is expected to
outpace the inflation rate in both 1999 and 2000. Overall employment growth is
expected to be 2.0% in 1999, almost the same as in 1998, but is expected to drop
to 1.7% in 2000, reflecting the slowing growth of the national economy,
continued spending restraint in government, constraints in labor supply, and
continued restructuring in the manufacturing, health care, and banking sectors.
Services. The services sector, which includes entertainment, personal services,
such as health care and auto repairs, and business-related services, such as
information processing, law and accounting, is the State's leading economic
sector. The services sector accounts for more than three of every ten
nonagricultural jobs in New York and has a noticeably higher proportion of total
jobs than does the rest of the nation.
Manufacturing. Manufacturing employment continues to decline in importance in
New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. The principal manufacturing industries in recent
years produced printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products, electronic and other
electric equipment, food and related products, chemicals and allied products,
and fabricated metal products.
Trade. Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses, such
as department stores and eating and drinking establishments.
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Finance, Insurance and Real Estate. New York City is the nation's leading center
of banking and finance and, as a result this is a far more important sector in
the State than in the nation as a whole. Although this sector accounts for under
one-tenth of all non-agricultural jobs in the State, it contributes about
one-fifth of all non-farm labor and proprietors' income.
Agriculture. Farming is an important part of the economy of large regions of the
State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk and dairy products,
greenhouse and nursery products, apples and other fruits, and fresh vegetables.
New York ranks among the nation's leaders in the production of these
commodities.
Government. Federal, State and local government together are the third largest
sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total State and local government employment.
Relative to the nation, the State has a smaller share of manufacturing and
construction and a larger share of service-related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.
Economic and Demographic Trends. In the calendar years 1987 through 1998, the
State's rate of economic growth was somewhat slower than that of the nation. In
particular, during the 1990-91 recession and post-recession period, the economy
of the State, and that of the rest of the Northeast, was more heavily damaged
than that of the nation as a whole and has been slower to recover. The total
employment growth rate in the State has been below the national average since
1987. The unemployment rate in the State dipped below the national rate in the
second half of 1981 and remained lower until 1991; since then, it has been
higher. According to data published by the US Bureau of Economic Analysis,
personal income in the State has risen more slowly since 1988 than personal
income for the nation as a whole, although preliminary data suggests that, in
1998, personal income in the State rose more rapidly.
Legal Categories of State Debt and Other Financings. State financing activities
include general obligation debt of the State and State-guaranteed debt, to which
the full faith and credit of the State has been pledged, as well as
lease-purchase and contractual-obligation financings, moral obligation
financings and other financings through public authorities and municipalities,
where the State's legal obligation to make payments to those public authorities
and municipalities for their debt service is subject to annual appropriation by
the Legislature.
General Obligation and State-Guaranteed Financing. There are a number of methods
by which the State itself may incur debt. The State may issue general obligation
bonds. Under the State Constitution, the State may not, with limited exceptions
for emergencies, undertake long-term general obligation borrowing (i.e.,
borrowing for more than one year) unless the borrowing is authorized in a
specific amount for a single work or purpose by the Legislature and approved by
the voters. There is no limitation on the amount of long-term general obligation
debt that may be so authorized and subsequently incurred by the State. With the
exception of general obligation housing bonds (which must be paid in equal
annual installments or installments that result in substantially level or
declining debt service payments, within 50 years after issuance, commencing no
more than three years after issuance), general obligation bonds must be paid in
equal annual installments or installments that result in substantially level or
declining debt service payments, within 40 years after issuance, beginning not
more than one year after issuance of such bonds.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes (TRANs), and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes (BANs). TRANs must mature within one year from
their dates of issuance and may not be refunded or refinanced beyond such
period. However, since 1990, the State's ability to issue TRANs has been limited
due to enactment of the fiscal reform program which created LGAC. BANs may only
be issued for the purposes and within the amounts for which bonds may be issued
pursuant to voter authorizations. Such BANs must be paid from the proceeds of
the sale of bonds in anticipation of which they were issued or from other
sources within two years of the date of issuance or, in the case of BANs for
housing purposes, within five years of the date of issuance. In order to provide
flexibility
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within these maximum term limits, the State utilizes the BANs authorization to
conduct a commercial paper program to fund disbursements eligible for general
obligation bond financing.
Pursuant to specific constitutional authorization, the State may also directly
guarantee certain public authority obligations. The State Constitution provides
for the State guarantee of the repayment of certain borrowings for designated
projects of the New York State Thruway Authority, the Job Development Authority
(JDA) and the Port Authority of New York and New Jersey. The State has never
been called upon to make any direct payments pursuant to such guarantees. State
guaranteed bonds of the Thruway Authority and the Port Authority of New York and
New Jersey were fully retired on July 1, 1995 and December 31, 1996,
respectively.
In February 1997, the JDA issued approximately $85 million of State-guaranteed
bonds to refinance certain of its outstanding bonds and notes in order to
restructure and improve JDA's capital finances. Due to concerns regarding the
economic viability of its programs, JDA's loan and loan guarantee activities wee
suspended in 1995. JDA resumed its lending activities in 1997 under a revised
set of lending programs and underwriting guidelines. As a result of the
structural imbalances in JDA's capital structure, and defaults in its loan
portfolio and loan guarantee program incurred between 1991 and 1996, JDA would
have experienced a debt service cash flow shortfall had it not completed the
1997 refinancing. JDA anticipates that it will transact additional refinancings
in 2000 and 2003 to complete its long-term plan of finance and further alleviate
cash flow imbalances which are likely to occur in future years. The State does
not anticipate that it will be called upon to make any payments pursuant to the
State guarantee in the 1999-2000 fiscal year.
Payments of debt service on State general obligation and State-guaranteed bonds
and notes are legally enforceable obligations of the State.
Lease-Purchase and Contractual-Obligation Financing. The State employs
additional long-term financing mechanisms, lease-purchase and
contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a financing
arrangement with LGAC to restructure the way the State makes certain local aid
payments.
The State also participates in the issuance of certificates of participation
(COPs) in a pool of leases entered into by the State's Office of General
Services on behalf of several State departments and agencies interested in
acquiring operational equipment, or in certain cases, real property. Legislation
enacted in 1986 established restrictions upon and centralized State control,
through the Comptroller and the Director of the, Budget, over the issuance of
COPs representing the State's contractual obligation, subject to annual
appropriation by the Legislature and availability of money, to make installment
or lease-purchase payments for the State's acquisition of such equipment or real
property.
The State has never defaulted on any of its general obligation indebtedness or
its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.
Moral Obligation and Other Financing. Moral obligation financing generally
involves the issuance of debt by a public authority to finance a
revenue-producing project or other activity. The debt is secured by project
revenues and includes statutory provisions requiring the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur in
the issuer's debt service reserve fund. There has never been a default on any
moral obligation debt of any public authority. The State does not intend to
increase statutory authorizations for moral obligation bond programs. From 1976
through 1987, the State was called upon to appropriate and make payments
totaling $162.8 million to make up deficiencies in the debt service reserve
funds of the Housing Finance Agency (HFA) pursuant to moral obligation
provisions. In the same period, the State also expended additional funds to
assist the Project Finance Agency, the Urban Development Corporation (UDC) and
other public authorities which had
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moral obligation debt outstanding. The State has not been called upon to make
any payments pursuant to any moral obligations since the 1986-87 fiscal year and
no such requirements are anticipated during the 1999-2000 fiscal year.
In addition to the moral obligation financing arrangements described above,
State law provides for the creation of State municipal assistance corporations,
which are public authorities established to aid financial troubled localities.
The Municipal Assistance Corporation for the City of New York (NYC MAC) was
created in 1975 to provide financing assistance to New York City. To enable NYC
MAC to pay debt service on its obligations, NYC MAC receives, subject to annual
appropriation by the Legislature, receipts from the four percent New York State
sales tax for the benefit of New York City, the State-imposed stock transfer tax
and, subject to certain prior liens, certain local assistance payments otherwise
payable to New York City. The legislation creating NYC MAC also includes a moral
obligation provision. Under its enabling legislation, NYC MAC's authority to
issue moral obligation bonds and notes (other than refunding bonds and notes)
expired on December 31, 1984 and no such bonds are outstanding. In 1995, the
State created the Municipal Assistance Corporation for the City of Troy (Troy
MAC). The bonds issued by Troy MAC do not include moral obligation provisions.
The State also provides for contingent contractual-obligation financing for the
Secured Hospital Program pursuant to legislation enacted in 1985. Under this
financing method, the State entered into service contracts which obligate the
State to pay debt service, subject to annual appropriations, on bonds either
formerly issued by the New York State Medical Care Facilities Finance Agency
(MCFFA) and now included as debt of the Dormitory Authority of the State of New
York (DASNY), or bonds issued directly by DASNY, in the event there are
shortfalls of revenues from other sources. The State has never been required to
make any payments pursuant to this financing arrangement, nor does it anticipate
being required to do so during the 1999-2000 fiscal year. The statutory
authorization to issue bonds under this program expired on March 1, 1998.
Local Government Assistance Corporation. In 1990, as part of a State fiscal
reform program, legislation was enacted creating LGAC, a public benefit
corporation empowered to issue long-term obligations to fund certain payments to
local governments that had been traditionally funded through the State's annual
seasonal borrowing. The legislation authorized LGAC to issue its bonds and notes
in an amount to yield net proceeds not in excess of $4.7 billion (exclusive of
certain refunding bonds). Over a period of years, the issuance of these
long-term obligations, which are to be amortized over no more than 30 years, was
expected to eliminate the need for continued short-term seasonal borrowing. The
legislation also dedicated revenues equal to one percent of the four percent
State sales and use tax to pay debt service on these bonds. The legislation also
imposed a cap on the annual seasonal borrowing of the State at $4.7 billion,
less net proceeds of bonds issued by LGAC and bonds issued to provide for
capitalized interest, except in cases where the Governor and the legislative
leaders have certified the need for additional borrowing and provided a schedule
for reducing it to the cap. If borrowing above the cap is permitted in any
fiscal year, it is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded. This provision capping the seasonal
borrowing was included as a covenant with LGAC's bondholders in the resolution
authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of $4.7
billion, completing the program. The impact of LGAC's borrowing, as well as
other changes in revenue and spending patterns, is that the State has been able
to meet its cash flow needs throughout the fiscal year without relying on short
term seasonal borrowings.
1999-2000 Borrowing Plan. Section 22-c of the State Finance Law, as amended by
Chapter 389 of the Laws of 1997, requires the Governor to submit the five-year
Capital Program and Financing Plan (the "Plan") with the Executive Budget. The
proposed 1999-2000 through 2003-04 Capital Program and Financing Plan was
released with the Executive Budget on January 27, 1999 and updated to reflect
the 30-Day Amendments on February 12, 1999. The Plan is required to be updated
by the later of July 30 or 90 days after the enactment of the State Budget. The
DOB expects to issue the updated Plan to reflect actions taken in the 1999-2000
enacted budget by the end of November 1999. A copy of the updated Plan, when
available can be obtained by contacting the DOB, State Capitol, Albany, NY
12224, (518) 473-8705, or by visiting its website at www.state.ny.us/dob.
The State's 1999-2000 borrowing plan projects issuances of $235 million in
general obligation bonds (including $140 million for purposes of redeeming
outstanding BANs) and $113 million in general obligation BANs. The State expects
to issue up to $366 million in Certificates of Participation to finance
equipment purchases (including costs
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of issuance, reserve funds, and other costs) during the 1999-2000 fiscal year.
Of this amount, it is anticipated that approximately $138 million will be used
to finance agency equipment acquisitions and to reimburse State special revenue
funds for prior year disbursements for Y2K compliance services. Approximately
$228 million is expected to finance the purchase of new welfare computer systems
designed to improve case management, fraud detection and child support
collection capabilities.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1999-2000. Included therein are borrowings by: (i) DASNY for the
State University of New York (SUNY); the City University of New York (CUNY);
other education purposes; and mental health facilities; (ii) the Thruway
Authority for the Dedicated Highway and Bridge Trust Fund and Consolidated
Highway Improvement Program; (iii) UDC (doing business as the Empire State
Development Corporation) for prisons, youth facilities and economic development
purposes; (iv) the Environmental Facilities Corporation (EFC) for environmental
projects; and (v) HFA for housing programs. These borrowings include the
Community Enhancement Facilities Assistance Program (CEFAP) for economic
development purposes. Four public authorities (Thruway Authority, DASNY, UDC and
HFA) are authorized to issue bonds under this program. The projections of State
borrowings for the 1999-2000 fiscal year are subject to change as market
conditions, interest rates and other facts vary throughout the fiscal year.
Outstanding Debt of the State and Certain Authorities. For purposes of analyzing
the financial condition of the State, debt of the State and of certain public
authorities may be classified as State-supported debt, which includes general
obligation debt of the State and lease-purchase and contractual obligations of
public authorities (and municipalities) where debt service is paid from State
appropriations (including dedicated tax sources, and other revenues such as
patient charges and dormitory facilities rentals). In addition, a broader
classification, referred to as State-related debt, includes State-supported
debt, as well as certain types of contingent obligations, including moral
obligation financings, certain contingent contractual-obligation financing
arrangements, and State-guaranteed debt, where debt service is expected to be
paid from other sources and State appropriations are contingent in that they may
be made and used only under certain circumstances.
State-Supported Debt Outstanding
General Obligation Bond Programs. The first type of State-supported debt,
general obligation debt, is currently authorized for three programmatic
categories: transportation, environmental and housing. The amount of general
obligation bonds and BANs issued in the 1996-97 through 1998-99 fiscal years
(excluding bonds issued to redeem BANs) were $439 million, $486 million, and
$249 million, respectively. Transportation-related bonds are issued for State
highway and bridge improvements, aviation, highway and mass transportation
projects and purposes, and rapid transit, rail, canal, port and waterway
programs and projects. Environmental bonds are issued to fund
environmentally-sensitive land acquisitions, air and water quality improvements,
municipal non-hazardous waste landfill closures and hazardous waste site cleanup
projects. As of March 31, 1999, the total amount of outstanding general
obligation debt was $4.8 billion, including $185 million in BANs.
Lease-Purchase and Contractual- Obligation Financing Programs. The second type
of State-supported debt, lease-purchase and contractual-obligation financing
arrangements with public authorities and municipalities, has been used primarily
by the State to finance the States' highway and bridge program, SUNY and CUNY
buildings, health and mental hygiene facilities, prison construction and
rehabilitation, and various other State capital projects.
The State has utilized and expects to continue to utilize lease-purchase and
contractual-obligation financing arrangements to finance its capital programs,
in addition to authorized general obligation bonds. Some of the major capital
programs financed by lease-purchase and contractual obligation agreements are
highlighted below.
Transportation. The State Department of Transportation is primarily responsible
for maintaining and rehabilitating the State's system of highways and bridges,
which includes 40,000 State highway lane miles and 7,500 State bridges. The
Department also oversees and funds programs for rail and aviation projects and
programs that help defray local capital expenses associated with road and bridge
projects.
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Legislation enacted in 1991 established the Dedicated Highway and Bridge Trust
Fund to provide for the dedication of a portion of the petroleum business tax
and certain other transportation-related taxes and fees for transportation
improvements. Legislation enacted in 1996 authorized a five-year, $12.7 billion
plan for State and local highways and bridges through 1999-2000, to be financed
by a combination of federal grants, pay-as you-go capital and bond proceeds
supported by the Dedicated Highway and Bridge Trust Fund, and a small amount of
general obligation bonds remaining under previous authorizations. The 1998-99
enacted budget increased this plan to $13 billion, which was maintained with the
1999-2000 enacted budget.
The State has supported the capital plans of the MTA in part by entering into
service contracts relating to certain bonds issued by the MTA. Legislation
adopted in 1992 and 1993 also authorized payments, subject to appropriation, of
a portion of the petroleum business tax from the State's Dedicated Mass
Transportation Trust Fund to the MTA and authorized it to be used as a source of
payment for bonds to be sold by the MTA to support its capital program.
Education. The State finances the physical infrastructure of SUNY and CUNY and
their respective community colleges and the State Education Department through
direct State capital spending and through financing arrangements with DASNY,
paying all capital costs of the senior colleges and sharing equally with local
governments for the community colleges, except that SUNY dormitories are
financed through dormitory fees.
The 34 SUNY campuses include more than 2,300 buildings, including classrooms,
dormitories, libraries, athletic and student facilities and other buildings of
which 84% are over 20 years of age. Together with the 30 SUNY community
colleges, the SUNY system serves nearly 290,000 full-time students. The CUNY
system is comprised of 11 senior colleges and 6 community colleges that serve
approximately 150,000 full-time students.
Mental Hygiene/Health. The State provides care for its citizens with mental
illness, mental retardation and developmental disabilities, and for those with
chemical dependencies, through the Office of Mental Health (OMH), the Office of
Mental Retardation and Developmental Disabilities (OMRDD) and the Office of
Alcoholism and Substance Abuse Services (OASAS). Historically, this care has
been provided at large State institutions. Beginning in the 1980s, the State
adopted policies to provide institutional care to those most in need and to
expand care in community residences. OMRDD has closed 12 of its 20 developmental
centers. OMH has reduced its adult institutional population from 22,000 in 1982
to 5,101 at the end of 1998-99.
In 1997, OMH released a "Statewide Comprehensive Plan for Mental Health Services
1997-2001." The plan presents the programmatic and fiscal strategy of
implementing an integrated community-based system of care, de-emphasizing State
adult inpatient hospitalization. It estimates that the State-operated adult
inpatient census will decline to a range of 3,700 to 4,700 by the end of the
decade. As OMH approaches its long-term census targets and inpatient bed needs
diminish, plans are underway to develop alternative uses for surplus facilities.
Capital investments for these programs are primarily supported by patient
revenues through financing arrangements with DASNY.
Various capital programs for Department of Health facilities have also been
financed by DASNY using contractual-obligation financing arrangements.
Corrections. During the 10-year period 1983 through 1992, the State's prison
system more than doubled in size due to the unprecedented increase in demand for
prison space. Today, the system houses approximately 71,000 inmates in 71
facilities with 3,400 buildings. Although the Department of Correctional
Services (DOCS) capital program was focused primarily on rehabilitation of
existing facilities in the early 1990s, continued inmate population growth and
projected future growth indicate the need for both expansion of existing
facilities and new facilities. The 1997-98 and 1998-99 enacted budgets
authorized the addition of approximately 4,600 beds in response to this
population growth.
Other Programs. The State also uses lease-purchase and contractual-obligation
financing arrangements for the institutional facilities of the Office of
Children and Family Services (formerly known as the Division for Youth), and
Youth Opportunity Centers; the State's housing programs; and various
environmental, economic development, and State building programs. In addition,
DASNY has issued taxable pension bonds to refinance the balance of a
pre-existing State pension, liability, for the purpose of achieving present
value savings.
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State Government Employment. The State has approximately 191,000 full-time
equivalent employees funded from all funds, including part-time and temporary
employees but excluding seasonal, legislative and judicial employees.
The current size of the State workforce reflects continuing efforts to
streamline operations and improve efficiency. The workforce is now 17.2% smaller
than it was nine years ago, when it peaked at 230,600 positions and the State
began its workforce reduction efforts. Between 1994-95 and 1996-97, the State
implemented concerted workforce initiatives that resulted in a reduction of
about 20,000 positions (more than one half of the overall reduction since 1990),
with levels stabilized in the last two fiscal years.
Negotiating units for State employees are defined by the State Public Employment
Relations Board. Collective bargaining negotiations are conducted by the
Governor's Office of Employee Relations except for employees of the Judiciary,
public authorities and the Legislature. Such negotiations include terms and
conditions of employment, except grade classification policies and certain
pension benefits. Approximately 93% of the State workforce is unionized. The
remainder of the workforce (about 12,000) is designated as managerial or
confidential and is excluded from collective bargaining. In practice, however,
the results of collective bargaining negotiations are generally applied to all
State employees within the executive agencies. The State is currently
negotiating with various unions to establish new agreements as most of the
existing contracts expired on March 31, 1999.
Under the State's Taylor Law, the general statute governing public
employee-employer relations in the State, employees are prohibited from
striking. A strike against the State last occurred in 1979 by employees of the
Department of Correctional Services.
State Retirement Systems. The New York State and Local Retirement Systems (the
"Systems") provide coverage for public employees of the State and its localities
(except employees of New York City and teachers, who are covered by separate
plans). The Systems comprise the New York State and Local Employees Retirement
System and the New York State and Local Police and Fire Retirement System. The
Comptroller is the administrative head of the Systems. State employees made up
about 37% of the membership during the 1998-99 fiscal year. There were 2,842
other public employers participating in the Systems, including all cities
(except New York City), all counties, most towns, villages and school districts
(with respect to non-teaching employees) and a large number of local authorities
of the State.
As of March 31, 1999, 593,188 persons were in membership and 289,046 pensioners
and beneficiaries were receiving benefits. The State Constitution considers
membership in any State pension or retirement system to be a contractual
relationship, the benefits of which shall not be diminished or impaired. Members
cannot be required to begin making contributions or make increased contributions
beyond what was required when membership began.
Contributions. Funding is provided in large part by employer and employee
contributions. Employers contribute on the basis of the plan or plans they
provide for members. Members joining since mid-1976, other than police and fire
members, have been required to contribute 3% of their salaries.
By law, the State makes its annual payment to the Systems on or before March 1
for the then current fiscal year ending on March 31 based on an estimate of the
required contribution prepared by the Systems. The Director of the Budget is
authorized to revise and amend the estimate of the Systems' bill for purposes of
preparing the State's budget for a fiscal year. Legislation also provides that
any underpayments by the State (as finally determined by the Systems) must be
paid, with interest at the actuarially assumed interest earnings rate, in the
second fiscal year following the year of the underpayment. Similarly, any
overpayment for a fiscal year serves as a credit against the Systems' estimated
bill for the second fiscal year following the fiscal year in which the
overpayment is made.
During the 1998-99 fiscal year, the State paid the Systems' 1998-99 estimated
bill of $122.3 million. The difference between the amounts paid on the estimated
bill and the final bill with interest results in an underpayment of the final
bill in the amount of $2.0 million and will be billed on March 1, 2001 ($1.9
million if paid on September 1, 2000).
Assets and Liabilities. Assets are held exclusively for the benefit of members,
pensioners and beneficiaries. Investments for the Systems are made by the
Comptroller as trustee of the Common Retirement Fund, a pooled
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investment vehicle. The net assets available for benefits as of March 31, 1999
were $112.7 billion (including $2.2 billion in receivables). The present value
of anticipated benefits for current members, retirees, and beneficiaries as of
March 31, 1999 was $92.5 billion. For current retirees and beneficiaries alone
the amount was $29.4 billion. Under the funding method used by the Systems, the
net assets, plus future actuarially determined contributions, are expected to be
sufficient to pay for the anticipated benefits of current members, retirees and
beneficiaries.
DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS
The Money Market Funds use the amortized cost method to determine their NAV.
Use of the Amortized Cost Method. The Money Market Funds' use of the amortized
cost method of valuing their instruments depends on their compliance with
certain conditions contained in Rule 2a-7 of the 1940 Act. Under Rule 2a-7, the
Trustees must establish procedures reasonably designed to stabilize the NAV, as
computed for purposes of distribution and redemption, at $1.00 per share, taking
into account current market conditions and the Money Market Funds' investment
objectives.
The Money Market Funds have elected to use the amortized cost method of
valuation pursuant to Rule 2a-7. This involves valuing an instrument at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
a Money Market Fund would receive if it sold the instrument. The value of
securities in a Money Market Fund can be expected to vary inversely with changes
in prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Funds will maintain a dollar-weighted
average portfolio maturity appropriate to its objective of maintaining a stable
NAV provided that a Money Market Fund will not purchase any security with a
remaining maturity of more than 397 days (securities subject to repurchase
agreements may bear longer maturities) nor maintain a dollar-weighted average
portfolio maturity which exceeds 90 days. Should the disposition of a Money
Market Fund's security result in a dollar weighted average portfolio maturity of
more than 90 days, the Money Market Fund will invest its available cash to
reduce the average maturity to 90 days or less as soon as possible.
The Trust's Trustees also have established procedures reasonably designed,
taking into account current market conditions and the Trust's investment
objectives, to stabilize the NAV of the Money Market Funds for purposes of sales
and redemptions at $1.00. These procedures include review by the Trustees, at
such intervals as they deem appropriate, to determine the extent, if any, to
which the NAV of the Money Market Funds calculated by using available market
quotations deviates from $1.00 per share. In the event such deviation exceeds
one-half of one percent, Rule 2a-7 requires that the Board promptly consider
what action, if any, should be initiated. If the Trustees believe that the
extent of any deviation from a Money Market Fund's $1.00 amortized cost price
per share may result in material dilution or other unfair results to new or
existing investors, they will take such steps as they consider appropriate to
eliminate or reduce to the extent reasonably practicable any such dilution or
unfair results. These steps may include selling portfolio instruments prior to
maturity, shortening the dollar-weighted average portfolio maturity, withholding
or reducing dividends, reducing the number of a Money Market Fund's outstanding
shares without monetary consideration, or using a NAV determined by using
available market quotations.
Monitoring Procedures
The Trustee's procedures include monitoring the relationship between the
amortized cost value per share and the NAV based upon available indications of
market value. The Trustees will decide what, if any, steps should be taken if
there is a difference of more than 0.5% between the two values. The Trustees
will take any steps they consider appropriate (such as redemption in kind or
shortening a Money Market Fund's average maturity) to minimize any material
dilution or other unfair results arising from differences between the two
methods of determining net asset value.
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Investment Restrictions
Rule 2a-7 requires that the Money Market Funds limit their investments to
instruments that, in the opinion of the Trustees, present minimal credit risks
and are "Eligible Securities" as defined in Rule 2a-7. See "Investments in Which
the Funds Can Invest." An Eligible Security generally must be rated by at least
one NRSRO. Such rating may be of the particular security or of a class of debt
obligations or a debt obligation in that class that is comparable in priority
and security issued by that issuer. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Money Market
Funds will limit the percentage allocation of their investments so as to comply
with Rule 2a-7, which generally (except in the case of the Ohio Municipal Money
Market Fund) limits to 5% of total assets the amount which may be invested in
the securities of any one issuer. Rule 2a-7 provides an exception to this 5%
limit: certain money market funds may invest up to 25% of their total assets in
the First-Tier Securities (as that term is defined by Rule 2a-7 (generally, a
First-Tier Security is a security that has received a rating in the highest
short-term rating category)) of a single issuer for a period of up to three days
after the purchase of such a security. This exception is available to all Money
Market Funds other than the Ohio Municipal Money Market Fund. Additionally,
under Rule 2a-7 the Ohio Municipal Money Market Fund, as a single state money
market fund, must limit the amount which it invests in the securities of any one
issuer to 5% of its total assets only with respect to 75% of its total assets;
provided, however, that no more than 5% of its total assets may be invested in
the securities of any one issuer unless those securities are First-Tier
Securities.
The Money Market Funds will purchase only First-Tier Securities. However, a
Money Market Fund will not necessarily dispose of a security if it ceases to be
a First-Tier Security, although if a First-Tier Security is downgraded to a
Second-Tier Security (as that term is defined by Rule 2a-7) the Adviser will
reassess promptly whether such security continues to present minimal credit
risks and will cause the Money Market Fund to take such action as it determines
is in the best interests of the Money Market Fund and its shareholders.
Rule 2a-7 imposes special diversification requirements on puts. Generally, with
respect to 75% of its total assets, immediately after the acquisition of a put,
a money market fund may have no more than 10% of its total assets invested in
securities issued by, or subject to puts from, the same institution. With
respect to the remaining 75% of its total assets, a money market fund may invest
more than 10% of its assets in puts issued by a non-controlled person so long as
the puts are First-Tier Securities. Where a put is a Second-Tier Security, no
more than 5% of the money market fund's total assets may be invested in
securities issued by, or subject to puts from, the same institution.
The Money Market Funds may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations. This policy may,
from time to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset value
is affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares of
the Money Market Funds computed by dividing the annualized daily income on a
Money Market Fund's portfolio by the net asset value computed as above may tend
to be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of the
Money Market Funds computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.
VALUATION OF PORTFOLIO SECURITIES FOR THE MONEY MARKET FUNDS
The net asset value of the Money Market Funds is determined and the shares of
each Money Market Fund are priced as of the valuation time(s) indicated in the
Prospectuses on each Business Day. A "Business Day" is a day on which the New
York Stock Exchange, Inc. (the "NYSE") and the Federal Reserve Bank of Cleveland
are open and any other day (other than a day on which no shares of a Money
Market Fund are tendered for redemption and no order to purchase any shares is
received) during which there is sufficient trading in portfolio instruments that
a Money Market Fund's net assets value per share might be materially affected.
The NYSE will not open in observance of
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the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas.
VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS AND THE TAX-FREE
BOND FUNDS
Investment securities held by the Fund For Income, the Government Mortgage Fund,
the Intermediate Income Fund, the Investment Quality Bond Fund, and the Limited
Term Income Fund (the "Taxable Bond Funds") and the National Municipal Bond
Fund, the New York Tax-Free Fund, and the Ohio Municipal Bond Fund (the
"Tax-Free Bond Funds") are valued on the basis of security valuations provided
by an independent pricing service, approved by the Trustees, which determines
value by using information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities. Specific investment securities which
are not priced by the approved pricing service will be valued according to
quotations obtained from dealers who are market makers in those securities.
Investment securities with less than 60 days to maturity when purchased are
valued at amortized cost which approximates market value. Investment securities
not having readily available market quotations will be priced at fair value
using a methodology approved in good faith by the Trustees.
VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS.
Each equity security held by a Fund is valued at the last sales price on the
exchange where the security is principally traded or, lacking any sales on a
particular day, the security is valued at the last available bid quotation on
that day. Exchange listed convertible debt securities are valued at the bid
obtained from broker-dealers or a comparable alternative, such as Bloomberg or
Reuters, based upon pricing procedures approved by the Board of Trustees. Each
security traded in the over-the-counter market (but not including securities
reported on the Nasdaq National Market System) is valued at the bid based upon
quotes furnished by market makers for such securities. Each security reported on
the Nasdaq National Market System is valued at the sales price on the valuation
date or absent a last sales price, at the mean between the closing bid and asked
prices on that day. Non-convertible debt securities are valued on the basis of
prices provided by independent pricing services. Prices provided by the pricing
service may be determined without exclusive reliance on quoted prices, and may
reflect appropriate factors such as institution-sized trading in similar groups
of securities, developments related to special securities, yield, quality,
coupon rate, maturity, type of issue, individual trading characteristics and
other market data. Securities for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
supervision of The Victory Portfolios' officers in a manner specially authorized
by the Board of Trustees. Short-term obligations having 60 days or less to
maturity are valued on the basis of amortized cost. For purposes of determining
NAV, futures and options contracts generally will be valued 15 minutes after the
close of trading of the NYSE.
Generally, trading in foreign securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the close of the NYSE. The values of such securities used
in computing the net asset value of each Fund's shares are determined at such
times. Foreign currency exchange rates are also generally determined prior the
close of the NYSE. Occasionally, events affecting the values of such securities
and such exchange rates may occur between the times at which such values are
determined and the close of the NYSE which will not be reflected in the
computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by or under the
supervision of the Board of Trustees.
PERFORMANCE OF THE MONEY MARKET FUNDS
Performance for a class of shares of a Money Market Fund depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested; o changes in
interest rates on money market instruments;
o changes in Fund (class) expenses; and
o the relative amount of Fund (class) cash flow.
73
<PAGE>
From time to time the Money Market Funds may advertise the performance of each
class compared to similar funds or portfolios using certain indices, reporting
services, and financial publications.
Yield. The Money Market Funds calculate the yield for a class daily, based upon
the seven days ending on the day of the calculation, called the "base period."
This yield is computed by:
o determining the net change in the value of a
hypothetical account with a balance of one share
at the beginning of the base period, with the net
change excluding capital changes but including
the value of any additional shares purchased with
dividends earned from the original one share and
all dividends declared on the original and any
purchased shares;
o dividing the net change in the account's value by
the value of the account at the beginning of the
base period to determine the base period return;
and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with the Money Market Funds,
the yield for a class will be reduced for those shareholders paying those fees.
The seven-day yields of the Money Market Funds for the seven-day period ending
October 31, 1998 are listed in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------- ---------- ------------------------------------- ----------
<S> <C> <C> <C>
Federal Money Market Fund: Investor 4.89% Ohio Municipal Money Market 2.59%
- ---------------------------------------- ---------- ------------------------------------- ----------
Federal Money Market Fund: Select 4.65% Prime Obligations Fund 4.68%
- ---------------------------------------- ---------- ------------------------------------- ----------
Financial Reserves Fund 4.73% Tax-Free Money Market 2.61%
- ---------------------------------------- ---------- ------------------------------------- ----------
Institutional Money Market Fund: 5.14% U.S. Government Obligations: 4.61%
Investor Investor
- ---------------------------------------- ---------- ------------------------------------- ----------
Institutional Money Market Fund: 4.83% U.S. Government Obligations: 4.37%
Select Select
- ---------------------------------------- ---------- ------------------------------------- ----------
</TABLE>
Effective Yield. The Money Market Funds' effective yields are computed by
compounding the unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
The effective yields of Money Market Funds for the seven-day period ending
October 31, 1998 are listed below.
<TABLE>
<CAPTION>
- ---------------------------------------- --------- ------------------------------------- ---------
<S> <C> <C> <C>
Federal Money Market Fund: Investor 5.01% Ohio Municipal Money Market 2.62%
- ---------------------------------------- --------- ------------------------------------- ---------
Federal Money Market Fund: Select 4.76% Prime Obligations Fund 4.79%
- ---------------------------------------- --------- ------------------------------------- ---------
Financial Reserves Fund 4.84% Tax-Free Money Market 2.65%
- ---------------------------------------- --------- ------------------------------------- ---------
Institutional Money Market Fund: 5.27% U.S. Government Obligations: 4.72%
Investor Investor
- ---------------------------------------- --------- ------------------------------------- ---------
Institutional Money Market Fund: 4.94% U.S. Government Obligations: 4.47%
Select Select
- ---------------------------------------- --------- ------------------------------------- ---------
</TABLE>
Total Return Calculations. Total returns quoted in advertising reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
net capital gain distributions (if any), and any change in the NAV of a Fund
over the period. Average annual total returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in a Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative total
return of 100% over ten years would produce an average annual total return of
7.18%, which is the steady annual rate of return that would equal 100% growth on
an annually compounded basis in ten years. While average annual total returns
(or "annualized total return") are a convenient means of comparing investment
alternatives, investors should realize that performance for a Fund is not
constant over time, but changes from year to year, and that average annual total
returns represent averaged figures as opposed to the actual year-to-year
performance of a Fund. When using total return and yield to compare a Fund with
other mutual funds, investors should take into consideration permitted portfolio
composition methods used to value
74
<PAGE>
portfolio securities and computing offering price. The total returns of the
Money Market Funds for the one year, five year, and ten year periods ending
October 31, 1998 and the period since inception of each Money Market Fund are as
follows:
<TABLE>
<CAPTION>
Since
One-Year Five-Year Ten-Year Inception
================================================= =========== ========= ======== =============
<S> <C> <C> <C> <C>
Federal Money Market Fund: Investor Shares 4.91% 4.66% 5.26% 5.35%
- ------------------------------------------------- ----------- ---------- --------- --------------
Federal Money Market Fund: Select Shares 3.14% N/A N/A 3.14%
- ------------------------------------------------- ----------- ---------- --------- --------------
Financial Reserves Fund 5.10% 4.84% 5.33% 6.12%
- ------------------------------------------------- ----------- ---------- --------- --------------
Institutional Money Market Fund: Investor 5.53% 5.17% 5.64% 6.51%
Shares
- ------------------------------------------------- ----------- ---------- --------- --------------
Institutional Money Market Fund: Select Shares 5.22% N/A N/A 4.93%
- ------------------------------------------------- ----------- ---------- --------- --------------
Ohio Municipal Money Market 2.94% 2.94% 3.49% 3.69%
- ------------------------------------------------- ----------- ---------- --------- --------------
Prime Obligations Fund 4.98% 4.70% 5.36% 5.56%
- ------------------------------------------------- ----------- ---------- --------- --------------
Tax-Free Money Market 2.91% 2.92% 3.53% 3.57%
- ------------------------------------------------- ----------- ---------- --------- --------------
U.S. Government Obligations: Investor Shares N/A N/A N/A 5.17%
- ------------------------------------------------- ----------- ---------- --------- --------------
U.S. Government Obligations: Select Shares 4.86% 4.65% 5.18% 5.34%
================================================= =========== ========= ======== =============
</TABLE>
In addition to average annual total returns, the Money Market Funds, on behalf
of a class, may quote unaveraged or cumulative total returns reflecting the
total income over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. The cumulative total
returns of the Money Market Funds for the five year and ten year periods ending
October 31, 1998 and the period since inception are as follows:
<TABLE>
<CAPTION>
============================================== ============= ============ =================
Five-Year Ten-Year Since Inception
- ---------------------------------------------- ------------- ------------ -----------------
<S> <C> <C> <C>
Federal Money Market Fund: Investor Shares 25.60% 66.92% 73.74%
- ---------------------------------------------- ------------- ------------ -----------------
Federal Money Market Fund: Select Shares N/A N/A 3.14%
- ---------------------------------------------- ------------- ------------ -----------------
Financial Reserves Fund 26.68% 68.02% 152.34%
- ---------------------------------------------- ------------- ------------ -----------------
Institutional Money Market Fund: Investor 28.64% 73.08% 171.01%
Shares
- ---------------------------------------------- ------------- ------------ -----------------
Institutional Money Market Fund: Select N/A N/A 17.80%
Shares
- ---------------------------------------------- ------------- ------------ -----------------
Ohio Municipal Money Market Fund 15.58% 40.98% 61.99%
- ---------------------------------------------- ------------- ------------ -----------------
Prime Obligations Fund 25.80% 68.51% 90.97%
- ---------------------------------------------- ------------- ------------ -----------------
Tax-Free Money Market Fund 15.50% 41.50% 42.93%
- ---------------------------------------------- ------------- ------------ -----------------
U.S. Government Obligations Fund: Investor N/A N/A 9.55%
Shares
- ---------------------------------------------- ------------- ------------ -----------------
U.S. Government Obligations Fund: Select 25.54% 65.76% 86.25%
Shares
============================================== ============= ============ =================
</TABLE>
PERFORMANCE OF THE NON-MONEY MARKET FUNDS
From time to time, the "standardized yield," "distribution return," "dividend
yield," "average annual total return," "total return," and "total return at net
asset value" of an investment in each class of Non-Money Market Fund shares may
be advertised. An explanation of how yields and total returns are calculated for
each class and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in reviewing the
Non-Money Market Fund's performance. A Non-Money Market Fund's advertisement of
its performance must, under applicable SEC rules, include the average annual
total returns for each class of shares of a Non-Money Market Fund for the 1, 5,
and 10-year period (or the life of the class, if less) as of the most recently
ended calendar quarter. This enables an investor to compare the Non-Money Market
Fund's performance to the performance of other funds for the same periods.
However, a number of factors should be considered before using such information
as a basis for comparison with
75
<PAGE>
other investments. Investments in a Non-Money Market Fund are not insured; their
yield and total return are not guaranteed and normally will fluctuate on a daily
basis. When redeemed, an investor's shares may be worth more or less than their
original cost. Yield and total return for any given past period are not a
prediction or representation by the Trust of future yields or rates of return on
its shares. The yield and total returns of the Class A and Class B shares of the
Non-Money Market Funds are affected by portfolio quality, portfolio maturity,
the type of investments the Non-Money Market Fund holds, and operating expenses.
Performance -- Class B Shares. Class B shares of the Funds were initially
offered on the dates listed below. The performance figures for Class B shares
for periods prior to such dates represent the performance for Class A shares of
the Funds, which have been restated to reflect the applicable contingent
deferred sales charge ("CDSC") payable at redemption within 6 years from
purchase. Class B Shares are subject to an asset based sales charge of 0.75% of
average daily net assets per year and other class-specific expenses. Had these
fees and expenses been reflected, performances quoted would have been lower.
Class B shares of the National Municipal Bond Fund and New York Tax Free Fund
were initially offered on September 26, 1994. Class B shares of the Balanced
Fund, Diversified Stock Fund, International Growth Fund, Ohio Regional Stock
Fund and Special Value Fund were initially offered on March 1, 1996.
Performance -- Class G Shares. The Diversified Stock Fund, the Fund for Income,
the International Growth Fund, the Ohio Municipal Bond Fund, and the Small
Company Opportunity Fund offer Class G shares. This Class was established in
October 1998 to facilitate the reorganization of the Gradison Funds, a family of
mutual funds advised by the Gradison Division of McDonald & Company Securities,
Inc. See "Purchasing Shares -- Class G Shares -- The Gradison Fund
Reorganization" in this SAI. The following table lists each Gradison Fund and
its corresponding Victory Fund.
Gradison Fund: Victory Fund (Class G):
U.S. Government Reserves -> Gradison Government Reserves Fund*
Government Income Fund -> Fund for Income
Ohio Tax-Free Income Fund -> Ohio Municipal Bond Fund
Established Value Fund -> Established Value Fund*
Growth & Income Fund -> Diversified Stock Fund
Opportunity Value Fund -> Small Company Opportunity Fund
International Fund -> International Growth Fund
- ---------------------
* Described in a separate statement of additional information.
In addition, the Stock Index Fund began offering Class G Shares on June 30, 1999
and the Intermediate Income Fund, Investment Quality Bond Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Value Fund, Growth Fund, Special
Value Fund, Balanced Fund, Convertible Securities Fund and Real Estate
Investment Fund began offering Class G Shares on December 15, 1999.
Except for historical performance information relating to the Gradison
Government Income Fund and the Gradison Opportunity Value Fund, no performance
information for the corresponding Class G shares has been provided in this SAI.
Standardized Yield. The "yield" (referred to as "standardized yield") of the
Non-Money Market Funds for a given 30-day period for a class of shares is
calculated using the following formula set forth in rules adopted by the SEC
that apply to all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)6 - 1 ]
----
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
76
<PAGE>
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield of a class of shares for a 30-day period may differ from
its yield for any other period. The SEC formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is not
based on actual distributions paid by a Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from a
Fund's portfolio investments calculated for that period. The standardized yield
may differ from the "dividend yield" of that class, described below.
Additionally, because each class of shares of a Fund is subject to different
expenses, it is likely that the standardized yields of the share classes of the
Funds will differ. The yields on the Funds for the 30-day period ended October
31, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------- ---------- ----------------------------------- ----------
<S> <C> <C> <C>
Balanced Fund: Class A 1.95% LifeChoice Growth Investor Fund 1.32%
- ------------------------------------- ---------- ----------------------------------- ----------
Balanced Fund: Class B 0.86% LifeChoice Moderate Investor Fund 2.29%
- ------------------------------------- ---------- ----------------------------------- ----------
Convertible Securities Fund 4.18% Limited Term Income Fund 4.34%
- ------------------------------------- ---------- ----------------------------------- ----------
Diversified Stock Fund: Class A 0.77% National Municipal Bond Fund: 3.21%
Class A
- ------------------------------------- ---------- ----------------------------------- ----------
Diversified Stock Fund: Class B (0.31)% National Municipal Bond Fund: 2.24%
Class B
- ------------------------------------- ---------- ----------------------------------- ----------
Fund for Income 5.39% New York Tax-Free Fund: Class A 3.25%
- ------------------------------------- ---------- ----------------------------------- ----------
Government Mortgage Fund 4.65% New York Tax-Free Fund: Class B 2.18%
- ------------------------------------- ---------- ----------------------------------- ----------
Gradison Government Income Fund 5.24%5 Ohio Municipal Bond Fund 3.38%
- ------------------------------------- ---------- ----------------------------------- ----------
Gradison Opportunity Value Fund N/A Ohio Regional Stock Fund: Class A 0.82%
- ------------------------------------- ---------- ----------------------------------- ----------
Growth Fund (0.03)% Ohio Regional Stock Fund: Class B (0.24)%
- ------------------------------------- ---------- ----------------------------------- ----------
Intermediate Income Fund 4.11% Real Estate Investment Fund 4.91%
- ------------------------------------- ---------- ----------------------------------- ----------
International Growth Fund: Class A N/A Small Company Opportunity Fund (0.71)%
- ------------------------------------- ---------- ----------------------------------- ----------
International Growth Fund: Class B N/A Special Value Fund: Class A 0.78%
- ------------------------------------- ---------- ----------------------------------- ----------
Investment Quality Bond Fund 4.29% Special Value Fund: Class B (0.31)%
- ------------------------------------- ---------- ----------------------------------- ----------
Lakefront Fund 1.20% Stock Index Fund 1.67%
- ------------------------------------- ---------- ----------------------------------- ----------
LifeChoice Conservative Investor 3.56% Value Fund A 0.38%
Fund
- ------------------------------------- ---------- ----------------------------------- ----------
</TABLE>
Dividend Yield and Distribution Returns. From time to time a Non-Money Market
Fund may quote a "dividend yield" or a "distribution return" for each class.
Dividend yield is based on the Class A or Class B share dividends derived from
net investment income during a one-year period. Distribution return includes
dividends derived from net investment income and from net realized capital gains
declared during a one-year period. The "dividend yield" is calculated as
follows:
Dividend Yield of the Class = Dividends of the Class for a Period of One-Year
Max. Offering Price of the Class
(last day of period
For Class A shares, the maximum offering price includes the maximum front-end
sales charge. For Class B shares, the maximum offering price is the NAV, without
considering the effect of the CDSC.
From time to time similar yield or distribution return calculations may also be
made using the Class A net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields on Class A shares
at maximum offering price and net asset value, and distribution returns on Class
A shares at maximum offering price and net asset value for the one year period
ended October 31, 1998 were as follows:
- ----------
5 The 30-day standardized yield is as of December 31, 1998.
77
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------- ------------- ------------- ------------- ---------------
Distribution
Dividend Return at
Yield at Dividend Maximum Distribution
Maximum Yield at Offering Return at Net
Offering Net Asset Price Asset Value
Price Value
- ------------------------------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund 2.36% 2.50% 7.14% 7.57%
- ------------------------------------- ------------- ------------- ------------- ---------------
Convertible Securities Fund 4.16% 4.42% 12.38% 13.14%
- ------------------------------------- ------------- ------------- ------------- ---------------
Diversified Stock Fund 0.56% 0.59% 10.47% 11.11%
- ------------------------------------- ------------- ------------- ------------- ---------------
Fund for Income 6.05% 6.17% 6.05% 6.17%
- ------------------------------------- ------------- ------------- ------------- ---------------
Government Mortgage Fund 5.37% 5.69% 5.37% 5.69%
- ------------------------------------- ------------- ------------- ------------- ---------------
Growth Fund 0.02% 0.02% 5.44% 5.77%
- ------------------------------------- ------------- ------------- ------------- ---------------
Intermediate Income Fund 5.11% 5.42% 5.11% 5.42%
- ------------------------------------- ------------- ------------- ------------- ---------------
International Growth Fund 0.40% 0.42% 5.98% 6.34%
- ------------------------------------- ------------- ------------- ------------- ---------------
Investment Quality Bond Fund 5.15% 5.46% 5.15% 5.46%
- ------------------------------------- ------------- ------------- ------------- ---------------
Lakefront Fund 1.18% 1.25% 2.72% 2.88%
- ------------------------------------- ------------- ------------- ------------- ---------------
LifeChoice Conservative Investor N/A 3.68% N/A 3.92%
Fund
- ------------------------------------- ------------- ------------- ------------- ---------------
LifeChoice Growth Investor Fund N/A 1.24% N/A 3.75%
- ------------------------------------- ------------- ------------- ------------- ---------------
LifeChoice Moderate Investor Fund N/A 2.40% N/A 3.18%
- ------------------------------------- ------------- ------------- ------------- ---------------
Limited Term Income Fund 5.28% 5.38% 5.28% 5.38%
- ------------------------------------- ------------- ------------- ------------- ---------------
National Municipal Bond Fund 3.71% 3.94% 3.71% 3.94%
- ------------------------------------- ------------- ------------- ------------- ---------------
New York Tax-Free Fund 4.50% 4.78% 4.68% 4.96%
- ------------------------------------- ------------- ------------- ------------- ---------------
Ohio Municipal Bond Fund 4.01% 4.25% 4.79% 5.09%
- ------------------------------------- ------------- ------------- ------------- ---------------
Ohio Regional Stock Fund 0.76% 0.81% 10.32% 10.95%
- ------------------------------------- ------------- ------------- ------------- ---------------
Real Estate Investment Fund 4.10% 4.35% 4.46% 4.73%
- ------------------------------------- ------------- ------------- ------------- ---------------
Small Company Opportunity Fund: 0.64% 0.68% 5.55% 5.89%
Class A*
- ------------------------------------- ------------- ------------- ------------- ---------------
Small Company Opportunity Fund: N/A 0.68% N/A 5.89%
Class G*
- ------------------------------------- ------------- ------------- ------------- ---------------
Special Value Fund 0.60% 0.63% 9.21% 9.77%
- ------------------------------------- ------------- ------------- ------------- ---------------
Stock Index Fund 1.60% 1.70% 6.52% 6.92%
- ------------------------------------- ------------- ------------- ------------- ---------------
Value Fund 0.52% 0.56% 7.58% 8.04%
- ------------------------------------- ------------- ------------- ------------- ---------------
</TABLE>
* as of March 31, 1999
The dividend yield on Class B shares with and without the CDSC, and distribution
returns on Class B shares with and without the CDSC for the one year period
ended October 31, 1998 were as follows.
<TABLE>
<CAPTION>
- ------------------------------------ ------------- -------------- ------------- ---------------
Dividend Dividend Distribution Distribution
Yield with Yield Returns Returns
CDSC without CDSC with CDSC without CDSC
- ------------------------------------ ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund 1.34% 1.41% 6.15% 6.48%
- ------------------------------------ ------------- -------------- ------------- ---------------
Diversified Stock Fund 0.00% 0.00% 10.13% 10.66%
- ------------------------------------ ------------- -------------- ------------- ---------------
International Growth Fund 0.00% 0.00% 5.79% 6.09%
- ------------------------------------ ------------- -------------- ------------- ---------------
National Municipal Bond Fund 2.72% 2.87% 2.72% 2.87%
- ------------------------------------ ------------- -------------- ------------- ---------------
New York Tax-Free Fund 3.57% 3.76% 3.75% 3.75%
- ------------------------------------ ------------- -------------- ------------- ---------------
Ohio Regional Stock Fund 0.00% 0.00% 9.81% 10.33%
- ------------------------------------ ------------- -------------- ------------- ---------------
Special Value Fund 0.00% 0.00% 8.85% 9.32%
- ------------------------------------ ------------- -------------- ------------- ---------------
</TABLE>
During the fiscal years indicated, the Predecessor Funds did not charge a sales
load. The dividend yield on Class G shares and distribution returns on Class G
shares for the fiscal years indicated were as follows:
78
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------- ----------------- --------------------- ---------------------
Dividend Yield Distribution Return Fiscal Year Ended
- ----------------------------------------- ----------------- --------------------- ---------------------
<S> <C> <C> <C>
Gradison Government Income Fund 5.68% 5.68% December 31,
1998
- ----------------------------------------- ----------------- --------------------- ---------------------
Gradison Opportunity Value Fund 0.97% 13.73% March 31, 1998
- ----------------------------------------- ----------------- --------------------- ---------------------
</TABLE>
Total Returns. The "average annual total return" of a Fund, or of each class of
a Fund, is an average annual compounded rate of return for each year in a
specified number of years. It is the rate of return based on the change in value
of a hypothetical initial investment of $1,000 ("P" in the formula below) held
for a number of years ("n") to achieve an Ending Redeemable Value ("ERV"),
according to the following formula:
(ERV)1n - 1 = Average Annual Total Return
------
(P)
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period greater than one year.
Its calculation uses some of the same factors as average annual total return,
but it does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
--------
P
In calculating total returns for Class A shares of the Funds, the current
maximum sales charge (as a percentage of the offering price) is deducted from
the initial investment ("P") (unless the return is shown at net asset value, as
discussed below). For Class B shares, the payment of the applicable CDSC (5.0%
for the first year, 4.0% for second year, 3.0% for the third and fourth years,
2.0% for the fifth year, 1.0% for the sixth year and none thereafter) is applied
to the investment result for the time period shown (unless the total return is
shown at net asset value, as described below). Total returns also assume that
all dividends and net capital gains distributions during the period are
reinvested to buy additional shares at NAV, and that the investment is redeemed
at the end of the period.
The average annual total return and cumulative total return on Class A and Class
B shares, for the period from the commencement of operations to October 31, 1998
(life of fund) at maximum offering price is shown on the table that follows. The
average annual total return for the one and five year periods (when applicable)
ended October 31, 1998 also are shown on the table that follows.
<TABLE>
<CAPTION>
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Average
Annual One-Year Five-Year
Total Cumulative Average Average Ten-Year
Return for Total Return Annual Annual Average
the Life of for the Life Total Total Annual Total
the Fund at of the Fund Return at Return at Return at
Maximum Maximum at Maximum Maximum Maximum Maximum
Sales Offering Offering Offering Offering Offering
Charge Price* Price* Price* Price* Price
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balanced -- A 5.75% 12.40% 77.12% 7.94% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Balanced -- B 5.00% 12.84% 80.50% 9.27% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Convertible Securities 5.75% 10.41% 184.20% (9.22%) 7.67% N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Diversified Stock -- A 5.75% 15.72% 273.71% 12.74% 19.45% N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Diversified Stock -- B 5.00% 16.16% 286.73% 14.34% 20.17% N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Fund for Income 2.00% 8.00% 142.09% 4.47% 5.91% N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Government Mortgage 5.75% 7.43% 83.35% 1.04% 4.92% N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Gradison Gov't Income 8.26% 144.88% 7.37% 6.33% 8.07%
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Gradison Opp'ty Value 12.49% 459.43% 42.02% 17.44% 14.88%
+
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Growth 5.75% 19.98% 144.60% 21.19% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Intermediate Income 5.75% 4.47% 23.87% 2.03% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
International Growth 5.75% 5.42% 56.26% (0.28%) 3.98% N/A
- -- A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
</TABLE>
- ----------
* For Class B Shares, the calculations reflect the imposition of the CDSC.
+ Period ended 3/31/98
79
<PAGE>
<TABLE>
<CAPTION>
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Average
Annual One-Year Five-Year
Total Cumulative Average Average Ten-Year
Return for Total Return Annual Annual Average
the Life of for the Life Total Total Annual Total
the Fund at of the Fund Return at Return at Return at
Maximum Maximum at Maximum Maximum Maximum Maximum
Sales Offering Offering Offering Offering Offering
Charge Price* Price* Price* Price* Price
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
International Growth 5.00% 5.7 5% 60.42% 0.51% 4.37% N/A
- -- B
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Investment Quality 5.75% 4.90% 26.36% 1.81% N/A N/A
Bond
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Lakefront 5.75% 7.48% 12.75% (1.00%) N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
LifeChoice 5.75% 7.50% 14.18% 2.66% N/A N/A
Conservative
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
LifeChoice Growth 5.75% 8.47% 16.08% 0.96% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
LifeChoice Moderate 5.75% 7.73% 14.62% 1.21% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Limited Term Income 2.00% 6.21% 72.36% 4.75% 4.63% N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
National Muni Bond -- A 5.75% 5.14% 26.81% 1.95% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
National Muni Bond -- B 5.00% 5.18% 27.02% 2.88% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
New York Tax-Free -- A 5.75% 5.99% 56.64% 0.04% 3.42% N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
New York Tax-Free -- B 5.00% 6.30% 60.25% 0.96% 3.74% N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Ohio Muni Bond: Class 5.75% 7.10% 78.63% 1.92% 5.04% N/A
A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Ohio Regional Stock -- 5.75% 12.20% 182.78% (8.71%) 11.97% N/A
A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Ohio Regional Stock -- 5.00% 12.51% 190.02% (7.81%) 12.42% N/A
B
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Real Estate Investment 5.75% 1.09% 1.64% (17.00%) N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Small Co. Opp'ty -- A 5.75% 9.47% 310.83% (26.56%) 9.34% 10.25%
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Small Co. Opp'ty -- G N/A 9.88% 335.89% (22.08%) 10.64% 10.90%
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Special Value -- A 5.75% 10.09% 60.30% (16.33%) N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Special Value -- B 5.00% 10.42% 62.68% (15.57%) N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Stock Index 5.75% 19.57% 140.52% 14.06% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
Value 5.75% 18.21% 127.38% 13.54% N/A N/A
- ------------------------ ---------- ------------- -------------- ------------- ------------- --------------
</TABLE>
From time to time the Non-Money Market Funds also may quote an "average annual
total return at net asset value" or a cumulative "total return at net asset
value." It is based on the difference in NAV at the beginning and the end of the
period for a hypothetical investment in that class of shares (without
considering front-end or contingent deferred sales charges) and takes into
consideration the reinvestment of dividends and capital gains distributions. The
average annual total return and cumulative total return on Class A and Class B
shares of the Funds, at net asset value for the period from the commencement of
operations to October 31, 1998 (life of fund) are shown in the table that
follows.
- ------------------------------------------- ---------------- ------------------
Average Annual Cumulative Total
Total Return Return at Net
at Net Asset Asset
Value Value
- ------------------------------------------- ---------------- ------------------
Balanced Fund: Class A 13.77% 87.93%
- ------------------------------------------- ---------------- ------------------
Balanced Fund: Class B 12.84% 80.50%
- ------------------------------------------- ---------------- ------------------
Convertible Securities Fund 10.41% 184.20%
- ------------------------------------------- ---------------- ------------------
Diversified Stock Fund: Class A 16.48% 296.50%
- ------------------------------------------- ---------------- ------------------
Diversified Stock Fund: Class B 16.16% 286.73%
- ------------------------------------------- ---------------- ------------------
Fund for Income 8.19% 146.93%
- ------------------------------------------- ---------------- ------------------
Government Mortgage Fund 8.19% 94.53%
- ------------------------------------------- ---------------- ------------------
Growth Fund 21.44% 159.53%
- ------------------------------------------- ---------------- ------------------
Intermediate Income Fund 5.75% 31.43%
- ------------------------------------------- ---------------- ------------------
International Growth Fund: Class A 6.16% 65.79%
- ------------------------------------------- ---------------- ------------------
International Growth Fund: Class B 5.75% 60.42%
- ------------------------------------------- ---------------- ------------------
Investment Quality Bond Fund 6.18% 34.06%
- ------------------------------------------- ---------------- ------------------
Lakefront Fund 7.48% 12.75%
- ------------------------------------------- ---------------- ------------------
LifeChoice Conservative Investor Fund 7.50% 14.18%
- ------------------------------------------- ---------------- ------------------
LifeChoice Growth Investor Fund 8.47% 16.08%
- ------------------------------------------- ---------------- ------------------
LifeChoice Moderate Investor Fund 7.73% 14.62%
- ------------------------------------------- ---------------- ------------------
Limited Term Income Fund 6.45% 75.80%
- ------------------------------------------- ---------------- ------------------
80
<PAGE>
- ------------------------------------------- ---------------- ------------------
Average Annual Cumulative Total
Total Return Return at Net
at Net Asset Asset
Value Value
- ------------------------------------------- ---------------- ------------------
National Municipal Bond Fund: Class A 6.46% 34.55%
- ------------------------------------------- ---------------- ------------------
National Municipal Bond Fund: Class B 5.18% 27.02%
- ------------------------------------------- ---------------- ------------------
New York Tax-Free Fund: Class A 6.80% 66.15%
- ------------------------------------------- ---------------- ------------------
New York Tax-Free Fund: Class B 6.30% 60.25%
- ------------------------------------------- ---------------- ------------------
Ohio Municipal Bond Fund: Class A 7.85% 89.52%
- ------------------------------------------- ---------------- ------------------
Ohio Regional Stock Fund: Class A 12.51% 190.02%
- ------------------------------------------- ---------------- ------------------
Ohio Regional Stock Fund: Class B 12.94% 200.03%
- ------------------------------------------- ---------------- ------------------
Real Estate Investment Fund: Class A 1.09% 1.64%
- ------------------------------------------- ---------------- ------------------
Small Company Opportunity Fund: Class A 9.88% 335.89%
- ------------------------------------------- ---------------- ------------------
Special Value Fund: Class A 11.42% 70.08%
- ------------------------------------------- ---------------- ------------------
Special Value Fund: Class B 10.42% 62.68%
- ------------------------------------------- ---------------- ------------------
Stock Index Fund 21.02% 155.19%
- ------------------------------------------- ---------------- ------------------
Value Fund 19.65% 141.26%
- ------------------------------------------- ---------------- ------------------
Other Performance Comparisons.
From time to time a Fund may publish the ranking of its performance or the
performance of its Class A, Class B or Class G shares by Lipper, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Non-Money Market Funds, and ranks the performance of the Funds and their classes
against all other funds in similar categories, for both equity and fixed income
funds. The Lipper performance rankings are based on total return that includes
the reinvestment of capital gains distributions and income dividends but does
not take sales charges or taxes into consideration.
From time to time a Fund may publish the ranking of its performance or
performance of its Class A, Class B or Class G shares by Morningstar, Inc., an
independent mutual fund monitoring service that ranks mutual funds, including
the Non-Money Market Funds, in broad investment categories (domestic equity,
international equity taxable bond, municipal bond or other) monthly, based upon
each fund's three, five, and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted for
fees and sales loads. There are five ranking categories with a corresponding
number of stars: highest (5), above average (4), neutral (3), below average (2),
and lowest (1). Ten percent of the funds, series or classes in an investment
category receive five stars, 22.5% receive four stars, 35% receive three stars,
22.5% receive two stars, and the bottom 10% receive one star.
The total return on an investment made in a Fund or in Class A, Class B or Class
G shares of a Fund may be compared with the performance for the same period of
one or more of the following indices: the Consumer Price Index, the Salomon
Smith Barney World Government Bond Index, the S&P 500 Index, the Russell 2000
Index, the Lehman Brothers Government/Corporate Bond Index, the Lehman Brothers
Aggregate Bond Index, the Lehman Brothers Mortgage-Backed Securities Index, the
Lehman GNMA Index, the J.P. Morgan Government Bond Index and the Morgan Stanley
All Country World Index Free ex US. Other indices may be used from time to time.
The Consumer Price Index generally is considered to be a measure of inflation.
The Salomon Smith Barney World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The Russell 2000 Index is a broad-based unmanaged index that
represents the general performance of domestically traded common stock of small-
to mid-sized companies. The Lehman Brothers Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Brothers
Mortgage-Backed Securities Index is a broad-based unmanaged index that
represents the general performance of fixed-rate mortgage bonds. The Lehman
Brothers Aggregate Bond Index measures the performance of U.S. corporate bond
issues, U.S. government securities and mortgage-backed securities. The J.P.
Morgan Government Bond Index generally represents the performance of government
bonds issued by various countries including the United States. The Morgan
Stanley All Country World Index is a widely recognized, unmanaged index of
common
81
<PAGE>
stock prices with country weightings of international companies. The foregoing
indices are unmanaged indices of securities that do not reflect reinvestment of
capital gains or take investment costs into consideration, as these items are
not applicable to indices.
From time to time, the yields and the total returns of the Funds or Class A,
Class B or Class G shares of a Non-Money Market Fund may be quoted in and
compared to other mutual funds with similar investment objectives in
advertisements, shareholder reports or other communications to shareholders. A
Fund also may include calculations in such communications that describe
hypothetical investment results. (Such performance examples are based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund's
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of a Fund investment would increase
more quickly than if dividends or other distributions had been paid in cash.
A Fund also may include discussions or illustrations of the potential investment
goals of a prospective investor (including but not limited to tax and/or
retirement planning), investment management techniques, policies or investment
suitability of a Fund, economic conditions, legislative developments (including
pending legislation), the effects of inflation and historical performance of
various asset classes, including but not limited to stocks, bonds and Treasury
bills.
From time to time advertisements or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund, as well as the views of the investment adviser
as to current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Fund.) A Fund may also include in
advertisements, charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to stock, bonds, and Treasury bills, as compared to an investment in
shares of a Fund, as well as charts or graphs which illustrate strategies such
as dollar cost averaging, and comparisons of hypothetical yields of investment
in tax-exempt versus taxable investments. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in a Fund. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, a Fund may reprint articles (or excerpts) written regarding a
Fund and provide them to prospective shareholders. Performance information with
respect to the Funds is generally available by calling the Funds at
800-539-FUND.
Investors also may judge, and a Fund may at times advertise, the performance of
a Fund or of Class A, Class B or Class G shares of a Fund by comparing it to the
performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies, which performance may be contained in
various unmanaged mutual fund or market indices or rankings such as those
prepared by Dow Jones & Co., Inc., S&P, Lehman Brothers, Merrill Lynch, and
Salomon Smith Barney, and in publications issued by Lipper and in the following
publications: IBC's Money Fund Reports, Value Line Mutual Fund Survey,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, Ibbotson Associates, and U.S.A. Today. In addition to
yield information, general information about a Fund that appears in a
publication such as those mentioned above may also be quoted or reproduced in
advertisements or in reports to shareholders.
Advertisements and sales literature may include discussions of specifics of a
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis. Advertisements may also
include descriptive information about the investment adviser, including, but not
limited to, its status within the industry, other services and products it makes
available, total assets under management, and its investment philosophy.
When comparing yield, total return, and investment risk of an investment in
shares of a Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an investment
in
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<PAGE>
shares of a Fund. For example, certificates of deposit may have fixed rates of
return and may be insured as to principal and interest by the FDIC, while a
Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the U.S.
Government. Money market mutual funds may seek to maintain a fixed price per
share.
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION
The NYSE holiday closing schedule indicated in this SAI under "Valuation of
Portfolio Securities for the Money Market Funds" is subject to change.
When the NYSE or the Federal Reserve Board of Cleveland is closed, or when
trading is restricted for any reason other than its customary weekend or holiday
closings, or under emergency circumstances as determined by the SEC to warrant
such action, the Funds may not be able to accept purchase or redemption
requests. A Fund's net asset value may be affected to the extent that its
securities are traded on days that are not Business Days.
The Trust has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem
shares of the Balanced Fund, Convertible Securities Fund, Diversified Stock
Fund, Federal Money Market Fund, Fund for Income, Government Mortgage Fund,
Growth Fund, Intermediate Income Fund, International Growth Fund, Investment
Quality Bond Fund, Lakefront Fund, the LifeChoice Funds, Limited Term Income
Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond
Fund, Ohio Regional Stock Fund, Small Company Opportunity Fund, Real Estate
Investment Fund, Special Value Fund, Stock Index Fund and Value Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The remaining portion of the
redemption may be made in securities or other property, valued for this purpose
as they are valued in computing the net asset value of each class of the Fund.
Shareholders receiving securities or other property on redemption may realize a
gain or loss for tax purposes and may incur additional costs as well as the
associated inconveniences of holding and/or disposing of such securities or
other property.
Pursuant to Rule 11a-3 under the 1940 Act, the Funds are required to give
shareholders at least 60 days' notice prior to terminating or modifying a Fund's
exchange privilege. The 60-day notification requirement may, however, be waived
if (1) the only effect of a modification would be to reduce or eliminate an
administrative fee, redemption fee, or deferred sales charge ordinarily payable
at the time of exchange or (2) a Fund temporarily suspends the offering of
shares as permitted under the 1940 Act or by the SEC or because it is unable to
invest amounts effectively in accordance with its investment objective and
policies.
The Funds reserve the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in the Adviser's judgment,
a Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise be adversely affected.
Purchasing Shares.
Alternative Sales Arrangements - Class A and Class G Shares. The alternative
sales arrangements permit an investor to choose the method of purchasing shares
that is more beneficial depending on the amount of the purchase, the length of
time the investor expects to hold shares and other relevant circumstances. When
comparing Class A and Class G shares, investors should understand that the
purpose and function of the asset-based sales charge with respect to Class G
shares are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Fund shares may receive different compensation with respect to one class
of shares in comparison to another class of shares on behalf of a single
investor (not including dealer "street name" or omnibus accounts). Over time,
generally it will be more advantageous for that investor to purchase Class A
shares of a Fund. However, some of the Funds also offer Class G shares, which
are described in "Class G Shares -- The Gradison Fund Reorganization" below.
Investors also should evaluate the benefits of investing in Class G shares.
Each class of shares represents interests in the same portfolio investments of a
Fund. However, each class has different shareholder privileges and features. The
net income attributable to a particular class and the dividends
83
<PAGE>
payable on these shares will be reduced by incremental expenses borne solely by
that class, including any asset-based sales charge to which these shares may be
subject.
Effective December 15, 1999, the Trust discontinued offering Class B shares of
the Funds. Holders of Class B shares may continue to reinvest their dividends in
additional Class B shares of their Funds. Each of the Funds that offered Class B
shares prior to December 15, 1999 expects to convert its outstanding Class B
shares to Class A shares in the future.
Class B Conversion Feature. Ninety-six months (eight years) after an investor's
purchase order for Class B shares is accepted, such "Matured Class B Shares"
automatically will convert to Class A shares, on the basis of the relative net
asset value of the two classes, without the imposition of any sales load or
other charge. Each time any Matured Class B shares convert to Class A shares,
any Class B shares acquired by the reinvestment of dividends or distributions on
such Matured Class B shares that are still held will also convert to Class A
shares, on the same basis. The conversion feature is intended to relieve holders
of Matured Class B shares of the asset-based sales charge under the Class B
Distribution Plan after such shares have been outstanding long enough that the
Distributor may have been compensated for distribution expenses related to such
shares.
The conversion of Matured Class B shares to Class A shares is subject to the
continuing availability of a private letter ruling from the Internal Revenue
Service, or an opinion of counsel or tax adviser, to the effect that the
conversion of Matured Class B shares does not constitute a taxable event for the
holder under Federal income tax law. If such a revenue ruling or opinion is no
longer available, the automatic conversion feature may be suspended, in which
event no further conversion of Matured Class B shares would occur while such
suspension remained in effect. Although Matured Class B shares could then be
exchanged for Class A shares on the basis of relative net asset value of the two
classes, without the imposition of a sales charge or fee, such exchange could
constitute a taxable event for the holder, and absent such exchange, Class B
shares might continue to be subject to the asset-based sales charge for longer
than six years.
The methodology for calculating the net asset value, dividends and distributions
of the Fund's Class A, Class B and Class G shares recognizes two types of
expenses. General expenses that do not pertain specifically to a Class are
allocated to the shares of each Class, based upon the percentage that the net
assets of such Class bears to a Fund's total net assets, and then pro rata to
each outstanding share within a given class. Such general expenses include (1)
management fees, (2) legal, bookkeeping and audit fees, (3) printing and mailing
costs of shareholder reports, prospectuses, statements of additional information
and other materials for current shareholders, (4) fees to the Trustees who are
not affiliated with the Adviser, (5) custodian expenses, (6) share issuance
costs, (7) organization and start-up costs, (8) interest, taxes and brokerage
commissions, and (9) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a Class are allocated equally to each
outstanding share within that class. Such expenses include (1) Rule 12b-1
distribution fees and shareholder servicing fees, (2) incremental transfer and
shareholder servicing agent fees and expenses, (3) registration fees, and (4)
shareholder meeting expenses, to the extent that such expenses pertain to a
specific class rather than to a Fund as a whole.
Class G Shares -- The Gradison Fund Reorganization. In 1998, KeyCorp, the parent
of Key Asset Management Inc. ("KAM" or the "Adviser"), completed the acquisition
of McDonald & Company Investments, Inc., the corporate parent of McDonald &
Company Securities Inc., a major regional broker-dealer. In October 1998,
McDonald & Company Securities Inc. changed its name to McDonald Investments Inc.
("McDonald"). It is anticipated that KAM will acquire certain investment
advisory operations of McDonald. To achieve economies of scale, the Trust's
Board of Trustees, on December 11, 1998, approved Agreements and Plans of
Reorganization by which the Trust, on behalf of certain of its series, acquired
the portfolio securities of seven funds previously managed by the McDonald in a
tax-free exchange for Class G shares of these series (the "Gradison Fund
Reorganization"). This exchange was subject to various conditions, such as
approval by the shareholders of the Gradison Funds. The Gradison Fund
Reorganization took place on March 26, 1999.
As outlined in the table under "Performance -- Class G Shares" in this SAI, each
of five of the seven Gradison funds transferred all of its assets to its
corresponding Victory Fund in exchange for newly established Class G shares of
such corresponding Fund and the assumption of its liabilities by such
corresponding Fund, followed by the constructive distribution pro rata to its
shareholders of the corresponding Fund's Class G shares received in the
reorganization. The two remaining Gradison Funds, Gradison U.S. Government
Reserves and Gradison Established
84
<PAGE>
Value Fund, participated in a separate reorganization which is described in a
separate statement of additional information.
In addition, the Stock Index Fund began offering Class G Shares on June 30, 1999
and the Intermediate Income Fund, Investment Quality Bond Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Value Fund, Growth Fund, Special
Value Fund, Balanced Fund, Convertible Securities Fund and Real Estate
Investment Fund began offering Class G Shares on December 15, 1999.
No sales charge is imposed on the purchase of Class G shares. McDonald
Investments Inc. compensates its own employees, and may compensate its
affiliates, for Class G share sales, some of which compensation may be recouped
in the event of share redemptions made during the first nine months after sale.
See "How to Sell Shares" in the Prospectuses.
In addition, Class G Shares of the Fund for Income, Intermediate Income Fund,
Investment Quality Bond Fund, National Municipal Bond Fund, New York Tax-Free
Fund and the Ohio Municipal Bond Fund are subject to an annual Rule 12b-1 fee of
up to 0.25% of average daily net assets and Class G Shares of the Value Fund,
Diversified Stock Fund, Growth Fund, Special Value Fund, International Growth
Fund and Small Company Opportunity Fund are subject to an Rule 12b-1 fee of up
to 0.50% of average daily net assets. There is no conversion feature applicable
to Class G shares. Distributions paid to holders of a Fund's Class G shares may
be reinvested in additional Class G shares of that Fund or Class G shares of a
different Fund.
Dealer Reallowances. The following table shows the amount of the front end sales
load that is reallowed to dealers as a percentage of the offering price of Class
A Shares of the Balanced Fund, Convertible Securities Fund, Diversified Stock
Fund, Government Mortgage Fund, Growth Fund, Intermediate Income Fund,
Investment Quality Bond Fund, International Growth Fund, Lakefront Fund,
National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund,
Ohio Regional Stock Fund, Real Estate Investment Fund, Small Company Opportunity
Fund, Special Value Fund, Stock Index Fund and Value Fund.
Initial Sales Charge: Concession to Dealers:
Amount of Purchase % of Offering Price % of Offering Price
------------------ ------------------- -------------------
Up to $49,999 5.75% 5.00%
$50,000 to $99,999 4.50% 4.00%
$100,000 to $249,999 3.50% 3.00%
$250,000 to $499,999 2.50% 2.00%
$500,000 to $999,999 2.00% 1.75%
$1,000,000 and above 0.00% *
The following table shows the amount of the front end sales load that is
reallowed to dealers as a percentage of the offering price of the Class A Shares
of the Fund for Income and Limited Term Income Fund
Initial Sales Charge: Concession to Dealers:
Amount of Purchase % of Offering Price % of Offering Price
------------------ ------------------- -------------------
Up to $49,999 2.00% 1.50%
$50,000 to $99,999 1.75% 1.25%
$100,000 to $249,999 1.50% 1.00%
$250,000 to $499,999 1.25% 0.75%
$500,000 to $999,999 1.00% 0.50%
$1,000,000 and above 0.00% *
85
<PAGE>
* Except as indicated below, there is no initial sales charge on purchases
of $1 million or more. However, a CDSC of 1.00% will be charged if shares
are redeemed in the first year after purchase, or 0.50% on shares sold
within two years of purchase, based on the lower of the cost of the shares
or net asset value at the time of redemption. No CDSC is imposed on
reinvested distributions. Investment professionals may be paid at a rate
of up to 1.00% of the purchase price. The initial sales charge exemption
on investments of $1 million or more does not apply to tax-deferred
retirement accounts (except IRA accounts); the sales charge on investments
by such tax-deferred retirement accounts of $1 million or more is the same
as for investments between $500,000 and $999,999.
The following Funds do not impose sales charges on their shares: the Federal
Money Market Fund, Financial Reserves Fund, Institutional Money Market Fund,
Ohio Municipal Money Market Fund, Prime Obligations Fund, Tax-Free Money
Market Fund and U.S. Government Obligations Fund.
The Trust's distributor reserves the right to pay the entire commission to
dealers. If that occurs, the dealer may be considered an "underwriter" under
federal securities laws.
Reduced Sales Charge. Reduced sales charges are available for purchases of
$50,000 or more of Class A shares of a Fund alone or in combination with
purchases of other Class A shares of the Trust. To obtain the reduction of the
sales charge, you or your Investment Professional must notify the Transfer Agent
at the time of purchase whenever a quantity discount is applicable to your
purchase.
In addition to investing at one time in any combination of Class A shares of the
Trust's in an amount entitling you to a reduced sales charge, you may qualify
for a reduction in the sales charge under the following programs:
Combined Purchases. When you invest in Class A shares of the Trust for several
accounts at the same time, you may combine these investments into a single
transaction if purchased through one Investment Professional, and if the total
is $50,000 or more. The following may qualify for this privilege: an individual,
or "company" as defined in Section 2(a)(8) of the 1940 Act; an individual,
spouse, and their children under age 21 purchasing for his, her, or their own
account; a trustee, administrator or other fiduciary purchasing for a single
trust estate or single fiduciary account or for a single or a parent-subsidiary
group of "employee benefit plans" (as defined in Section 3(3) of ERISA); and
tax-exempt organizations under Section 501(c)(3) of the Code.
Rights of Accumulation. "Rights of Accumulation" permit reduced sales charges on
future purchases of Class A shares after you have reached a new breakpoint. You
can add the value of existing Trust's Class A shares held by you, your spouse,
and your children under age 21, determined at the previous day's net asset value
at the close of business, to the amount of your new purchase valued at the
current offering price to determine your reduced sales charge.
Letter of Intent. If you anticipate purchasing $50,000 or more of shares of a
Fund alone or in combination with Class A shares of certain other Funds within a
13-month period, you may obtain shares of the portfolios at the same reduced
sales charge as though the total quantity were invested in one lump sum, by
filing a non-binding Letter of Intent (the "Letter") within 90 days of the start
of the purchases. Each investment you make after signing the Letter will be
entitled to the sales charge applicable to the total investment indicated in the
Letter. For example, a $2,500 purchase toward a $60,000 Letter would receive the
same reduced sales charge as if the $60,000 had been invested at one time. To
ensure that the reduced price will be received on future purchases, you or your
Investment Professional must inform the Transfer Agent that the Letter is in
effect each time shares are purchased. Neither income dividends nor capital gain
distributions taken in additional shares will apply toward the completion of the
Letter.
You are not obligated to complete the additional purchases contemplated by a
Letter. If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
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<PAGE>
If you purchase more than the amount specified in the Letter and qualify for a
further sales charge reduction, the sales charge will be adjusted to reflect
your total purchase at the end of 13 months. Surplus funds will be applied to
the purchase of additional shares at the then current offering price applicable
to the total purchase.
Exchanging Shares.
Shares of any Victory Money Market Fund may be exchanged for Class A shares of
any of the Funds and may be subject to payment of a sales charge.
Shares of a Fund may be exchanged for the same class of shares of any other Fund
of the Trust. For example, an investor can exchange Class A shares of a Fund
only for Class A shares of another Fund. At present, not all Funds of the Trust
offer multiple classes of shares. Shareholders owning shares of more than one
class of shares must specify the class that they intend to exchange. If you do
not make a selection, your exchange will be made in Class A shares.
Class G shares of any Fund may be exchanged for Class G shares, Select shares,
or any single class money market shares of a Fund offered by the Trust.
Shareholders who owned Class G shares on the closing date of the Gradison Fund
reorganization, can exchange into Class A shares of any Fund that does not offer
Class G Shares without paying a sales charge.
An exchange of a Fund's shares for shares of another Fund will be treated as a
sale for federal income tax purposes. A shareholder must recognize any gain or
loss in connection with any such exchange.
Redeeming Shares.
Reinstatement Privilege. Within 90 days of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of Class A shares in Class A
shares of a Fund or any of the other Funds into which shares of the Fund are
exchangeable as described above, at the net asset value next computed after
receipt by the Transfer Agent of the reinvestment order. No service charge is
currently made for reinvestment in shares of the Funds. The shareholder must ask
the Distributor for such privilege at the time of reinvestment. Any capital gain
that was realized when the shares were redeemed is taxable, and reinvestment
will not alter any capital gains tax payable on that gain. If there has been a
capital loss on the redemption, some or all of the loss may not be tax
deductible, depending on the timing and amount of the reinvestment. Under the
Code, if the redemption proceeds of Fund shares on which a sales charge was paid
are reinvested in shares of the same Fund or another Fund offered by the Trust
within 90 days of payment of the sales charge, the shareholder's basis in the
shares of the Fund that were redeemed may not include the amount of the sales
charge paid. That would reduce the loss or increase the gain recognized from
redemption. The Funds may amend, suspend, or cease offering this reinvestment
privilege at any time as to shares redeemed after the date of such amendment,
suspension, or cessation. The reinstatement must be into an account bearing the
same registration.
DIVIDENDS AND DISTRIBUTIONS
The Funds distribute substantially all of their net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent required for the Funds to qualify for favorable
federal tax treatment. The Funds ordinarily declare and pay dividends separately
for each class of shares, from their net investment income as follows. Each Fund
declares and pays capital gains annually.
<TABLE>
<CAPTION>
- ------------------- --------------------------------------------------------------------------
<S> <C>
Income Dividends Balanced Fund, Fund for Income, Government Mortgage Fund, Intermediate
Declared and Paid Income Fund, Investment Quality Bond Fund, Limited Term Income Fund,
Monthly National Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal
Bond Fund
- ------------------- --------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ------------------- --------------------------------------------------------------------------
<S> <C>
Income Dividends Convertible Securities Fund, Diversified Stock Fund, Growth Fund,
Declared and Paid International Growth Fund, Lakefront Fund, the LifeChoice Funds, Ohio
Quarterly Regional Stock Fund, Real Estate Investment Fund, Small Company
Opportunity Fund, Special Value Fund, Stock Index Fund, Value Fund
- ------------------- --------------------------------------------------------------------------
Declared Daily Money Market Funds
and Paid Monthly
- ------------------- --------------------------------------------------------------------------
</TABLE>
The amount of a class's distributions may vary from time to time depending on
market conditions, the composition of a Fund's portfolio, and expenses borne by
a Fund or borne separately by a class. Dividends are calculated in the same
manner, at the same time and on the same day for shares of each class. However,
dividends attributable to a particular class will differ in amount as a
consequence of any differences in net asset value among the classes due to
differences in distribution expenses and other class-specific expenses.
For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount earned, including both original issue and
market discount, on discount paper accrued ratably to the date of maturity.
Expenses, including the compensation payable to the Adviser, are accrued each
day. The expenses and liabilities of a Fund shall include those appropriately
allocable to the Fund as well as a share of the general expenses and liabilities
of the Trust in proportion to the Fund's share of the total net assets of the
Trust.
TAXES
Information set forth in the Prospectuses and this SAI that relates to federal
taxation is only a summary of certain key federal tax considerations generally
affecting purchasers of shares of the Funds. The following is only a summary of
certain additional tax considerations generally affecting each Fund and its
shareholders that are not described in the Prospectuses. No attempt has been
made to present a complete explanation of the federal tax treatment of the Funds
or the implications to shareholders, and the discussions here and in each Fund's
prospectus are not intended as substitutes for careful tax planning.
Accordingly, potential purchasers of shares of the Funds are urged to consult
their tax advisers with specific reference to their own tax circumstances.
Special tax considerations may apply to certain types of investors subject to
special treatment under the Code (including, for example, insurance companies,
banks and tax-exempt organizations). In addition, the tax discussion in the
Prospectuses and this SAI is based on tax law in effect on the date of the
Prospectuses and this SAI; such laws and regulations may be changed by
legislative, judicial, or administrative action, sometimes with retroactive
effect.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a Fund is not
subject to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends, and other taxable ordinary income, net of expenses)
and capital gain net income (i.e., the excess of capital gains over capital
losses) that it distributes to shareholders, provided that it distributes at
least 90% of its investment company taxable income (i.e., net investment income
and the excess of net short-term capital gain over net long-term capital loss)
and at least 90% of its tax-exempt income (net of expenses allocable thereto)
for the taxable year (the "Distribution Requirement"), and satisfies certain
other requirements of the Code that are described below. Distributions by a Fund
made during the taxable year or, under specified circumstances, within twelve
months after the close of the taxable year, will be considered distributions of
income and gains for the taxable year and will therefore count toward
satisfaction of the Distribution Requirement.
If a Fund has a net capital loss (i.e., an excess of capital losses over capital
gains) for any year, the amount thereof may be carried forward up to eight years
and treated as a short-term capital loss which can be used of offset capital
gains in such future years. As of October 31, 1998, the Financial Reserves Fund
had capital loss carryforwards of approximately $5,000 which expire in 2001; the
Tax-Free Money Market Fund had capital loss carryforwards of
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<PAGE>
approximately $4,000 which expire in 2006; Limited Term Income Fund had capital
loss carryforwards of approximately $1,335,000, $553,000 and $906,000 which
expire in 2002, 2003, and 2004, respectively; the Fund for Income had capital
loss carryforwards of approximately $585,000, $588,000, and $328,000 which
expire in 2001, 2002, and 2003, respectively; Government Mortgage Fund had
capital loss carryforwards of approximately $698,000 and $109,000 which expire
in 2002 and 2005, respectively; the Investment Quality Bond Fund had capital
loss carryforwards of approximately $3,961,000 which expire in 2002; the Real
Estate Investment Fund had capital loss carryforwards of approximately $497,000
which expire in 2006; and the Small Company Opportunity Fund had capital loss
carryforwards of approximately $9,811,000 which expire in 2006. The Investment
Quality Bond Fund has additional capital loss carryforwards as the successor to
the Government Bond Fund; however, as explained below, such carryforwards are
subject to limitations on availability. Under Code Sections 382 and 383, if a
Fund has an "ownership change," then the Fund's use of its capital loss
carryforwards in any year following the ownership change will be limited to an
amount equal to the net asset value of the Fund immediately prior to the
ownership change multiplied by the long-term tax-exempt rate (which is published
monthly by the Internal Revenue Service (the "IRS")) in effect for the month in
which the ownership change occurs (the rate for December, 1999 is 5.72%). The
Funds will use their best efforts to avoid having an ownership change. However,
because of circumstances which may be beyond the control or knowledge of a Fund,
there can be no assurance that a Fund will not have, or has not already had, an
ownership change. If a Fund has or has had an ownership change, then the Fund
will be subject to federal income taxes on any capital gain net income for any
year following the ownership change in excess of the annual limitation on the
capital loss carryforwards unless distributed by the Fund. Any distributions of
such capital gain net income will be taxable to shareholders as described under
"Distributions" below.
Pursuant to a planned reorganization (described in this SAI at "Additional
Purchase, Exchange, and Redemption Information: Class G Shares -- The Gradison
Fund Reorganization"), but only upon the consummation of the reorganization and
its qualification, as demonstrated by the written opinion of counsel, as a
tax-free exchange, certain of the Funds will acquire additional capital loss
carryforwards by virtue of acquiring a Gradison Fund in the reorganization. Such
capital loss carryforwards may be subject to the limitations of Sections 382 and
383 described above. As of June 30, 1998, the Gradison Ohio Tax Free Income Fund
had capital loss carryforwards of approximately $527, which expire in 2003; as
of March 31, 1998, the Gradison International Fund had capital loss
carryforwards of approximately $368,000, which expire in 2006; and as of
December 31, 1997, the Gradison Government Income Fund had capital loss
carryforwards of approximately $5,349,618 and $536,544, which expire in 2003 and
2004, respectively. The capital loss carryforwards of each of these funds will
be taken into account by the Victory fund which acquires such fund's assets in
the reorganizations. Specifically, the aforementioned funds' capital loss
carryforwards will be taken into account by the Victory Ohio Municipal Bond
Fund, the Victory International Growth Fund and the Victory Fund For Income,
respectively.
In addition to satisfying the Distribution Requirement, a regulated investment
company must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies (the "Income Requirement").
In general, gain or loss recognized by a Fund on the disposition of an asset
will be a capital gain or loss. In addition, gain will be recognized as a result
of certain constructive sales, including short sales "against the box." However,
gain recognized on the disposition of a debt obligation (including municipal
obligations) purchased by a Fund at a market discount (generally, at a price
less than its principal amount) will be treated as ordinary income to the extent
of the portion of the market discount which accrued while the Fund held the debt
obligation. In addition, under the rules of Code Section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto, and gain or loss recognized on the
disposition of a foreign currency forward contract, futures contract, option or
similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section 1256
(unless a Fund elects otherwise), generally will be treated as ordinary income
or loss to the extent attributable to changes in foreign currency exchange
rates.
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Further, the Code also treats as ordinary income a portion of the capital gain
attributable to a transaction where substantially all of the expected return is
attributable to the time value of a Fund's net investment in the transaction
and: (1) the transaction consists of the acquisition of property by the Fund and
a contemporaneous contract to sell substantially identical property in the
future; (2) the transaction is a straddle within the meaning of Section 1092 of
the Code; (3) the transaction is one that was marketed or sold to the Fund on
the basis that it would have the economic characteristics of a loan but the
interest-like return would be taxed as capital gain; or (4) the transaction is
described as a conversion transaction in the Treasury Regulations. The amount of
such gain that is treated as ordinary income generally will not exceed the
amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the applicable federal rate, reduced
by the sum of: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capitalized interest on acquisition indebtedness under
Code Section 263(g), among other amounts. However, if a Fund has a built-in loss
with respect to a position that becomes a part of a conversion transaction, the
character of such loss will be preserved upon a subsequent disposition or
termination of the position. No authority exists that indicates that the
character of the income treated as ordinary under this rule will not pass
through to the Funds' shareholders.
In general, for purposes of determining whether capital gain or loss recognized
by a Fund on the disposition of an asset is long-term or short-term, the holding
period of the asset may be affected (as applicable, depending on the type of the
Fund involved) if (1) the asset is used to close a "short sale" (which includes
for certain purposes the acquisition of a put option) or is substantially
identical to another asset so used, (2) the asset is otherwise held by the Fund
as part of a "straddle" (which term generally excludes a situation where the
asset is stock and Fund grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto), or (3) the
asset is stock and the Fund grants an in-the-money qualified covered call option
with respect thereto. In addition, a Fund may be required to defer the
recognition of a loss on the disposition of an asset held as part of a straddle
to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or loss recognized by
a Fund from a closing transaction with respect to, an option written by the Fund
will be treated as a short-term capital gain or loss.
Certain transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
Contracts." Section 1256 Contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such Section 1256 Contracts have not
terminated (by delivery, exercise, entering into a closing transaction, or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 Contracts is taken into account for
the taxable year together with any other gain or loss that was recognized
previously upon the termination of Section 1256 Contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
Contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such Section 1256 Contracts) generally is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. A Fund,
however, may elect not to have this special tax treatment apply to Section 1256
Contracts that are part of a "mixed straddle" with other investments of the Fund
that are not Section 1256 Contracts.
A Fund may enter into notional principal contracts, including interest rate
swaps, caps, floors, and collars. Treasury Regulations provide, in general, that
the net income or net deduction from a notional principal contract for a taxable
year is included in or deducted from gross income for that taxable year. The net
income or deduction from a notional principal contract for a taxable year equals
the total of all of the periodic payments (generally, payments that are payable
or receivable at fixed periodic intervals of one year or less during the entire
term of the contract) that are recognized from that contract for the taxable
year and all of the non-periodic payments (including premiums for caps, floors,
and collars) that are recognized from that contract for the taxable year. No
portion of a payment by a party to a notional principal contract is recognized
prior to the first year to which any portion of a payment by the counterparty
relates. A periodic payment is recognized ratably over the period to which it
relates. In general, a non-periodic payment must be recognized over the term of
the notional principal contract in a manner that reflects the economic substance
of the contract. A non-periodic payment that relates to an interest rate swap,
cap, floor, or collar is recognized over the term of the contract by allocating
it in accordance with the values of a series of cash-settled forward or option
contracts that reflect the specified index and notional principal amount upon
which the notional principal contract is based (or under an alternative method
provided in Treasury Regulations).
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<PAGE>
A Fund may purchase securities of certain foreign investment funds or trusts
which constitute passive foreign investment companies ("PFICs") for federal
income tax purposes. If a Fund invests in a PFIC, it has three separate options.
First, it may elect to treat the PFIC as a qualified electing fund (a "QEF"), in
which event the Fund will each year have ordinary income equal to its pro rata
share of the PFIC's ordinary earnings for the year and long-term capital gain
equal to its pro rata share of the PFIC's net capital gain for the year,
regardless of whether the Fund receives distributions of any such ordinary
earnings or capital gains from the PFIC. Second, a Fund that invests in stock of
a PFIC may make a mark-to-market election with respect to such stock. Pursuant
to such election, the Fund will include as ordinary income any excess of the
fair market value of such stock at the close of any taxable year over the Fund's
adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock
exceeds the fair market value of the stock at the end of a given taxable year,
such excess will be deductible as ordinary loss in an amount equal to the lesser
of the amount of such excess or the net mark-to-market gains on the stock that
the Fund included in income in previous years. The Fund's holding period with
respect to its PFIC stock subject to the election will commence on the first day
of the first taxable year beginning after the last taxable year in which the
mark-to-market election applied. If the Fund makes the mark-to-market election
in the first taxable year it holds PFIC stock, it will not incur the tax
described below under the third option.
Finally, if a Fund does not elect to treat the PFIC as a QEF and does not make a
mark-to-market election, then, in general, (1) any gain recognized by the Fund
upon the sale or other disposition of its interest in the PFIC or any excess
distribution received by the Fund from the PFIC will be allocated ratably over
the Fund's holding period of its interest in the PFIC stock, (2) the portion of
such gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Fund's gross income for such year as ordinary income (and the distribution of
such portion by the Fund to shareholders will be taxable as an ordinary income
dividend, but such portion will not be subject to tax at the Fund level), (3)
the Fund shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year, plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received, at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Fund to its shareholders of the portions of such gain or excess distribution
so allocated to prior years (net of the tax payable by the Fund thereon) will be
taxable to the shareholders as an ordinary income dividend.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss (including, to the
extent provided in Treasury Regulations, losses recognized pursuant to the PFIC
mark-to-market election) incurred after October 31 as if it had been incurred in
the succeeding year.
In addition to satisfying the requirements described above, a Fund must satisfy
an asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a Fund's taxable year,
at least 50% of the value of the Fund's assets must consist of cash and cash
items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (provided that, with respect to each
issuer, the Fund has not invested more than 5% of the value of the Fund's total
assets in securities of each such issuer and the Fund does not hold more than
10% of the outstanding voting securities of each such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option. For purposes
of asset diversification testing, obligations issued or guaranteed by certain
agencies or instrumentalities of the U.S. Government, such as the Federal
Agricultural Mortgage Corporation, the Farm Credit System Financial Assistance
Corporation, a Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, the Government National
Mortgage Association, and the Student Loan Marketing Association, are treated as
U.S. Government securities.
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If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to 98% of its ordinary
taxable income for the calendar year and 98% of its capital gain net income for
the one-year period ended on October 31 of such calendar year (or, with respect
to capital gain net income, at the election of a regulated investment company
having a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). (Tax-exempt interest on municipal obligations is not
subject to the excise tax.) The balance of such income must be distributed
during the next calendar year. For the foregoing purposes, a regulated
investment company is treated as having distributed any amount on which it is
subject to income tax for any taxable year ending in such calendar year.
For purposes of calculating the excise tax, a regulated investment company: (1)
reduces its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year and (2) excludes foreign
currency gains and losses and ordinary gains or losses arising as a result of a
PFIC mark-to-market election (or upon the actual disposition of the PFIC stock
subject to such election) incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, includes such gains and losses in determining the company's ordinary
taxable income for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that a Fund may in certain circumstances be required to liquidate portfolio
investments to make sufficient distributions to avoid excise tax liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes. Distributions attributable to dividends received by a Fund from
domestic corporations will qualify for the 70% dividends-received deduction
("DRD") for corporate shareholders only to the extent discussed below.
Distributions attributable to interest received by a Fund will not, and
distributions attributable to dividends paid by a foreign corporation generally
should not, qualify for the DRD. In general, dividends paid on the various
Funds' share classes are calculated at the same time and in the same manner. In
general, dividends may differ among classes as a result of differences in
distribution expenses and other class specific expenses.
Ordinary income dividends paid by a Fund with respect to a taxable year may
qualify for the 70% DRD generally available to corporations (other than
corporations such as S corporations, which are not eligible for the deduction
because of their special characteristics, and other than for purposes of special
taxes such as the accumulated earnings tax and the personal holding company tax)
to the extent of the amount of dividends received by the Fund from domestic
corporations for the taxable year. No DRD will be allowed with respect to any
dividend (1) if it has been received with respect to any share of stock that the
Fund has held for less than 46 days (91 days in the case of certain preferred
stock) during the 90-day period (180-day period in the case of certain preferred
stock) beginning on the date which is 45 days (90 days in the case of certain
preferred stock) before the date on which such share becomes ex-dividend with
respect to such dividend, excluding for this purpose under the rules of Code
Section 246(c) any period during which the Fund has an option to sell, is under
a contractual obligation to sell, has made and not closed a short sale of, is
the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or
has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that the
Fund is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent the stock on which the dividend is paid is
treated as debt-financed under the rules of Code Section 246A. Moreover, the DRD
for a corporate
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shareholder may be disallowed or reduced (1) if the corporate shareholder fails
to satisfy the foregoing requirements with respect to its shares of the Fund or
(2) by application of Code Section 246(b), which in general limits the DRD to
70% of the shareholder's taxable income (determined without regard to the DRD
and certain other items). With respect to the International Growth Fund, only an
insignificant portion of the Fund will be invested in stock of domestic
corporations; therefore the ordinary dividends distributed by that Fund will not
qualify for the DRD for corporate shareholders.
A Fund may either retain or distribute to shareholders its net capital gain for
each taxable year. Each Fund currently intends to distribute any such amounts.
If net capital gain is distributed and designated as a capital gain dividend, it
will be taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his shares or whether such gain was
recognized by the Fund prior to the date on which the shareholder acquired his
shares. The Code provides, however, that under certain conditions only 50% of
the capital gain recognized upon a Fund's disposition of domestic qualified
"small business" stock will be subject to tax.
Conversely, if a Fund elects to retain its net capital gain, the Fund will be
subject to tax thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Each of the New York Tax-Free Fund, National Municipal Bond Fund, Ohio Municipal
Bond Fund, Ohio Municipal Money Market Fund, and Tax-Free Money Market Fund (the
"Tax Exempt Funds") intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Tax-Exempt
Fund's taxable year at least 50% of its total assets consists of tax-exempt
municipal obligations. Distributions from a Tax-Exempt Fund will constitute
exempt-interest dividends to the extent of such Fund's tax-exempt interest
income (net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of a Tax-Exempt Fund are excluded from gross income
for federal income tax purposes. However, shareholders required to file a
federal income tax return will be required to report the receipt of exempt
interest dividends on their returns. Moreover, while exempt-interest dividends
are excluded from gross income for federal income tax purposes, they may be
subject to alternative minimum tax ("AMT") in certain circumstances and may have
other collateral tax consequences as discussed below. Distributions by a
Tax-Exempt Fund of any investment company taxable income or of any net capital
gain will be taxable to shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds, the regular
income tax and is computed at a maximum marginal rate of 28% for non-corporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 will generally constitute an item of tax
preference includable in AMTI for both corporate and non-corporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI. For purposes of the corporate AMT, the corporate
dividends- received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders will generally be required
to take the full amount of any dividend received from a Fund into account
(without a dividends-received deduction) in determining their adjusted current
earnings.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be included
in an individual shareholder's gross income and subject to federal income tax.
Further, a shareholder of a Tax-Exempt Fund is denied a deduction for interest
on indebtedness incurred or continued to purchase or carry shares of a
Tax-Exempt Fund. Moreover, a shareholder who is (or is related to) a
"substantial user" of a facility financed by industrial development bonds held
by a Tax-Exempt Fund will likely be subject to tax on dividends paid by the
Tax-Exempt Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers,
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including financial institutions, property and casualty insurance companies, and
foreign corporations engaged in a trade or business in the United States.
Prospective investors should consult their own advisers as to such consequences.
Investment income that may be received by the International Growth Fund from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the Fund to a reduced rate of, or exemption from, taxes
on such income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested in various
countries is not known. If more than 50% of the value of the Fund's total assets
at the close of its taxable year consist of the stock or securities of foreign
corporations, the Fund may elect to "pass through" to the Fund's shareholders
the amount of foreign taxes paid by the Fund. If the Fund so elects, each
shareholder would be required to include in gross income, even though not
actually received, his pro rata share of the foreign taxes paid by the Fund, but
would be treated as having paid his pro rata share of such foreign taxes and
would therefore be allowed to either deduct such amount in computing taxable
income or use such amount (subject to various Code limitations) as a foreign tax
credit against federal income tax (but not both). For purposes of the foreign
tax credit limitation rules of the Code, each shareholder would treat as foreign
source income his pro rata share of such foreign taxes plus the portion of
dividends received from the Fund representing income derived from foreign
sources. No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Each shareholder should consult his
own tax adviser regarding the potential application of foreign tax credit rules.
Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends, or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by a Fund will be treated in the manner described above regardless
of whether such distributions are paid in cash or reinvested in additional
shares of the Fund (or of another fund). Shareholders receiving a distribution
in the form of additional shares will be treated as receiving a distribution in
an amount equal to the fair market value of the shares received, determined as
of the reinvestment date. In addition, if the net asset value at the time a
shareholder purchases shares of a Fund reflects undistributed net investment
income, recognized net capital gain, or unrealized appreciation in the value of
the assets of the Fund, distributions of such amounts will be taxable to the
shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and paid by a Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has failed to
provide a correct taxpayer identification number, (2) who is subject to backup
withholding for failure to report the receipt of interest or dividend income
properly, or (3) who has failed to certify to the Fund that it is not subject to
backup withholding or is an "exempt recipient" (such as a corporation).
Sale or Redemption of Shares
The Money Market Funds seek to maintain a stable net asset value of $1.00 per
share; however, there can be no assurance that the Money Market Funds will do
this. In such a case, and for all the Funds other than the Money Market Funds, a
shareholder will recognize gain or loss on the sale or redemption of shares of a
Fund (including an exchange of shares of a Fund for shares of another Fund) in
an amount equal to the difference between the proceeds of the sale or redemption
and the shareholder's adjusted tax basis in the shares. All or a portion of any
loss so recognized may be disallowed if the shareholder purchases other shares
of the same Fund within 30 days before or after the sale or redemption. In
general, any gain or loss arising from (or treated as arising from) the sale or
redemption of shares of a Fund will be considered capital gain or loss and will
be long-term capital gain or loss if
94
<PAGE>
the shares were held for longer than one year. However, any capital loss arising
from the sale or redemption of shares held for six months or less will be
disallowed to the extent of the amount of exempt-interest dividends received on
such shares and (to the extent not disallowed) will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c) (discussed above in connection with the dividends-received deduction for
corporations) generally will apply in determining the holding period of shares.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a Fund, (2)
disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on such shares but shall be
treated as incurred on the acquisition of the subsequently acquired shares.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership
("foreign shareholder"), depends on whether the income from a Fund is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
such foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such a foreign shareholder in the International Growth Fund may be
subject to U.S. withholding tax at the rate of 30% (or lower applicable treaty
rate) on the gross income resulting from the Fund's election to treat any
foreign taxes paid by it as paid by its shareholders, but may not be allowed a
deduction against such gross income or a credit against the U.S. withholding tax
for the foreign shareholder's pro rata share of such foreign taxes which it is
treated as having paid. Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale of shares of a Fund,
capital gain dividends and exempt-interest dividends, and amounts retained by
the Fund that are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then ordinary income dividends, capital
gain dividends, and any gains realized upon the sale of shares of the Fund will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund, including the
applicability of foreign taxes.
Effect of Future Legislation, Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect.
Rules of state and local taxation of ordinary income dividends, exempt-interest
dividends, and capital gain dividends from regulated investment companies may
differ from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences of
these and other state and local tax rules affecting investment in a Fund.
95
<PAGE>
TRUSTEES AND OFFICERS
Board of Trustees.
Overall responsibility for management of the Trust rests with the Trustees, who
are elected by the shareholders of the Trust. The Trust is managed by the
Trustees in accordance with the laws of the State of Delaware. There are
currently seven Trustees, five of whom are not "interested persons" of the Trust
within the meaning of that term under the 1940 Act ("Independent Trustees"). The
Trustees, in turn, elect the officers of the Trust to supervise actively its
day-to-day operations. There are also two Advisory Trustees who attend meetings
and serve on committees but do not vote.
The Trustees and the Advisory Trustees of the Trust, their ages, addresses, and
their principal occupations during the past five years are as follows. Each of
the following individuals, except Theodore H. Emmerich and Donald E. Weston,
holds the same position with The Victory Variable Insurance Funds, a registered
investment company in the same fund complex as the Trust. Whereas Messrs.
Emmerich and Weston serve as Advisory Trustees of the Trust, each of them serves
as a Trustee of The Victory Variable Insurance Funds.
<TABLE>
<CAPTION>
Position(s)
Held with
Name, Age and Address the Trust Principal Occupation During Past 5 Years
- --------------------- --------- ----------------------------------------
<S> <C> <C>
Roger Noall,* 64 Chairman Since 1996, Executive of KeyCorp; from 1995 to 1996,
c/o Brighton Apt. 1603 and General Counsel and Secretary of KeyCorp; from 1994 to
8231 Bay Colony Drive Trustee 1996, Senior Executive Vice President and Chief
Naples, FL 34108 Administrative Officer of KeyCorp.
Leigh A. Wilson,** 54 President Since 1989, Chairman and Chief Executive Officer, New
New Century Care, Inc. and Century Care, Inc. (merchant bank); since 1995,
53 Sylvan Road North Trustee Principal of New Century Living, Inc.; since 1989,
Westport, CT 06880 Director of Chimney Rock Vineyard and Chimney Rock
Winery.
Dr. Harry Gazelle, 71 Trustee Retired radiologist, Drs. Hill and Thomas Corporation.
17822 Lake Road
Lakewood, OH 44107
Eugene J. McDonald, 67 Trustee Since 1990, Executive Vice President and Chief Duke
Management Company Investment Officer for Asset
Management of Duke 2200 West Main Street University and
President and CEO of Duke Management Suite 1000 Company;
Director of CCB Financial Corporation, Flag Durham, NC
27705 Group of Mutual Funds, DP Mann Holdings, Greater
Triangle Community Foundation, and NC Bar Association
Investment Committee.
</TABLE>
* Mr. Noall is an "interested person" and an "affiliated person" of the
Trust.
** Mr. Wilson is deemed to be an "interested person" of the Trust under
the 1940 Act solely by reason of his position as President.
96
<PAGE>
<TABLE>
<CAPTION>
Position(s)
Held with
Name, Age and Address the Trust Principal Occupation During Past 5 Years
- --------------------- --------- ----------------------------------------
<S> <C> <C>
Dr. Thomas F. Morrissey, 66 Trustee Since 1970, Professor, Weatherhead School of Weatherhead
School of Management, Case Western Reserve University;
from 1989 Management to 1995, Associate Dean of
Weatherhead School of Case Western Reserve Management;
from 1987 to December 1994, Member of the University
Supervisory Committee of Society's Collective 10900
Euclid Avenue Investment Retirement Fund. Cleveland,
OH 44106-7235
H. Patrick Swygert, 56 Trustee Since 1995, President, Howard University; since May
Howard University 1996, Director, Hartford Financial Services Group;
2400 6th Street, N.W. since May 1997, Director, Hartford Life Insurance
Suite 402 Company; from 1990 to 1995, President, State
Washington, DC 20059 University of New York at Albany.
Frank A. Weil, 68 Trustee Since 1984, Chairman and Chief Executive Officer of
Abacus & Associates Abacus & Associates, Inc. (private investment firm);
147 E. 47th Street Director and President of the Norman and Hickrill
New York, NY 10017 Foundations; Director, Trojan Industries; from 1977 to
1979, United States Assistant Secretary of Commerce
for Industry and Trade. Advisory Trustees
Theodore H. Emmerich, 74 Advisory Retired; until 1986, managing partner (Cincinnati
1201 Edgecliff Place Trustee office) Ernst & Young LLP; Director of Carillon Fund,
Cincinnati, Ohio 45206 Inc. (investment company), American Financial Group
(insurance), and Cincinnati Milacron Commercial
Corporation (financing arm of Cincinnati Milacron
Corporation, a machine tool manufacturer); Trustee of
Summit Investment Trust and Carillon Investment Trust.
Donald E. Weston, 63* Advisory Since October 1998, Chairman of Gradison McDonald
McDonald Investments Inc. Trustee Investments, a division of McDonald Investments Inc.;
580 Walnut Street until October 1998, Chairman of the Gradison Division
Cincinnati, Ohio 45202 of McDonald & Company Securities, Inc. and a Director
of McDonald & Company Investments Inc.; Director of
Cincinnati Milacron Commercial Corporation.
</TABLE>
The Board currently has an Investment Committee, a Business, Legal, and Audit
Committee, and a Board Process and Nominating Committee. The members of the
Investment Committee are Messrs. Weil (Chairman), Morrissey, Weston and Wilson.
The function of the Investment Committee is to review the existing investment
policies of the Trust, including the levels of risk and types of funds available
to shareholders, and make recommendations to the Trustees regarding the revision
of such policies or, if necessary, the submission of such revisions to the
Trust's shareholders for their consideration. The members of the Business, Legal
and Audit Committee are Messrs. Gazelle (Chairman), Emmerich, McDonald and
Swygert. The function of the Business, Legal, and Audit Committee is to
recommend independent auditors and monitor accounting and financial matters and
to review compliance and contract matters. Mr. Swygert is the Chairman of the
Board Process and Nominating Committee (consisting of all the Trustees and
Advisory Trustees), which nominates persons to serve as Independent Trustees and
Trustees to serve on committees of the Board. This Committee also reviews
Trustee performance and compensation issues.
- ----------
* Mr. Weston is an "interested person" and an "affiliated person" of the
Trust.
97
<PAGE>
Remuneration of Trustees and Certain Executive Officers.
Each Trustee (other than Mr. Wilson) receives an annual fee of $31,500 for
serving as Trustee of all the Funds of the Trust, and an additional per meeting
fee ($3,500 in person and $1,500 per telephonic meeting). Mr. Wilson receives an
annual fee of $37,500 for serving as President and Trustee for all of the Funds
of the Trust, and an additional per meeting fee ($4,100 in person and $1,800 per
telephonic meeting). The Adviser pays the expenses of Messrs.
Noall and Weston.
The following table indicates the estimated compensation received by each
Trustee from the Victory "Fund Complex"(1) for the fiscal year ended October 31,
1998.
<TABLE>
<CAPTION>
Aggregate Aggregate
Pension or Estimated Compensation Compensation
Retirement Annual Benefits from Victory from Victory
Benefits Accrued Upon Retirement Portfolios "Fund Complex"
as Portfolio
Expenses
<S> <C> <C> <C> <C>
Leigh A. Wilson........... -0- -0- $45,000 $53,250
Robert G. Brown*.......... -0- -0- $18,300 $18,300
Edward P. Campbell**...... -0- -0- $36,600 $43,500
Theordore H. Emmerich# -0- -0- None None
Harry Gazelle............. -0- -0- $36,600 $39,000
Eugene J. McDonald+....... -0- -0- $25,050 $43,050
Thomas F. Morrissey....... -0- -0- $36,600 $39,000
H. Patrick Swygert........ -0- -0- $36,600 $39,000
Frank A. Weil+............ -0- -0- $25,050 $44,250
</TABLE>
(1) There are currently 41 mutual funds in the Victory "Fund Complex" for
which the above-named Trustees are compensated, but not all of these
Trustees serve on the board of each fund of the "Fund Complex."
* Mr. Brown resigned as of April 4, 1998.
** Mr. Campbell resigned as of December 31, 1998.
# Mr. Emmerich commenced service on the Board as of January 1, 1999.
+ Mr. McDonald and Mr. Weil commenced service on the Board as of January
1, 1998.
Officers.
The officers of the Trust, their ages, and principal occupations during the past
five years, are as follows:
<TABLE>
<CAPTION>
Position(s)
with the
Name and Age Trust Principal Occupation During Past 5 Years
- ------------ ----- ----------------------------------------
<S> <C> <C>
Leigh A. Wilson, 54 President See biographical information under "Board of Trustees"
and above.
Trustee
J. David Huber, 53 Vice President of BISYS Fund Services Inc. ("BISYS");
President officer of BISYS since June 1987.
Robert D. Hingston, 47 Secretary Since November 1998, Vice President of BISYS; from
January 1995 to October 1998, founder and principal of
RDH Associates (mutual fund management consulting firm);
from June 1980 to January 1995, Vice President of
Investors Bank & Trust Company.
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
Position(s)
with the
Name and Age Trust Principal Occupation During Past 5 Years
- ------------ ----- ----------------------------------------
<S> <C> <C>
Joel B. Engle, 33 Treasurer Since September 1998, Vice President of BISYS; from
March 1995 to September 1998, Vice President, Northern
Trust Company; from July 1994 to February 1995, General
Accountant, Wanger Asset Management.
</TABLE>
The mailing address of each officer of the Trust is 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
The officers of the Trust (other than Mr. Wilson) receive no compensation
directly from the Trust for performing the duties of their offices. BISYS
receives fees from the Trust as Administrator.
As of September 30, 1999, the Trustees and officers as a group owned
beneficially less than 1% of all classes of outstanding shares of the Funds.
The LifeChoice Funds -- Conflicts of Interest. The Trustees and officers of the
Trust are subject to conflicts of interest in managing both the LifeChoice Funds
described here and some of the underlying Proprietary Portfolios. This conflict
is most evident in the Board's supervision of KAM. KAM and certain of its
affiliates may provide services to, and receive fees from, not just the Funds,
but also some of the Proprietary and Other Portfolios. Their selection of
investments and allocation of Fund assets will be continuously and closely
scrutinized by the Board in order to avoid even the appearance of improper
practices. It is possible, however, that a situation might arise where one
course of action for a LifeChoice Fund would be detrimental to a Proprietary
Portfolio, or vice versa. In that unlikely event, the Trustees and officers of
the Trust will exercise good business judgment in upholding their fiduciary
duties to each set of Funds, thus minimizing such conflicts, if any should
arise.
ADVISORY AND OTHER CONTRACTS
Investment Adviser and Sub-Advisers.
One of the Fund's most important contracts is with its investment adviser, KAM,
a New York corporation registered as an investment adviser with the SEC. KAM, a
wholly owned subsidiary of KeyCorp. On October 23, 1998, the corporate parent of
McDonald & Company Securities, Inc. merged with KeyCorp, as a result of which
KAM is expected to acquire certain of the investment advisory operations of
McDonald & Company Securities, Inc., including its Gradison Division. Affiliates
of the Adviser manage approximately $79 billion for numerous clients including
large corporate and public retirement plans, Taft-Hartley plans, foundations and
endowments, high net worth individuals, and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127 Public
Square, Cleveland, Ohio 44114. As of June 30, 1999, KeyCorp had an asset base of
$81 billion, with banking offices in 13 states from Maine to Alaska, and trust
and investment offices in 14 states. KeyCorp's McDonald Investments Inc., a
registered broker dealer, is located primarily in the midwestern United States.
KeyCorp's major business activities include providing traditional banking and
associated financial services to consumer, business and commercial markets. Its
non-bank subsidiaries include investment advisory, securities brokerage,
insurance, bank credit card processing, and leasing companies.
The following schedule lists the advisory fees for each Fund, as a percentage of
its average daily net assets.
- ----------------------------------- -----------------------------------------
0.20% LifeChoice Conservative Investor Fund
LifeChoice Growth Investor Fund
LifeChoice Moderate Investor Fund
- ----------------------------------- -----------------------------------------
0.25% Federal Money Market Fund
Institutional Money Market Fund
- ----------------------------------- -----------------------------------------
0.35% Prime Obligations Fund
Tax-Free Money Market Fund
99
<PAGE>
- ----------------------------------- -----------------------------------------
U.S. Government Obligations Fund
- ----------------------------------- -----------------------------------------
0.50% Financial Reserves Fund
Fund for Income
Government Mortgage Fund
Limited Term Income Fund
Ohio Municipal Money Market Fund
- ----------------------------------- -----------------------------------------
0.55% National Municipal Bond Fund
New York Tax-Free Fund
- ----------------------------------- -----------------------------------------
0.60% Ohio Municipal Bond Fund
Stock Index Fund
- ----------------------------------- -----------------------------------------
0.65% Diversified Stock Fund
- ----------------------------------- -----------------------------------------
0.65% of the first $100 million, Small Company Opportunity Fund *
0.55% of the next $100 million, and
0.45% in excess of $200 million
- ----------------------------------- -----------------------------------------
0.75% Convertible Securities Fund
Intermediate Income Fund
Investment Quality Bond Fund
Ohio Regional Stock Fund
- ----------------------------------- -----------------------------------------
1.00% Balanced Fund
Growth Fund
Lakefront Fund
Real Estate Investment Fund
Special Value Fund
Value Fund
- ----------------------------------- -----------------------------------------
1.10% International Growth Fund
- ----------------------------------- -----------------------------------------
Investment Advisory Services to the LifeChoice Funds
KAM continuously monitors the allocation of each Fund's investment in Underlying
Portfolios in three distinct investment categories according to certain
percentage ranges predetermined by the Trustees as follows:
Conservative Growth Moderate
Investor Fund Investor Fund Investor Fund
------------- ------------- -------------
Equity Funds 30-50% 70-90% 50-70%
Bond/Fixed Income Funds 50-70% 10-30% 30-50%
Money Market Funds/Cash 0-15% 0-15% 0-15%
KAM rebalances or reallocates the LifeChoice Funds' investments across
Underlying Portfolios as market conditions warrant. All reallocations are
expected to occur within the above-described ranges.
The selection of the Proprietary Portfolios in which the LifeChoice Funds will
invest, as well as the percentage of assets which can be invested in each type
of underlying mutual fund, are not fundamental investment policies and can be
changed without the approval of a majority of the respective Fund's
shareholders. Any changes to the percentage ranges shown above for allocation
across types of Underlying Portfolios or for allocation in Proprietary
Portfolios and Other Portfolios requires the approval of the Trust's Board of
Trustees. Investors desiring more information on a Proprietary Portfolio listed
above may call the Trust at 800-539-FUND to request a prospectus, which is
available without charge. The selection of the Other Portfolios also is within
the Adviser's discretion.
- ----------
* Prior to March 29, 1999, the Small Company Opportunity Fund paid an
advisory fee equal to 1.00% of its average daily net assets.
100
<PAGE>
The Portfolio Managers of the Proprietary Portfolios
As a shareholder in the Proprietary Portfolios, the LifeChoice Funds will bear
their proportionate share of the investment advisory fees paid by the
Portfolios. Set forth in "The Investment Advisory and Investment Sub-Advisory
Agreements" below is a description of the investment advisory agreements for
each Proprietary Portfolio.
The persons primarily responsible for the investment management of the
Proprietary Portfolios are as follows (unless otherwise noted, a portfolio
manager has managed the Portfolio since commencement of the Fund's operations):
<TABLE>
<CAPTION>
Victory Fund Portfolio Manager Experience
]------------ ----------------- ----------
<S> <C> <C>
Convertible Richard A. Janus Senior Managing Director of KAM, and has been in the
Securities (since April, 1996) investment advisory business since 1977.
James K. Kaesberg Portfolio Manager and Managing Director of Convertible
(since April, 1996) Securities Investments for KAM, and has been in the
investment advisory business since 1985.
Diversified Lawrence G. Babin Senior Portfolio Manager and Managing Director of KAM,
Stock and has been in the investment business since 1982.
Fund for Income Thomas M. Seay Mr. Seay served as Portfolio Manager of the Gradison
(since April 1998) Government Income Fund since
April 1998, prior to which he served as
vice president and fixed income
portfolio manager of Lexington
Management Corporation.
Trenton Fletcher Mr. Fletcher is a Portfolio Manager and Director of
(since January, 1998) KAM, and has been associated with KAM or its
affiliates since 1989.
Government Trenton Fletcher See Fund for Income, above.
Mortgage (since January, 1998)
Growth William F. Ruple Senior Portfolio Manager and Director of KAM, and has
(since June, 1995) been in the investment advisory business since 1970.
Intermediate Matthew D. Meyer Senior Portfolio Manager and Director in the Taxable
Income (since May, 1999) Fixed Income Group of KAM since January 1999, prior to
which he was employed by McDonald &
Company as a First Vice President,
Senior Mortgage-Backed Securities Trader
from January 1996 to January 1999 and a
Mortgage-Backed and Agency Securities
Trader with First Tennessee National
Corporation from February
1993 to December 1995.
International Conrad Metz Senior Portfolio Manager and Managing Director of KAM
Growth (since October, 1995) since October 1995; from 1993 to 1995 he was Senior
Vice President, International Equities, at Bailard
Biehl & Kaiser. He has been in the investment
business since 1978.
Leslie Globits Portfolio Manager and Managing Director of KAM.
(since June, 1998) He has been employed by KAM or an affiliate
since 1987.
Ayaz Ebrahim Director and Portfolio Manager of IIIS, Hong Kong, and
(since December, has been employed by IIIS or an affiliate since 1991.
1997)
Didier LeConte Senior Portfolio Manager - European Equities at IIIS,
(since December, and has been employed by IIIS or an affiliate since
1997) 1996.
Jean-Claude Head of Equity Management at IIIS, and has been
Kaltenbach employed by IIIS or an affiliate since 1994.
(since December,
1997)
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
Victory Fund Portfolio Manager Experience
]------------ ----------------- ----------
<S> <C> <C>
Investment Richard T. Heine Vice President and Portfolio Manager with KAM, and has
Quality Bond been in the investment advisory business since 1977
Limited Term Deborah Svoboda Ms. Svoboda has been a Portfolio Manager and Managing
Income (since September, Director of KAM since September 1998, prior to which
1998) she was a Senior Vice President responsible for
asset-backed securities syndication and marketing for
McDonald & Company Investments Inc.
Small Company William J. Leugers, Mr. Leugers is a Portfolio Manager and Managing
Opportunity Jr. Director of Gradison McDonald and has been associated
(since November 1998) with Gradison McDonald since 1975.
Daniel R. Shick Mr. Shick is a Portfolio Managers and Managing
(since November 1998) Directors of Gradison McDonald and has been associated
with McDonald since 1972.
Gary H. Miller Mr. Miller is a Vice-President and Portfolio Manager
(since November, of Gradison McDonald and been associated with Gradison
1998) McDonald since 1987.
Real Estate Patrice Derrington Managing Director and Portfolio Manager of KAM, and
Investment has been in the real estate, investment, and finance
business since 1991.
Richard E. Salomon Director of, and a Senior Managing Director with KAM,
and has been in the investment advisory business
since 1982.
Special Value Anthony Aveni Senior Managing Director with KAM, and has been in the
(since December, investment business since 1981.
1993)
Paul Danes Portfolio Manager and Director of KAM, and has been in
(since October, 1995) the investment business since 1987.
Value Neil A. Kilbane Portfolio Manager and Managing Director of KAM, and
(since April, 1998) has been in the investment business since 1986.
</TABLE>
Sub-Advisers
The Lakefront Fund. Lakefront Capital Investors, Inc. ("Lakefront") serves as
sub-adviser to the Lakefront Fund. Pursuant to an agreement with the Adviser
dated as of March 1, 1997, the Adviser pays Lakefront a monthly fee of 0.50%
of the Lakefront Fund's average daily net assets from its advisory fee.
Lakefront is a registered investment adviser with the SEC. As of October 29,
1998, Lakefront managed approximately $14 million for its clients.
The International Growth Fund -- Manager of Managers. As the "Manager of
Managers" of the International Growth Fund, KAM may select one or more
sub-advisers to manage the Fund's assets. KAM evaluates each sub-adviser's
skills, investment styles and strategies in light of KAM's analysis of the
international securities markets. Under its Advisory Agreement with the Trust,
KAM oversees the investment advisory services that a sub-adviser provides to the
International Growth Fund. If KAM engages more than one sub-adviser, KAM may
reallocate assets among sub-advisers when it believes it is appropriate. KAM
provides investment advice with respect to short-term debt securities. KAM has
the ultimate responsibility for the International Growth Fund's investment
performance because it is responsible for overseeing all sub-advisers and
recommending to the Trust's Board of Trustees that it hire, terminate or replace
a particular sub-adviser.
The Trust and KAM have obtained an order from the SEC that allows KAM to serve
as a Manager of Managers. The order lets KAM, subject to certain conditions,
select new sub-advisers with the approval of the Board, without obtaining
shareholder approval. The order also allows KAM to change the terms of
agreements with the sub-advisers or to keep a sub-adviser even if certain events
would otherwise require that a sub-advisory agreement terminate. The Trust will
notify shareholders of any sub-adviser change. Shareholders, however, also have
the right
102
<PAGE>
to terminate an agreement with a particular sub-adviser. If KAM hires more than
one sub-adviser, the order also allows the International Growth Fund to disclose
only the aggregate amount of fees paid to all sub-advisers.
IIIS (collectively with Lakefront, the "Sub-Advisers") serves as sub-adviser to
the International Growth Fund. Pursuant to an agreement with the Adviser dated
as of June 1, 1998, the Adviser pays IIIS a monthly fee of 0.55% of the
International Growth Fund's average daily net assets from its advisory fee.
IIIS is a registered investment adviser with the SEC. As of June 30, 1999, IIIS
and its affiliates managed approximately $145 billion for their clients. IIIS
also serves as investment adviser to the France Growth Fund and sub-adviser to
the BNY Hamilton International Equity Fund and the John Hancock European Equity
Fund.
The Investment Advisory and Investment Sub-Advisory Agreements.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Trust, on behalf of the Funds (the "Investment Advisory Agreement"),
provides that it will continue in effect as to the Funds for an initial two-year
term and for consecutive one-year terms thereafter, provided that such renewal
is approved at least annually by the Trustees or by vote of a majority of the
outstanding shares of each Fund (as defined under "Additional Information -
Miscellaneous"), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to any particular Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, by vote of the Board of Trustees
of the Victory Portfolios, or by the Adviser. The Investment Advisory Agreement
also terminates automatically in the event of any assignment, as defined in the
1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with the performance of services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its duties, or from reckless disregard by the Adviser of
its duties and obligations thereunder.
For the three fiscal years ended October 31, 1998 (except where noted), KAM
earned the following advisory fees with respect to each Fund, the amount of fees
paid to the Adviser is net of the amount of fee reduction* :
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
Fee Fee Fee
Fees Paid Reduction Fees Paid Reduction Fees Paid Reduction
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $3,019,535 $943,992 $2,810,294 $353,372 $2,006,013 $376,178
- -------------------------------------------------------------------------------------------------
Convertible 794,188** 0 595,753+ $566,242++
Securities
- -------------------------------------------------------------------------------------------------
Diversified Stock 5,039,529 1,022,826 4,560,843 0 3,147,950 55,678
- -------------------------------------------------------------------------------------------------
Federal Money Market 589,340** 732,604 0+ 277,326 0++ 64,632
- -------------------------------------------------------------------------------------------------
Financial Reserves 3,761,563 123,455 3,786,668 301,812 3,402,511 582,762
- -------------------------------------------------------------------------------------------------
Fund for Income 16,446 103,873 5,722 92,630 22,779 87,637
- -------------------------------------------------------------------------------------------------
</TABLE>
* Does not include investment advisory fees paid by Class G shares of the
Diversified Stock Fund, Fund for Income, International Growth Fund, Ohio
Municipal Bond Fund and Opportunity Value Fund (the "Gradison Funds").
** For the period from December 1, 1997 to October 31, 1998.
+ For the fiscal year ended November 30, 1997.
++ For the fiscal year ended November 30, 1996.
103
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
Fee Fee Fee
Fees Paid Reduction Fees Paid Reduction Fees Paid Reduction
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Government Mortgage 380,810 134,385 565,656 0 646,159 3,389
- -------------------------------------------------------------------------------------------------
Gradison Government 796,226 773,094 866,440
Income
- -------------------------------------------------------------------------------------------------
Gradison Opportunity 881,658 699,336 631,571
Value
- -------------------------------------------------------------------------------------------------
Growth 1,936,780 304,983 1,709,722 0 1,181,723 70,660
- -------------------------------------------------------------------------------------------------
Institutional Money 2,051,053 1,279,243 1,638,661 855,791 1,003,395 932,844
Market
- -------------------------------------------------------------------------------------------------
Intermediate Income 1,159,701 681,558 1,622,286 340,846 1,218,106 357,865
- -------------------------------------------------------------------------------------------------
International Growth 1,082,604 123,169 1,317,383 0 1,224,364 30,428
- -------------------------------------------------------------------------------------------------
Investment Quality 880,262 436,244 993,289 208,773 836,655 185,307
Bond
- -------------------------------------------------------------------------------------------------
Lakefront 6,293 6,293 2,144 5,022 N/A N/A
- -------------------------------------------------------------------------------------------------
LifeChoice 9,198 4,473 4,311++ 139 N/A N/A
Conservative Investor
- -------------------------------------------------------------------------------------------------
LifeChoice Growth 11,797 5,708 6,130++ 128 N/A N/A
Investor
- -------------------------------------------------------------------------------------------------
LifeChoice Moderate 15,484 9,367 6,565++ 1,024 N/A N/A
Investor
- -------------------------------------------------------------------------------------------------
Limited Term Income 271,020 123,743 418,588 15,636 671,988 46,818
- -------------------------------------------------------------------------------------------------
National Municipal 0 295,779 0 239,815 0 206,174
Bond
- -------------------------------------------------------------------------------------------------
New York Tax-Free 54,279 60,020 23,901 73,540 7,542 83,068
- -------------------------------------------------------------------------------------------------
Ohio Municipal Bond 301,873 174,387 376,962 79,594 298,093 103,079
- -------------------------------------------------------------------------------------------------
Ohio Municipal Money 2,513,242 1,026,186 2,281,185 833,236 1,129,662 1,706,115
Market
- -------------------------------------------------------------------------------------------------
Ohio Regional Stock 334,000 61,447 375,231 0 318,859 4,181
- -------------------------------------------------------------------------------------------------
Prime Obligations 3,673,976 0 1,870,850 0 1,628,427 0
- -------------------------------------------------------------------------------------------------
Real Estate 14,049 111,672 0 15,464 N/A N/A
Investment
- -------------------------------------------------------------------------------------------------
Small Company 881,658* 0 699,336* 0 711,543 33,521
Opportunity **
- -------------------------------------------------------------------------------------------------
Special Value 3,814,898 443,848 3,525,053 0 2,304,543 71,047
- -------------------------------------------------------------------------------------------------
Stock Index 2,681,381 798,447 1,715,703 574,290 936,282 382,702
- -------------------------------------------------------------------------------------------------
Tax-Free Money Market 1,829,130 29,470 1,283,064 37,520 1,092,669 31,987
- -------------------------------------------------------------------------------------------------
U.S. Government 6,864,953 0 5,387,642 0 4,208,590 0
Obligations
- -------------------------------------------------------------------------------------------------
Value 4,505,880 613,276 4,396,880 0 3,378,303 62,495
- -------------------------------------------------------------------------------------------------
</TABLE>
Sub-Advisory Agreements. Under the Investment Advisory Agreement, the Adviser
may delegate a portion of its responsibilities to a sub-adviser. In addition,
the Investment Advisory Agreement provides that the Adviser may render services
through its own employees or the employees of one or more affiliated companies
that are qualified to act as an investment adviser of the Funds and are under
the common control of KeyCorp as long as all such persons are functioning as
part of an organized group of persons, managed by authorized officers of the
Adviser.
Each Sub-Adviser's Agreement with KAM is terminable at any time, without
penalty, by the Board of Trustees, by the Adviser or by vote of a majority of
the respective Fund's outstanding voting securities on 60 days' written notice
to the Adviser. Unless sooner terminated, each Sub-Advisory Agreement shall
continue in effect from year to year if approved at least annually by a majority
vote of the Board of Trustees, including a majority of the Trustees who are not
interested persons of the Adviser or the respective Sub-Adviser, cast in person
at a meeting called for the purpose of voting on the relevant Sub-Advisory
Agreement.
- ----------
++ For the period from December 31, 1996 to November 30, 1997.
** Fiscal years ended March 31. For the fiscal year ended March 31, 1999, the
Small Company Opportunity Value Fund paid $935,246 in advisory fees, after
waivers of $1,689.
104
<PAGE>
Glass-Steagall Act.
In 1971 the United States Supreme Court held in Investment Company Institute v.
Camp that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board") issued a regulation and interpretation to the
effect that the Glass-Steagall Act and such decision: (a) forbid a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
On November 12, 1999, President Clinton signed a bill repealing the
Glass-Steagall Act. As a result, the Adviser may in the future perform certain
functions for the Funds that previously were not permitted under federal law.
From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective shareholders of the Funds may include
descriptions of Key Trust Company of Ohio, N.A. and the Adviser including, but
not limited to, (1) descriptions of the operations of Key Trust Company of Ohio,
N.A. and the Adviser; (2) descriptions of certain personnel and their functions;
and (3) statistics and rankings related to the operations of Key Trust Company
of Ohio, N.A. and the Adviser.
Code of Ethics.
The Funds, the Adviser, and the Sub-advisers have each adopted a Code of Ethics
to which all investment personnel and all other access persons of the Funds must
conform. Investment personnel must refrain from certain trading practices and
are required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination of
employment.
Portfolio Transactions.
The Money Market Funds. Pursuant to the Investment Advisory Agreement between
the Adviser and the Trust, on behalf of the Money Market Funds, the Adviser
determines, subject to the general supervision of the Trustees of the Trust, and
in accordance with each Money Market Fund's investment objective, policies and
restrictions, which securities are to be purchased and sold by the Money Market
Funds, and which brokers are to be eligible to execute its portfolio
transactions. Since purchases and sales of portfolio securities by the Money
Market Funds are usually principal transactions, the Money Market Funds incur
little or no brokerage commissions. For the three fiscal years ended October 31,
1998, the Money Market Funds paid no brokerage commissions. Securities of the
Money Market Funds are normally purchased directly from the issuer or from a
market maker for the securities. The purchase price paid to dealers serving as
market makers may include a spread between the bid and asked prices. The Money
Market Funds also may purchase securities from underwriters at prices which
include the spread retained by the underwriter from the proceeds of the offering
to the issuer.
The Money Market Funds do not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity, but the
Adviser may seek to enhance the yield of the Funds by taking advantage of yield
disparities or other factors that occur in the money markets. For example,
market conditions frequently result in similar securities trading at different
prices. The Adviser may dispose of any portfolio security prior to its maturity
if such disposition and reinvestment of proceeds are expected to enhance yield
consistent with the Adviser's judgment as to desirable portfolio maturity
structure or if such disposition is believed to be advisable due to other
circumstances or conditions. The investment policies of the Money Market Funds
require that investments
105
<PAGE>
mature in 90 days or less. Thus, there is likely to be relatively high portfolio
turnover, but since brokerage commissions are not normally paid on money market
instruments, the high rate of portfolio turnover is not expected to have a
material effect on the net income or expenses of the Money Market Funds.
The Adviser's primary consideration in effecting a security transaction is to
obtain the best net price and the most favorable execution of the order.
Allocation of transactions, including their frequency, among various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders.
Income and Equity Funds. Pursuant to the Investment Advisory Agreement (and for
the Lakefront Fund and the International Growth Fund, the Sub-Advisory
Agreements), the Adviser* determines, subject to the general supervision of the
Trustees of the Trust, and in accordance with each Fund's investment objective
and restrictions, which securities are to be purchased and sold by the Funds,
and which brokers are to be eligible to execute its portfolio transactions.
Purchases from underwriters and/or broker-dealers of portfolio securities
include a commission or concession paid by the issuer to the underwriter and/or
broker-dealer and purchases from dealers serving as market makers may include
the spread between the bid and asked price. While the Adviser generally seeks
competitive spreads or commissions, each Fund may not necessarily pay the lowest
spread or commission available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by the Adviser in its best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the Adviser may receive orders for transactions by the
Trust. Information so received is in addition to and not in lieu of services
required to be performed by the Adviser and does not reduce the investment
advisory fees payable to the Adviser by the Funds. Such information may be
useful to the Adviser in serving both the Trust and other clients and,
conversely, such supplemental research information obtained by the placement of
orders on behalf of other clients may be useful to the Adviser in carrying out
its obligations to the Trust. The Trustees have authorized the allocation of
brokerage to affiliated broker-dealers on an agency basis to effect portfolio
transactions. The Trustees have adopted procedures incorporating the standards
of Rule 17e-1 of the 1940 Act, which require that the commission paid to
affiliated broker-dealers must be "reasonable and fair compared to the
commission, fee or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." At times, the Funds may also purchase
portfolio securities directly from dealers acting as principals, underwriters or
market makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by the Funds.
All Funds. The Trust will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with the Adviser, the Sub-Advisers,
Key Trust Company of Ohio, N.A. ("Key Trust") or their affiliates, or BISYS or
its affiliates, and will not give preference to Key Trust's correspondent banks
or affiliates, or BISYS with respect to such transactions, securities, savings
deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for each Fund are made independently from those made for
the other Funds of the Trust or any other investment company or account managed
by the Adviser. Such other investment companies or accounts may also invest in
the securities and may follow similar investment strategies as the Funds. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and any other Fund, investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which the Adviser believes to be equitable to such Funds,
investment company or account. In some instances, this investment procedure may
affect the price paid or received by a Fund or the size of the position obtained
by the Fund in an adverse manner relative to the result that would have been
obtained if only that particular Fund had participated in or been allocated such
trades. To the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for a Fund with those to be sold or purchased for the
other Funds of the Trust or for other investment companies or accounts in order
to obtain best execution. In making investment recommendations for the Trust,
the Adviser will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by a Fund is a customer of the Adviser,
their parents or subsidiaries or affiliates and,
- ----------
* For purposes of the following discussion, the term "Adviser" refers to the
Adviser and any sub-advisers.
106
<PAGE>
in dealing with their commercial customers, the Adviser, its parents,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.
Brokerage commissions paid by each of the Funds listed below were as follows for
the three fiscal years ended October 31, 1998* .
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced $197,179.88 $212,666.31 $190,526.34
--------------------------------------------------------------------------------------------------
Convertible Securities ** 73,375.17 46,738 50,000
--------------------------------------------------------------------------------------------------
Diversified Stock 1,533,314.33 906,124.85 881,427.50
--------------------------------------------------------------------------------------------------
Fund for Income -- -- 1,250.00
--------------------------------------------------------------------------------------------------
Government Mortgage -- -- 542.84
--------------------------------------------------------------------------------------------------
Gradison Opportunity Value ++ 136,378 92,853 71,036
--------------------------------------------------------------------------------------------------
Growth 150,360.66 68,970.96 97,820.00
--------------------------------------------------------------------------------------------------
Institutional Money Market -- -- --
--------------------------------------------------------------------------------------------------
Intermediate Income 1,271.88 3,242.20 61,811.73
--------------------------------------------------------------------------------------------------
International Growth Fund 619,297.58 1,103,488.08 --
--------------------------------------------------------------------------------------------------
Investment Quality Bond 773.44 1,734.39 12,889.90
--------------------------------------------------------------------------------------------------
Lakefront 1,927.90 2,513.90 --
--------------------------------------------------------------------------------------------------
Limited Term Income -- 468.75 8,580.94
--------------------------------------------------------------------------------------------------
Ohio Regional Stock 23,932.34 21,805.75 6,597.60
--------------------------------------------------------------------------------------------------
Real Estate Investment 46,584.80 -- --
--------------------------------------------------------------------------------------------------
Small Company Opportunity ++ 136,378 92,853 176,980.29
--------------------------------------------------------------------------------------------------
Special Value 581,672.43 428,514.23 431,541.97
--------------------------------------------------------------------------------------------------
Stock Index 107,718.60 43,190.22 27,553.63
--------------------------------------------------------------------------------------------------
Value 391,275.21 218,946.60 225,799.21
--------------------------------------------------------------------------------------------------
</TABLE>
Portfolio Turnover.
The portfolio turnover rates stated in the Prospectuses are calculated by
dividing the lesser of each Fund's purchases or sales of portfolio securities
for the year by the monthly average value of the portfolio securities. The
calculation excludes all securities whose maturities, at the time of
acquisition, were one year or less. Portfolio turnover is calculated on the
basis of the Fund as a whole without distinguishing between the classes of
shares issued. As indicated below, the Fund for Income experienced
higher-than-usual portfolio turnover for the fiscal year ended October 31, 1998
due to extraordinarily volatile market conditions. The portfolio turnover rates
for each of the Funds listed below were as follows for the two fiscal years
ended October 31, 1998 (except where noted)*.
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
Balanced Fund 231% 109%
- ----------------------------------------------------------------------------
- ----------
* Does not include commissions paid by the Gradison Funds.
** Brokerage commission information for the Convertible Securities Fund
reflects brokerage commissions paid for the fiscal years ended November
30, 1996 and November 30, 1997 and the period from December 1, 1997 to
October 31, 1998.
++ Fiscal years ended March 31. For the fiscal year ended March 31, 1999, the
Small Company Opportunity Fund paid $311,946 in brokerage commissions.
* Does not include turnover related to the Gradison Funds.
107
<PAGE>
- ----------------------------------------------------------------------------
Convertible Securities Fund** 77% 77%
- ----------------------------------------------------------------------------
Diversified Stock Fund 84% 63%
- ----------------------------------------------------------------------------
Fund for Income 118% 26%
- ----------------------------------------------------------------------------
Government Mortgage Fund 296% 115%
- ----------------------------------------------------------------------------
Gradison Government Income Fund*** 36% 12%
- ----------------------------------------------------------------------------
Growth Fund 29% 21%
- ----------------------------------------------------------------------------
Intermediate Income Fund 318% 195%
- ----------------------------------------------------------------------------
International Growth Fund 86% 116%
- ----------------------------------------------------------------------------
Investment Quality Bond Fund 492% 249%
- ----------------------------------------------------------------------------
Lakefront Fund 36% 36%
- ----------------------------------------------------------------------------
LifeChoice Conservative Investor Fund 78%++ 19%+
- ----------------------------------------------------------------------------
LifeChoice Growth Investor Fund 30%++ 106%+
- ----------------------------------------------------------------------------
LifeChoice Moderate Investor Fund 42%++ 50%+
- ----------------------------------------------------------------------------
Limited Term Income Fund 177% 139%
- ----------------------------------------------------------------------------
National Municipal Bond Fund 152% 154%
- ----------------------------------------------------------------------------
New York Tax-Free Fund 38% 11%
- ----------------------------------------------------------------------------
Ohio Municipal Bond Fund 95% 74%
- ----------------------------------------------------------------------------
Ohio Regional Stock Fund 6% 8%
- ----------------------------------------------------------------------------
Real Estate Investment Fund 53% 21%
- ----------------------------------------------------------------------------
Small Company Opportunity Fund + 42% 35%
- ----------------------------------------------------------------------------
Special Value Fund 44% 39%
- ----------------------------------------------------------------------------
Stock Index Fund 8% 11%
- ----------------------------------------------------------------------------
Value Fund 40% 26%
- ----------------------------------------------------------------------------
Administrator.
BISYS, Inc. (the "Administrator") serves as administrator to the Funds pursuant
to an administration agreement dated October 1, 1997 (the "Administration
Agreement"). The Administrator assists in supervising all operations of the
Funds (other than those performed by the Adviser or the Sub-Advisers under the
Investment Advisory Agreement and Sub-Advisory Agreements), subject to the
supervision of the Board of Trustees.
For the services rendered to the Funds and related expenses borne by the
Administrator, each Fund (except the LifeChoice Funds) pays the Administrator an
annual fee, computed daily and paid monthly, at the following annual rates based
on each Fund's average daily net assets:
0.15% for portfolio assets of $300 million and less,
0.12% for the next $300 million through $600 million of portfolio
assets, and
0.10% for portfolio assets greater than $600 million.
- ----------
** Portfolio turnover information for the Convertible Securities Fund and the
Federal Money Market Fund reflects portfolio turnover for the fiscal year
ended November 30, 1997 and the period from December 1, 1997 to October
31, 1998.
*** Fiscal years ended December 31.
++ From December 1, 1997 to October 31, 1998.
+ From December 31, 1996 to November 30, 1997.
+ Fiscal years ended March 31. For the fiscal year ended march 31, 1999, the
Small Company Opportunity Fund had a portfolio turnover rate of 30%.
108
<PAGE>
For the services rendered to the LifeChoice Funds and related expenses borne by
the Administrator, each of these Funds pays the Administrator an annual fee,
computed daily and paid monthly, equal to the greater of 0.01% of the Fund's
average daily net assets or $12,000.
The Administrator may periodically waive all or a portion of its fee with
respect to any Fund in order to increase the net income of one or more of the
Funds available for distribution to shareholders.
Unless sooner terminated, the Administration Agreement will continue in effect
as to each Fund for a period of two years, and for consecutive one-year terms
thereafter, provided that such continuance is ratified at least annually by the
Trustees or by vote of a majority of the outstanding shares of each Fund, and in
either case by a majority of the Trustees who are not parties to the
Administration Agreement or interested persons (as defined in the 1940 Act) of
any party to the Administration Agreement, by votes cast in person at a meeting
called for such purpose.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by it of its
obligations and duties thereunder.
Under the Administration Agreement, the Administrator assists in each Fund's
administration and operation, including providing statistical and research data,
clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and dissemination
of reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
The following chart reflects the aggregate administration fees earned after fee
reductions by the Administrator in connection with the sale of shares of each
Fund for the three fiscal years ended October 31, 1998 (does not include
administration fees paid by the Gradison Funds).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
Fee Fee Fee
Fees Reductions Fees Reductions Fees Reductions
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced................... $565,625 $0 $472,961 $0 $357,125 $0
- ------------------------------------------------------------------------------------------------
Convertible Securities** .. 174,181 0 169,130 0 163,169+ 0
- ------------------------------------------------------------------------------------------------
Diversified Stock.......... 1,142,672 0 1,034,997 0 678,848 60,602
- ------------------------------------------------------------------------------------------------
Federal Money Market **.... 429,784 0 213,167 0 64,632+ 0
- ------------------------------------------------------------------------------------------------
Financial Reserves......... 987,007 0 1,209,552 0 1,196,089 0
- ------------------------------------------------------------------------------------------------
Fund for Income............ 14,438 21,658 11,799 17,707 13,292 19,833
- ------------------------------------------------------------------------------------------------
Government Mortgage........ 154,559 0 169,697 0 195,013 0
- ------------------------------------------------------------------------------------------------
Growth..................... 336,265 0 256,459 0 187,857 0
- ------------------------------------------------------------------------------------------------
Institutional Money Market. 799,361 742,945 340,471 1,156,193 464,863 696,881
- ------------------------------------------------------------------------------------------------
Intermediate Income........ 368,253 0 392,489 0 314,921 0
- ------------------------------------------------------------------------------------------------
</TABLE>
- ----------
** Administration fee information for the Convertible Securities Fund and the
Federal Money Market Fund reflects payments made for the fiscal years
ended November 30, 1996 and November 30, 1997 and the period from December
1, 1997 to October 31, 1998.
+ From December 1, 1995 through March 31, 1996, SBSF served as administrator
to the Convertible Securities Fund and Federal Money Market Fund and
received fees of $53,761 and $22,722, respectively. From April 1, 1996
through July 11, 1996, Concord Holding Corporation served as administrator
to these Funds and received fees of $41,268 and $15,349, respectively.
From July 11, 1996 through November 30, 1996, BISYS served as
administrator to these Funds and received fees of $68,140 and $26,561,
respectively.
109
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Growth....... 164,424 0 179,643 0 171,154 0
- ------------------------------------------------------------------------------------------------
Investment Quality Bond.... 263,302 0 240,312 0 205,210 0
- ------------------------------------------------------------------------------------------------
Lakefront.................. 1,888 0 1,045 0 N/A N/A
- ------------------------------------------------------------------------------------------------
LifeChoice Conservative.... 11,015 0 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
LifeChoice Growth.......... 11,015 0 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
LifeChoice Moderate........ 11,015 0 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------
Limited Term Income........ 118,429 0 130,222 0 216,263 0
- ------------------------------------------------------------------------------------------------
National Municipal Bond.... 80,667 0 65,363 0 20,352 35,877
- ------------------------------------------------------------------------------------------------
New York Tax-Free.......... 12,437 18,656 10,626 15,949 9,888 14,823
- ------------------------------------------------------------------------------------------------
Ohio Municipal Bond........ 119,065 0 114,083 0 100,340 0
- ------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 917,889 0 548,673 375,708 851,457 0
- ------------------------------------------------------------------------------------------------
Ohio Regional Stock........ 79,090 0 75,046 0 64,609 0
- ------------------------------------------------------------------------------------------------
Prime Obligations.......... 1,259,710 0 790,839 0 697,897 0
- ------------------------------------------------------------------------------------------------
Real Estate Investment..... 11,216 7,642 0 2,320 N/A N/A
- ------------------------------------------------------------------------------------------------
Small Company Opportunity.. 160,216 0 138,080 0 112,578 0
- ------------------------------------------------------------------------------------------------
Special Value.............. 601,051 0 525,357 0 356,371 0
- ------------------------------------------------------------------------------------------------
Stock Index................ 0 782,953 0 567,979 0 329,746
- ------------------------------------------------------------------------------------------------
Tax-Free Money Market...... 726,665 0 562,890 0 446,706 35,290
- ------------------------------------------------------------------------------------------------
U.S. Government Obligations 2,171,416 0 2,258,117 0 1,803,685 0
- ------------------------------------------------------------------------------------------------
Value...................... 704,301 0 654,663 0 516,120 0
- ------------------------------------------------------------------------------------------------
</TABLE>
Sub-Administrator.
KAM serves as sub-administrator to the Trust pursuant to a sub-administration
agreement dated October 1, 1997 (the "Sub-Administration Agreement"). As
sub-administrator, KAM assists the Administrator in all aspects of the
operations of the Trust, except those performed by KAM under its Investment
Advisory Agreement.
For services provided under the Sub-Administration Agreement, the Administrator
pays KAM a fee, with respect to each Fund, calculated at the annual rate of up
to five one-hundredths of one percent (0.05%) of such Fund's average daily net
assets. Except as otherwise provided in the Administration Agreement, KAM shall
pay all expenses incurred by it in performing its services and duties as
sub-administrator. Unless sooner terminated, the Sub-Administration Agreement
will continue in effect as to each Fund for a period of two years, and for
consecutive one-year terms thereafter, unless written notice not to renew is
given by the non-renewing party.
Under the Sub-Administration Agreement, KAM's duties include maintaining office
facilities, furnishing statistical and research data, compiling data for various
state and federal filings by the Trust, assist in mailing and filing the Trust's
annual and semi-annual reports to shareholders, providing support for board
meetings, and arranging for the maintenance of books and records and providing
the office facilities necessary to carry out the duties thereunder.
Distributor.
BISYS serves as distributor (the "Distributor") for the continuous offering of
the shares of the Funds pursuant to a Distribution Agreement between the
Distributor and the Trust. Unless otherwise terminated, the Distribution
Agreement will remain in effect with respect to each Fund for two years, and
will continue thereafter for consecutive one-year terms, provided that the
renewal is approved at least annually (1) by the Trustees or by the vote of a
majority of the outstanding shares of each Fund, and (2) by the vote of a
majority of the Trustees of the Trust who are not parties to the Distribution
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Distribution Agreement
will terminate in the event of its assignment, as defined under the 1940 Act.
110
<PAGE>
The following chart reflects the total underwriting commissions earned and the
amount of those commissions retained by the Distributor in connection with the
sale of shares of each Fund for the three fiscal years ended October 31, 1998.*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
Underwriting Amount Underwriting Amount Underwriting Amount
Commissions Retained Commission Retained Commissions Retained
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced $148,456 $5,744 $96,700 $4,600 $63,000 $60,000
- ----------------------------------------------------------------------------------------------
Convertible** 48,035 6,080
- ----------------------------------------------------------------------------------------------
Diversified Stock 1,362,247 83,232 1,412,000 448,000 452,000 430,000
- ----------------------------------------------------------------------------------------------
Federal Money 0 0
Mkt**
- ----------------------------------------------------------------------------------------------
Financial 0 0 0 0 -- --
Reserves
- ----------------------------------------------------------------------------------------------
Fund for Income 11,928 3,160 13,800 3,600 18,000 17,000
- ----------------------------------------------------------------------------------------------
Gov't Mortgage 9,293 1,145 17,200 2,000 2,000 2,000
- ----------------------------------------------------------------------------------------------
Gradison Gov't 30,601+/- 110,078+/-+/-
Inc.
- ----------------------------------------------------------------------------------------------
Growth 45,898 5,927 15,300 2,200 1,000 1,000
- ----------------------------------------------------------------------------------------------
Inst. Money Mkt 0 0 0 0 -- --
- ----------------------------------------------------------------------------------------------
Intermediate 665 89 2,600 300 2,000 2,000
Income
- ----------------------------------------------------------------------------------------------
International 19,553 1,565 11,600 1,300 17,000 17,000
Growth
- ----------------------------------------------------------------------------------------------
Inv. Quality Bond 3,437 448 15,700 2,200 6,000 6,000
- ----------------------------------------------------------------------------------------------
Lakefront 2,620 380 3,000 500 -- --
- ----------------------------------------------------------------------------------------------
LifeChoice Cons. 0 0
- ----------------------------------------------------------------------------------------------
LifeChoice Growth 0 0
- ----------------------------------------------------------------------------------------------
LifeChoice 0 0
Moderate
- ----------------------------------------------------------------------------------------------
Ltd Term Income 406 100 400 100 3,000 3,000
- ----------------------------------------------------------------------------------------------
National Muni 37,577 2,273 30,200 1,300 31,000 31,000
Bond
- ----------------------------------------------------------------------------------------------
New York Tax-Free 19,708 1,281 51,300 3,900 43,000 39,000
- ----------------------------------------------------------------------------------------------
Ohio Municipal 29,884 3,834 26,000 3,500 20,000 20,000
Bond
- ----------------------------------------------------------------------------------------------
Ohio Muni Mon. 0 0 0 0 -- --
Mkt
- ----------------------------------------------------------------------------------------------
Ohio Regional 15,644 1,031 19,800 1,500 21,000 21,000
Stock
- ----------------------------------------------------------------------------------------------
Prime Obligations 0 0 0 0 -- --
- ----------------------------------------------------------------------------------------------
Real Estate Inv. 12,709 1,631 16,600 2,300 -- --
- ----------------------------------------------------------------------------------------------
Small Co. Opp'ty 14,615 2,156 18,200 2,800 2,000 2,000
#
- ----------------------------------------------------------------------------------------------
Special Value 58,381 3,770 76,000 4,600 22,000 11,000
- ----------------------------------------------------------------------------------------------
Stock Index 123,439 17,022 91,700 12,800 9,000 9,000
- ----------------------------------------------------------------------------------------------
Tax-Free Money 0 0 0 0 -- --
Mkt
- ----------------------------------------------------------------------------------------------
U.S. Gov't Obl's 0 0 0 0 -- --
- ----------------------------------------------------------------------------------------------
Value 18,412 2,472 12,800 2,000 1,000 1,000
- ----------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Does not include distribution fees paid by the Gradison Funds.
** Underwriting commission information for the Convertible Securities Fund
and the Federal Money Market Fund reflects commissions generated during
the fiscal years ended November 30, 1996 and November 30, 1997 and the
period from December 1, 1997 to October 31, 1998.
+/- Reflects sales charges paid to McDonald & Co. for the period January 1,
1997 until July 1, 1997. (The Gradison Government Income Fund eliminated
its sales charge effective July 7, 1997.)
+/-+/ Reflects sales charges paid to McDonald & Co. for the fiscal year
December 31, 1996
# Fiscal years ended March 31.
111
<PAGE>
The following chart reflects miscellaneous service fees paid to an affiliate.
<TABLE>
<CAPTION>
- ----------------------------------------- --------------- --------------- -------------------
1998 1997 1996
- ----------------------------------------- --------------- --------------- -------------------
<S> <C> <C> <C>
Data Processing Services $39,970 $40,302 $45,119
Gradison Government Income Fund*
- ----------------------------------------- --------------- --------------- -------------------
Shareholder Servicing Personnel Costs $59,992 $53,667 $59,036
Gradison Government Income Fund*
- ----------------------------------------- --------------- --------------- -------------------
Transfer Agent and Accounting Services $384,111 $154,756 $140,112
Gradison Opportunity Value Fund** (from 6/1/95)
- ----------------------------------------- --------------- --------------- -------------------
Transfer Agent and Accounting Services $710,599 $544,851 --
Small Company Opportunity Fund **
- ----------------------------------------- --------------- --------------- -------------------
</TABLE>
Transfer Agent.
State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Funds. Boston Financial Data Services, Inc. serves as the dividend
disbursing agent and shareholder servicing agent for the Funds, pursuant to a
Transfer Agency and Service Agreement. Under its agreement with the Trust, State
Street has agreed (1) to issue and redeem shares of the Funds; (2) to address
and mail all communications by the Funds to their shareholders, including
reports to shareholders, dividend and distribution notices, and proxy material
for its meetings of shareholders; (3) to respond to correspondence or inquiries
by shareholders and others relating to its duties; (4) to maintain shareholder
accounts and certain sub-accounts; and (5) to make periodic reports to the
Trustees concerning the Trust's operations.
Shareholder Servicing Plan.
Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser and each Sub-Adviser) are
for administrative support services to customers who may from time to time
beneficially own shares, which services may include: (1) aggregating and
processing purchase and redemption requests for shares from customers and
transmitting promptly net purchase and redemption orders to our distributor or
transfer agent; (2) providing customers with a service that invests the assets
of their accounts in shares pursuant to specific or pre-authorized instructions;
(3) processing dividend and distribution payments on behalf of customers; (4)
providing information periodically to customers showing their positions in
shares; (5) arranging for bank wires; (6) responding to customer inquiries; (7)
providing sub-accounting with respect to shares beneficially owned by customers
or providing the information to the Funds as necessary for sub-accounting; (8)
if required by law, forwarding shareholder communications from us (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to customers; (9) forwarding to
customers proxy statements and proxies containing any proposals which require a
shareholder vote; and (10) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations.
Distribution and Service Plan.
The Trust, on behalf of the Class A shares of the Financial Reserves Fund, Fund
for Income, Lakefront Fund, National Municipal Bond Fund, New York Tax-Free
Fund, Ohio Municipal Money Market Fund, Real Estate Investment Fund, Class G
shares of the Stock Index Fund and Investor and Select shares of the
Institutional Money Market Fund and U.S. Obligations Fund, has adopted a
Distribution and Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940
Act (the "Rule 12b-1"). Rule 12b-1 provides in substance that a mutual fund may
not engage directly or indirectly in financing any activity that is primarily
intended to result in the sale of shares of such mutual fund except pursuant to
a plan adopted by the fund under Rule 12b-1. The Board of Trustees has adopted
the Plan to allow the Adviser, any Sub-Adviser and the Distributor to incur
certain expenses that might be considered to constitute indirect payment by the
Funds of distribution expenses. No separate payments are authorized to be made
by the Funds pursuant to the Plan. Under the Plan, if a payment to the Advisers
or a Sub-Adviser of management
- ----------
* Fiscal years ended December 31.
** Fiscal years ended March 31. For the fiscal year ended, the Small Company
Opportunity Fund paid $759,344 in service fees to an affiliate.
112
<PAGE>
fees or to the Distributor of administrative fees should be deemed to be
indirect financing by the Trust of the distribution of their shares, such
payment is authorized by the Plan.
The Plan specifically recognizes that the Adviser, any Sub-Adviser or the
Distributor, directly or through an affiliate, may use its fee revenue, past
profits, or other resources, without limitation, to pay promotional and
administrative expenses in connection with the offer and sale of shares of the
Funds. In addition, the Plan provides that the Adviser, a Sub-Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Funds' shares,
or to third parties, including banks, that render shareholder support services.
The Plan has been approved by the Board of Trustees. As required by Rule 12-1,
the Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and have determined that there
is a reasonable likelihood that the Plan will benefit the Funds and their
shareholders. In particular, the Trustees noted that the Plan does not authorize
payments by the Funds other than the advisory and administrative fees authorized
under the investment advisory and administration agreements. To the extent that
the Plan gives the Adviser, a Sub-Adviser or the Distributor greater flexibility
in connection with the distribution of shares of the Funds, additional sales of
the Funds' shares may result. Additionally, certain shareholder support services
may be provided more effectively under the Plan by local entities with whom
shareholders have other relationships.
Class B and Class G Shares Distribution Plans.
The Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act for Class B shares of the Balanced Fund, Diversified Stock Fund,
International Growth Fund, National Municipal Bond Fund, New York Tax-Free Fund,
Ohio Regional Stock Fund and Special Value Fund under the Rule. In addition, the
Trust has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under
the 1940 Act for Class G shares of the Diversified Stock Fund, the Fund for
Income, the International Growth Fund, the Ohio Municipal Bond Fund and the
Small Company Opportunity Fund. (Collectively, the Class B Distribution Plan and
the Class G Distribution and Service Plan will be referred to as the "Rule 12b-1
Plans.")
The Class B Distribution Plan adopted by the Trustees provides that each Fund,
as applicable, will pay the Distributor a distribution fee under the Plan at the
annual rate of 0.75% of the average daily net assets of the Fund attributable to
the Class B shares. Under the Class G Distribution and Service Plan, Class G
shares of each of the Fund for Income, Intermediate Income Fund, Investment
Quality Bond Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Bond Fund, Diversified Stock Fund, International Growth Fund and Small
Company Opportunity Fund pays the Distributor a service fee of up to 0.25% and
Class G shares of each of the Value Fund, Diversified Stock Fund, Growth Fund,
Special Value Fund, International Growth Fund and Small Company Opportunity Fund
pays the Distributor a distribution fee of up to 0.25%.
The Rule 12b-1 fees may be used by the Distributor for: (a) costs of printing
and distributing each Fund's prospectus, statement of additional information and
reports to prospective investors in the Funds; (b) costs involved in preparing,
printing and distributing sales literature pertaining to the Funds; (c) an
allocation of overhead and other branch office distribution-related expenses of
the Distributor; (d) payments to persons who provide support services in
connection with the distribution of each Fund's Class B or Class G shares,
including but not limited to, office space and equipment, telephone facilities,
answering routine inquiries regarding the Funds, processing shareholder
transactions and providing any other shareholder services not otherwise provided
by the Funds' transfer agent; (e) accruals for interest on the amount of the
foregoing expenses that exceed the distribution fee and the CDSCs received by
the Distributor; and (f) any other expense primarily intended to result in the
sale of the Funds' Class B or Class G shares, including, without limitation,
payments to salesmen and selling dealers at the time of the sale of such shares,
if applicable, and continuing fees to each such salesmen and selling dealers,
which fee shall begin to accrue immediately after the sale of such shares.
The amount of the Rule 12b-1 fees payable by any Fund under a Rule 12b-1 Plan is
not related directly to expenses incurred by the Distributor and neither Rule
12b-1 Plan obligates the Funds to reimburse the Distributor for such expenses.
The fees set forth in each Rule 12b-1 Plan will be paid by each Fund to the
Distributor unless and until the Plan is terminated or not renewed with respect
to such Fund; any distribution or service expenses incurred by the Distributor
on behalf of the Funds in excess of payments of the distribution fees specified
above which the
113
<PAGE>
Distributor has accrued through the termination date are the sole responsibility
and liability of the Distributor and not an obligation of the Funds.
The Rule 12b-1 Plans for the Class B and Class G shares each specifically
recognizes that either the Adviser or the Distributor, directly or through an
affiliate, may use its fee revenue, past profits, or other resources, without
limitation, to pay promotional and administrative expenses in connection with
the offer and sale of shares of the Funds. In addition, each Plan provides that
the Adviser and the Distributor may use their respective resources, including
fee revenues, to make payments to third parties that provide assistance in
selling the Funds' Class B or Class G shares, as the case may be, or to third
parties, including banks, that render shareholder support services.
Each Rule 12b-1 Plan was approved by the Trustees, including the independent
Trustees, at a meeting called for that purpose. As required by Rule 12b-1, the
Trustees carefully considered all pertinent factors relating to the
implementation of each Distribution Plan prior to its approval, and have
determined that there is a reasonable likelihood that each Distribution Plan
will benefit the Funds and their Class B or Class G shareholders, as the case
may be. To the extent that a Rule 12b-1 Plan gives the Adviser or the
Distributor greater flexibility in connection with the distribution of Class B
or Class G shares of the Funds, additional sales of the Funds' Class B or Class
G shares may result. Additionally, certain Class B and/or Class G shareholder
support services may be provided more effectively under the relevant
Distribution Plan by local entities with whom shareholders have other
relationships.
The following chart reflects the payment of 12b-1 fees paid to the distributors
of the Funds.
<TABLE>
<CAPTION>
- ---------------------------------------- ----------------- ------------- ---------------- -------------
1999 1998 1997 1996
- ---------------------------------------- ----------------- ------------- ---------------- -------------
<S> <C> <C> <C>
Gradison Government Income Fund $390,404 $380,694 $427,632
(fiscal years ended December 31)
(for shareholder services only)
- ---------------------------------------- ----------------- ------------- ---------------- -------------
Gradison Opportunity Value Fund $710,599 $544,851
(fiscal years ended March 31)
(1/2 for distribution and 1/2 for
shareholder services)
- ---------------------------------------- ----------------- ------------- ---------------- -------------
Small Company Opportunity Fund $759,344 $710,599 $544,851 $421,414
(years ended March 31)
- ---------------------------------------- ----------------- ------------- ---------------- -------------
</TABLE>
Fund Accountant.
BISYS Fund Services Ohio, Inc. ("BISYS, Inc.") serves as fund accountant for the
all of the Funds, except the Real Estate Investment Fund, pursuant to a fund
accounting agreement with the Trust dated May 31, 1995 (the "Fund Accounting
Agreement"). As fund accountant for the Trust, BISYS, Inc. calculates each
Fund's net asset value, the dividend and capital gain distribution, if any, and
the yield. BISYS, Inc. also provides a current security position report, a
summary report of transactions and pending maturities, a current cash position
report, and maintains the general ledger accounting records for the Funds. Under
the Fund Accounting Agreement, BISYS, Inc. is entitled to receive annual fees of
.03% of the first $100 million of the Fund's daily average net assets, .02% of
the next $100 million of the Fund's daily average net assets, and .01% of the
Fund's remaining daily average net assets. These annual fees are subject to a
minimum monthly assets charge of $2,500 per taxable fund, $2,917 per tax-free
fund and $3,333 per international fund and does not include out-of-pocket
expenses or multiple class charges of $833 per month assessed for each class of
shares after the first class.
For the three fiscal years ended October 31, 1998, the Fund accountant earned
the following fund accounting fees:*
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $134,087 $89,610 $93,776
- -----------------------------------------------------------------------------------------------
Convertible Securities Fund** 38,972
- -----------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Does not include distribution fees paid by the Gradison Funds.
114
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diversified Stock Fund 148,523 119,767 159,249
- -----------------------------------------------------------------------------------------------
Federal Money Market Fund** 65,217
- -----------------------------------------------------------------------------------------------
Financial Reserves Fund 94,228 88,998 78,188
- -----------------------------------------------------------------------------------------------
Fund for Income 56,497 48,449 57,144
- -----------------------------------------------------------------------------------------------
Government Mortgage Fund 50,535 38,396 50,487
- -----------------------------------------------------------------------------------------------
Growth Fund 63,019 51,705 35,364
- -----------------------------------------------------------------------------------------------
Institutional Money Market Fund 107,693 102,437 86,455
- -----------------------------------------------------------------------------------------------
Intermediate Income Fund 77,887 67,260 61,867
- -----------------------------------------------------------------------------------------------
International Growth Fund 66,653 70,707 90,570
- -----------------------------------------------------------------------------------------------
Investment Quality Bond Fund 73,539 57,053 52,699
- -----------------------------------------------------------------------------------------------
Lakefront Fund 35,620 24,280 N/A
- -----------------------------------------------------------------------------------------------
LifeChoice Conservative Investor Fund 36,056 N/A N/A
- -----------------------------------------------------------------------------------------------
LifeChoice Growth Investor Fund 33,290 N/A N/A
- -----------------------------------------------------------------------------------------------
LifeChoice Moderate Investor Fund 36,454 N/A N/A
- -----------------------------------------------------------------------------------------------
Limited Term Income Fund 41,478 33,524 39,040
- -----------------------------------------------------------------------------------------------
National Municipal Bond Fund 62,558 57,061 65,000
- -----------------------------------------------------------------------------------------------
New York Tax-Free Fund 52,402 49,575 51,388
- -----------------------------------------------------------------------------------------------
Ohio Municipal Bond Fund 51,323 46,445 51,845
- -----------------------------------------------------------------------------------------------
Ohio Municipal Money Market Fund 96,726 99,579 65,058
- -----------------------------------------------------------------------------------------------
Ohio Regional Stock Fund 48,723 45,783 51,094
- -----------------------------------------------------------------------------------------------
Prime Obligations Fund 97,944 92,710 85,261
- -----------------------------------------------------------------------------------------------
Real Estate Investment Fund 34,750 15,520 N/A
- -----------------------------------------------------------------------------------------------
Small Company Opportunity Fund 41,005 39,041 57,804
- -----------------------------------------------------------------------------------------------
Special Value Fund 97,582 87,704 79,170
- -----------------------------------------------------------------------------------------------
Stock Index Fund 153,032 120,844 87,027
- -----------------------------------------------------------------------------------------------
Tax-Free Money Market Fund 93,791 79,661 107,911
- -----------------------------------------------------------------------------------------------
U.S. Government Obligations Fund 106,407 97,657 85,062
- -----------------------------------------------------------------------------------------------
Value Fund 92,444 83,739 71,046
- -----------------------------------------------------------------------------------------------
</TABLE>
Custodian.
Cash and securities owned by each of the Funds are held by Key Trust as
custodian pursuant to a Custodian Agreement dated August 1, 1996. Cash and
securities owned by the Funds are also held by Morgan Stanley Trust Company
("Morgan Stanley") as sub-custodian, and certain foreign sub-custodians,
pursuant to a Sub-Custody Agreement. Under these Agreements, Key Trust and
Morgan Stanley each (1) maintains a separate account or accounts in the name of
each respective fund; (2) makes receipts and disbursements of money on behalf of
each Fund; (3) collects and receives all income and other payments and
distributions on account of portfolio securities; (4) responds to correspondence
from security brokers and others relating to its duties; and (5) makes periodic
reports to the Trustees concerning the Trust's operations. Key Trust may, with
the approval of a fund and at the custodian's own expense, open and maintain a
sub-custody account or accounts on behalf of a fund, provided that Key Trust
shall remain liable for the performance of all of its duties under the Custodian
Agreement.
Independent Accountants.
PricewaterhouseCoopers LLP serves as the Trust's auditors.
PricewaterhouseCoopers LLP's address is 100 East Broad Street, Columbus, Ohio
43215.
- ----------
** Fund accounting fee information for the Convertible Securities Fund and
the Federal Money Market Fund reflects fund accounting fees paid during
the fiscal years ended November 30, 1996 and November 30, 1997 and the
period from December 1, 1997 to October 31, 1998.
115
<PAGE>
Legal Counsel.
Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York 10022,
is the counsel to the Trust.
Expenses.
The Funds bear the following expenses relating to its operations, including:
taxes, interest, brokerage fees and commissions, fees of the Trustees, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to current
shareholders, outside auditing and legal expenses, advisory and administration
fees, fees and out-of-pocket expenses of the custodian and transfer agent,
certain insurance premiums, costs of maintenance of the Funds' existence, costs
of shareholders' reports and meetings, and any extraordinary expenses incurred
in the Funds' operation.
ADDITIONAL INFORMATION
Description of Shares.
The Trust is a Delaware business trust. The Delaware Trust Instrument authorizes
the Trustees to issue an unlimited number of shares, which are units of
beneficial interest, without par value. The Trust currently has 38 series of
shares, which represent interests in the Funds and their respective classes
listed below (described in separate Statements of Additional Information) in
addition to those listed on the first page of this SAI.
1. Established Value Fund, Class G Shares
2. Equity Income Fund, Class A Shares
3. Gradison Government Reserves Fund, Class G Shares
4. Maine Municipal Bond Fund (Intermediate), Class A Shares
5. Maine Municipal Bond Fund (Short-Intermediate), Class A Shares
6. Michigan Municipal Bond Fund, Class A Shares
7. National Municipal Bond Fund (Long), Class A Shares
8. National Municipal Bond Fund (Short-Intermediate), Class A Share
The Trust Instrument authorizes the Trustees to divide or redivide any unissued
shares of the Trust into one or more additional series by setting or changing in
any one or more aspects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends, qualifications,
and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectuses and this SAI, the Trust's shares will
be fully paid and non-assessable. In the event of a liquidation or dissolution
of the Trust, shares of a Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative asset values of the respective Funds, of any general assets not
belonging to any particular Fund that are available for distribution.
To the best knowledge of the Trust, the names and addresses of the holders of 5%
or more of the outstanding shares of each class of the Funds' equity securities
as of September 30, 1999, and the percentage of the outstanding shares held by
such holders are set forth in the table below.
<TABLE>
<CAPTION>
- ----------------------- ------------------------------------- --------------- -----------------
Percent Owned Percent Owned
Victory Fund Name and Address of Owner of Record Beneficially
- ----------------------- ------------------------------------- --------------- -----------------
<S> <C> <C>
Balanced Fund - Class SNBOC and Company 96.33%
A 4900 Tiedeman Road
Cleveland, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
</TABLE>
116
<PAGE>
<TABLE>
<CAPTION>
- ----------------------- ------------------------------------- --------------- -----------------
Percent Owned Percent Owned
Victory Fund Name and Address of Owner of Record Beneficially
- ----------------------- ------------------------------------- --------------- -----------------
<S> <C> <C>
Convertible Charles Schwab & Co. 26.05%
Securities Fund - Special Custody Account #2
Class A FOB Customers
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
- ----------------------- ------------------------------------- --------------- -----------------
Key Trust 35.88%
Attn: Jim Osborne, OH-01-49-0330
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Diversified Stock SNBOC and Company 74.23%
Fund - Class A Attn: Jim Osborne, OH-01-49-0330
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Diversified Stock McDonald & Co. Securities 98.39%
Fund - Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ----------------------- ------------------------------------- --------------- -----------------
Federal Money Market KeyCorp Investment Products 82.92%
Fund - Investor Class Attn: Jennifer Ryan
127 Public Square
Cleveland, OH 44114-1216
- ----------------------- ------------------------------------- --------------- -----------------
Summit County Treasurer 6.93%
Attn: John Donofrio
175 South Main Street
Akron, OH 44308-1306
- ----------------------- ------------------------------------- --------------- -----------------
Federal Money Market KeyCorp Investment Products 93.47%
Fund - 127 Public Square
Select Class Cleveland, OH 44114-1216
- ----------------------- ------------------------------------- --------------- -----------------
Financial Reserves SNBOC and Company 91.00%
Fund - Class A Attn: Jim Osborne OH-01-49-0330
4900 Tiedeman Road
Cleveland, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Fund for Income - Key Trust Cleveland 61.89%
Class A PO Box 93971
4900 Tiedeman Road
Cleveland, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Fund for Income McDonald & Co. Securities 96.27%
Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ----------------------- ------------------------------------- --------------- -----------------
Government Mortgage SNBOC and Company 95.17%
Fund - Class A 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Growth Fund - Class A SNBOC and Company 88.19%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
</TABLE>
117
<PAGE>
<TABLE>
<CAPTION>
- ----------------------- ------------------------------------- --------------- -----------------
Percent Owned Percent Owned
Victory Fund Name and Address of Owner of Record Beneficially
- ----------------------- ------------------------------------- --------------- -----------------
<S> <C> <C>
Institutional Money KeyCorp Investment Products 6.70%
Market Fund - 127 Public Square
Investor Shares Cleveland, OH 44114-1216
- ----------------------- ------------------------------------- --------------- -----------------
Liefke & Co. 74.83%
c/o KeyCorp Trust Services
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
McDonald & Co. Securities 7.57%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ----------------------- ------------------------------------- --------------- -----------------
Institutional Money KeyCorp Investment Products 5.75%
Market Fund - 127 Public Square
Select Shares Cleveland, OH 44114-1216
- ----------------------- ------------------------------------- --------------- -----------------
BISYS Fund Services Ohio Inc. 93.20%
The Benefit of our Customers
Attn: Victory Cash Control Dept.
3435 Stelzer Road
Columbus, OH 43219-6004
- ----------------------- ------------------------------------- --------------- -----------------
Intermediate Income SNBOC and Company 96.84%
Fund - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
International Growth SNBOC and Company 86.50%
Fund - Class A PO Box 93971
4900 Tiedeman Road
Cleveland, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
International Growth Subash C Mahajan Keogh PS 18.62% 18.62%
Fund - Class B KeyBank C/FBO
7215 Old Oak Blvd., Suite 3104
Cleveland, Ohio 44130-3340
- ----------------------- ------------------------------------- --------------- -----------------
Barbara A Dalesandro IRA 5.39% 5.39%
McDonald Investments Inc. C/FBO
5997 Glenwood Avenue
Youngstown, Ohio 44512-2817
- ----------------------- ------------------------------------- --------------- -----------------
Jerry L Ufford IRA 6.56% 6.56%
McDonald Investments Inc. C/FBO
3303 Linden Road Suite 308
Rocky River, Ohio 44116-4105
- ----------------------- ------------------------------------- --------------- -----------------
International Growth McDonald & Co. Securities 95.65%
Fund - Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ----------------------- ------------------------------------- --------------- -----------------
Investment Quality SNBOC and Company 81.58%
Bond Fund - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
- ----------------------- ------------------------------------- --------------- -----------------
Percent Owned Percent Owned
Victory Fund Name and Address of Owner of Record Beneficially
- ----------------------- ------------------------------------- --------------- -----------------
<S> <C> <C>
Lakefront Fund - SNBOC and Company 43.60%
Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
BISYS Fund Services 27.34%
Attn: Fund Administration & Reg.
Serv.
3435 Stelzer Road
Columbus, OH 43219-6004
- ----------------------- ------------------------------------- --------------- -----------------
Merrill Lynch Pierce Fenner & Smith 18.96%
For Sole Benefit of its Customers
Attn: Fund Admin Team
4800 Deer Lake Drive East 3rd Floor
Jacksonville FL 32246-6484
- ----------------------- ------------------------------------- --------------- -----------------
LifeChoice - SNBOC and Company 94.27%
Conservative Investor 4900 Tiedeman Road
- - Class A Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
LifeChoice - SNBOC and Company 92.82%
Growth Investor - 4900 Tiedeman Road
Class A Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
CoreLink Financial Inc. 5.40%
PO Box 4054
Concord, CA 94524-4054
- ----------------------- ------------------------------------- --------------- -----------------
LifeChoice - SNBOC and Company 93.22%
Moderate Investor - 4900 Tiedeman Road
Class A Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
CoreLink Financial Inc. 6.27%
PO Box 4054
Concord, CA 94524-4054
- ----------------------- ------------------------------------- --------------- -----------------
Limited Term SNBOC and Company 96.84%
Income Fund - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
National Muni Bond Key Trust Cleveland 30.00%
Fund - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Estate of Mr. Salomon 5.73%
Park Square Station
PO BOX 15490
Stamford CT 06901-0490
- ----------------------- ------------------------------------- --------------- -----------------
National Muni Bond For Robert, Geraldine and Janet 12.90% 12.90%
Fund - Class B Sylvester
And GFS ND Manufacturing Co
115 Cocheco Street
Dover, NH 03820
- ----------------------- ------------------------------------- --------------- -----------------
Anne C Quinn 11.55% 11.55%
42 Juniper Court
St. Marys Place
London W8 5UF England 44813
- ----------------------- ------------------------------------- --------------- -----------------
Marden Spencer 5.96% 5.96%
958 E. Olympus Park Dr.
Salt Lake City, UT 84117
- ----------------------- ------------------------------------- --------------- -----------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ----------------------- ------------------------------------- --------------- -----------------
Percent Owned Percent Owned
Victory Fund Name and Address of Owner of Record Beneficially
- ----------------------- ------------------------------------- --------------- -----------------
<S> <C> <C>
New York Tax-Free Key Trust Cleveland 19.01%
Fund - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
New York Tax-Free Anna Maria Desocio 7.38% 7.38%
Fund - Class B 1624 Caleb Ave.
Syracuse, NY 13206
- ----------------------- ------------------------------------- --------------- -----------------
Richard A. Dudley 15.79% 15.79%
Margaret H. Dudley JTTEN
68 Center St.
Geneseo, NY 14454
- ----------------------- ------------------------------------- --------------- -----------------
Ohio Muni Bond Fund - SNBOC and Company 83.04%
Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Ohio Municipal McDonald & Co. Securities 31.11%
MMKT Fund - Class A The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, OH 45202
- ----------------------- ------------------------------------- --------------- -----------------
SNBOC and Company 18.09%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Private Banking 43.28%
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- ----------------------- ------------------------------------- --------------- -----------------
Ohio Regional Stock SNBOC and Company 84.22%
Fund - Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Ohio Regional Stock Gordon T Laflash IRA 5.24% 5.24%
Fund - Class B McDonald Investments Inc. C/FBO
2448 Ragan Woods Drive
Toledo, Ohio 43614-1017
- ----------------------- ------------------------------------- --------------- -----------------
Jerry L Ufford IRA 6.38% 6.38%
McDonald Investments Inc. C/FBO
3303 Linden Road, Suite 308
Rocky River, Ohio 44116-4105
- ----------------------- ------------------------------------- --------------- -----------------
Stephen A Warth IRA 5.36% 5.36%
McDonald Investments Inc. C/FBO
10064 Hunting Drive
Brecksville, Ohio 44141-3645
- ----------------------- ------------------------------------- --------------- -----------------
Ohio Regional Stock McDonald & Co. Securities 98.88%
Fund - Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ----------------------- ------------------------------------- --------------- -----------------
</TABLE>
120
<PAGE>
<TABLE>
<CAPTION>
- ----------------------- ------------------------------------- --------------- -----------------
Percent Owned Percent Owned
Victory Fund Name and Address of Owner of Record Beneficially
- ----------------------- ------------------------------------- --------------- -----------------
<S> <C> <C>
Prime Obligations Private Banking 39.92%
Fund - Class A c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- ----------------------- ------------------------------------- --------------- -----------------
McDonald & Co. Securities 22.27%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ----------------------- ------------------------------------- --------------- -----------------
KeyCorp Investment Products 32.63%
127 Public Square
Cleveland, OH 44114-1216
- ----------------------- ------------------------------------- --------------- -----------------
Real Estate SNBOC and Company 83.50%
Investment Fund - PO Box 93971
Class A 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Special Value Fund - SNBOC and Company 94.50%
Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Stock Index Fund - SNBOC and Company 95.42%
Class A 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Stock Index Fund - McDonald & Co. Securities 99.91%
Class G The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ----------------------- ------------------------------------- --------------- -----------------
Tax-Free MMKT Fund - SNBOC and Company 28.79%
Class A PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Private Banking 33.59%
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- ----------------------- ------------------------------------- --------------- -----------------
McDonald & Co. Securities 32.71%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, OH 45202
- ----------------------- ------------------------------------- --------------- -----------------
US Gov't Obligations SNBOC and Company 99.34%
Fund - Investor PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
- ----------------------- ------------------------------------- --------------- -----------------
Percent Owned Percent Owned
Victory Fund Name and Address of Owner of Record Beneficially
- ----------------------- ------------------------------------- --------------- -----------------
<S> <C> <C>
US Gov't Obligations SNBOC and Company 15.20%
Fund - Select PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Private Banking 33.85%
c/o Society National Bank
Attn: Joe Caroscio
2025 Ontario Street
Cleveland, OH 44115-1022
- ----------------------- ------------------------------------- --------------- -----------------
KeyCorp Investment Products 35.25%
127 Public Square
Cleveland, OH 44114-1216
- ----------------------- ------------------------------------- --------------- -----------------
McDonald & Co. Securities 7.66%
The Exclusive Benefit of Customers
Attn: Jeff Carter
c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ----------------------- ------------------------------------- --------------- -----------------
Value Fund - Class A SNBOC and Company 96.16%
PO Box 93971
4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Small Company SNBOC and Company 93.36%
Opportunity Fund - PO Box 93971
Class A 4900 Tiedeman Road
Brooklyn, OH 44144-2338
- ----------------------- ------------------------------------- --------------- -----------------
Small Company McDonald & Co. Securities 99.44%
Opportunity Fund - The Exclusive Benefit of Customers
Class G c/o Gradison Division
580 Walnut Street
Cincinnati, Ohio 45202-3110
- ----------------------- ------------------------------------- --------------- -----------------
</TABLE>
Shares of the Funds are entitled to one vote per share (with proportional voting
for fractional shares) on such matters as shareholders are entitled to vote.
Shareholders vote as a single class on all matters except (1) when required by
the 1940 Act, shares shall be voted by individual series or class, and (2) when
the Trustees have determined that the matter affects only the interests of one
or more series, then only shareholders of such series shall be entitled to vote
thereon. There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees have been elected by the shareholders, at which time the Trustees then
in office will call a shareholders' meeting for the election of Trustees. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., persons who have been shareholders for at least six months, and who hold
shares having a net asset value of at least $25,000 or constituting 1% of the
outstanding shares) stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust will provide a list
of shareholders or disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each Fund of
the Trust affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a Fund will be required in
connection with a matter, a Fund will be deemed to be affected by a matter
unless it is clear that the
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<PAGE>
interests of each Fund in the matter are identical, or that the matter does not
affect any interest of the Fund. Under Rule 18f-2, the approval of an investment
advisory agreement or any change in investment policy would be effectively acted
upon with respect to a fund only if approved by a majority of the outstanding
shares of such Fund. However, Rule 18f-2 also provides that the ratification of
independent accountants, the approval of principal underwriting contracts, and
the election of Trustees may be effectively acted upon by shareholders of the
Trust voting without regard to series.
Shareholder and Trustee Liability.
The Trust is organized as a Delaware business trust. The Delaware Business Trust
Act provides that a shareholder of a Delaware business trust shall be entitled
to the same limitation of personal liability extended to shareholders of
Delaware corporations, and the Delaware Trust Instrument provides that
shareholders of the Trust shall not be liable for the obligations of the Trust.
The Delaware Trust Instrument also provides for indemnification out of the trust
property of any shareholder held personally liable solely by reason of his or
her being or having been a shareholder. The Delaware Trust Instrument also
provides that the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Trust, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer, or agent
of the Trust shall be personally liable in connection with the administration or
preservation of the assets of the funds or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
Financial Statements.
The audited financial statements of the Trust, with respect to all the Funds
(other than Class G shares), for the fiscal year ended October 31, 1998 are
incorporated by reference herein. These financial statements have been audited
by PricewaterhouseCoopers LLP as set forth in their report incorporated by
reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. The unaudited
financial statements of the following Funds, each dated April 30, 1999, are also
incorporated herein by reference: Limited Term Income Fund, Intermediate Income
Fund, Government Mortgage Fund, Investment Quality Bond Fund, National Municipal
Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund, Value Fund,
Diversified Stock Fund, Stock Index Fund, Growth Fund, Special Value Fund, Ohio
Regional Stock Fund, International Growth Fund, Balanced Fund, Convertible
Securities Fund and Real Estate Investment Fund.
The audited financial statements of Gradison Government Income Fund and Gradison
Opportunity Value Fund for the fiscal years ended December 31, 1997 and March
31, 1998, respectively, and the audited financial statements of the Small
Company Opportunity Fund for the fiscal year ended March 31, 1999 are
incorporated by reference herein. These financial statements have been audited
by Arthur Andersen L.L.P. as set forth in their report incorporated by reference
herein, and are included in reliance upon such report and on the authority of
such firm as experts in auditing and accounting. Arthur Andersen LLP's address
is 425 Walnut Street, Cincinnati, Ohio 45202. The unaudited financial statements
of Gradison Government Income Fund and Gradison Opportunity Value Fund, dated
June 30, 1998 and September 30, 1998, respectively, are also incorporated herein
by reference.
Miscellaneous.
As used in the Prospectuses and in this SAI, "assets belonging to a fund" (or
"assets belonging to the Fund") means the consideration received by the Trust
upon the issuance or sale of shares of a Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale, exchange, or liquidation of such investments, and
any funds or payments derived from any reinvestment of such proceeds and any
general assets of the Trust, which general liabilities and expenses are not
readily identified as belonging to a particular Fund that are allocated to that
Fund by the Trustees. The Trustees may allocate such general assets in any
manner they deem fair and equitable. It is anticipated that the factor that will
be used by the Trustees in making
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<PAGE>
allocations of general assets to a particular fund of the Trust will be the
relative net asset value of each respective fund at the time of allocation.
Assets belonging to a particular Fund are charged with the direct liabilities
and expenses in respect of that Fund, and with a share of the general
liabilities and expenses of each of the Funds not readily identified as
belonging to a particular Fund, which are allocated to each Fund in accordance
with its proportionate share of the net asset values of the Trust at the time of
allocation. The timing of allocations of general assets and general liabilities
and expenses of the Trust to a particular fund will be determined by the
Trustees and will be in accordance with generally accepted accounting
principles. Determinations by the Trustees as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectuses and in this SAI, a "vote of a majority of the
outstanding shares" of the Fund means the affirmative vote of the lesser of (a)
67% or more of the shares of the Fund present at a meeting at which the holders
of more than 50% of the outstanding shares of the Fund are represented in person
or by proxy, or (b) more than 50% of the outstanding shares of the Fund.
The Trust is registered with the SEC as an open-end management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Trust.
The Prospectuses and this SAI omit certain of the information contained in the
Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee.
The Prospectuses and this SAI are not an offering of the securities described in
these documents in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectuses and this SAI.
124
<PAGE>
APPENDIX
Description of Security Ratings.
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Adviser or the Sub-Advisers with regard to
portfolio investments for the Funds include Moody's Investors Service
("Moody's"), Standard & Poor's ("S&P"), Duff & Phelps Credit Rating Co.
("Duff"), Thomson Financial BankWatch ("Thomson") and Fitch IBCA International.
Set forth below is a description of the relevant ratings of each such NRSRO. The
NRSROs that may be utilized by the Adviser or a Sub-Adviser and the description
of each NRSRO's ratings is as of the date of this SAI, and may subsequently
change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements - their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
A-1
<PAGE>
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-. High credit quality Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- - Leading market positions in well-established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
A-2
<PAGE>
Duff 1+. Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3. Satisfactory liquidity and other protection factors qualify issue as to
investment grade.
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
BankWatch Ratings do not constitute a recommendation to buy or sell securities
of any of these companies. Further, BankWatch does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
A-3
<PAGE>
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
Fitch IBCA International Credit Ratings
Fitch IBCA's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and
short-term ratings assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.
International credit ratings assess the capacity to meet foreign currency or
local currency commitments. Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local currency rating measures
the probability of payment within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency rating, does not take
account of the possibility of foreign exchange controls limiting transfer into
foreign currency.
Fitch IBCA International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative, "BB' ratings indicate that there is a possibility of credit risk
developing particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B Highly speculative, `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that default of some
king appears probable. `C' ratings signal imminent default.
A-4
<PAGE>
DDD, DD, and D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. `DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. `DD' indicates
potential recoveries in the range of 50%-90%, and `D' the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated `DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated `DD' and `D' are generally undergoing a formal
reorganization or liquidation process; those rated `DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated `D' have a
poor prospect for repaying all obligations.
Fitch IBCA International Short-Term Credit Ratings
A short term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; they may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
obligations.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there is
a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
A-5
